I am a part of this industry, and I would like to say a lot here as this issue is both interesting to me and important to my livelihood.
I used to firmly come down on the side of “yes, obviously!” but now I think the situation is more ambiguous.
As far as I have come to know, there isn’t any sense in which companies “recoup” development costs, and in any event, approximating what really went to development is a wildly varying figure depending on which bean counters you ask at which companies.
The company wants to make a profit. So it will set prices at what it can and still generate a profit that satisfies it, or if that price cannot be met, then remove the product from the market (not sure if this has ever happened with drugs, though). But companies also want to stay in business, and for pharmaceutical companies this means patented drugs.
In the beginning of R&D phases, there are millions of molecules manufactured to be tested. Hell, companies exist whose only purpose is to turn out variations on a molecular theme: combinatorial chemists find a type of molecule that can show variations and vary it. Vary the hell out of it.
Now all these have to be tested in some way. how these millions (and I am not exaggerating) of molecules are best tested is a matter of debate, science, and friggin’ divination. Accurate results with current technology are, in the scale of millions of tests to run, sloooooow. So finding target drugs is a hit or miss process. Most companies pretty much try and do as much as they can to get a drug out. If you actually look at what pharmas put out in terms of new patents (not reformulation patents, the dirty bastards :mad:**) you’ll see it isn’t exactly a bustling field. There are a lot of big pharmas that only release a pretty damned small number of drugs, and they need to ride that patent as long as they can.
Most estimates for drug development run about five years, start to finish (FDA approval). Since current technology basically means “try a bunch of 'em and pray one is good enough for something that we’re researching”, we’re talking some pretty hefty “luck” herepart of why biotechs aren’t stable stocks in the slightest.
Of course, finding a drug isn’t a matter of just creating one and checking its properties. You have to also check them against targets: what you want the drug to do. And that’s the other half of the research: finding drugs that do something we are looking into. For all you know you have the best weight-loss drug ever, but if you’re checking into how it affects cancer or something, you’ll never know.
Currently, most pharmas do things backwards (in my opinion, but I’m not alone). They have diseases etc they’re researching, and find molecules that seem to have the desired affect, make a shitload of variations on them, and try and find a formulation that works (dissolves right, is absorbed properly, isn’t destroyed by various processes before it can do its thing, and can be delivered effectively without poisoning effects, etc, etc, etc). As I mentioned before, accurate measurements of the instrinsic properties of a molecule (intrinsic: permeability, solubility, dissolution, blah blah blah) are slow to gather right now, so they are mostly forced to go the other path. Efficient production would allow us to go the other way, or actually both ways: to find drugs that will at least get into the body, and then see which of these do what we want. This would allow big pharmas to basically stockpile usable molecules and test them against whatever targets they want. But… the technology isn’t there, so things go the other way. Instrumentation companies are working on that all the time: better, faster, more meaningful measurements.
What this means is the there is no real way to “recoup” development costs, because if you try and figure out what you spent to get a drug you’re lost. You’re lost for two reasons. One is mostly what was mentioned above: the path a molecule goes through from beginning to end is really convoluted. The other is that, as mentioned as well, the development time is incredibly long: at least five times as long as any fiscal year. And the costs to develop it can’t be known in advance in any meaningful predictive way.
So what is done instead is simply that research is budgeted, period. It is budgeted in two ways: by purpose (ie cancer research, etc), and by department (late stage research, target formation, yadda yadda yadda).
Research budgets vary not based on how much profits the company has, but rather on what they are looking for. Public and private research grants incite research directions. Perceived demand for better products can spur research. Company acquisitions can shift research entirely.
So to a pharma, research is more like an overhead than something they strictly invest in. When I invest in training my employees (hypothetically), I can expect certain things. If I invest in late-stage development, there is no way to tell what this will accomplish.
So I hope I’m clear: pharmas do not, and right now cannot, recoup research expenses because there is no meaningful way for the pharmas to quantify them. In the years I’ve been in the field I’ve seen pharmas grow from one-room labs to multinational corporations (Milennium Pharmaceuticals became unbelievably big in just six short years riding off a patent or three). I’ve also seen big uns downsize and send thousands and thousands of chemists fleeing for anywhere they can go.
What this all means. If there is no way to meaningfully recoup research costs, there is no way to assert that anyone subsidizes it. Pharma’s research, like most public and private companies, is indeed driven by profits in an absolute sense, but not in any proportional way. So to look in terms of recouping costs is to actually approach this issue the wrong way. Instead the approach must be to look at profits as extending the life of a company with a very high operating cost (ie treat research more like overhead – this isn’t factual because research does have different tax implications, but conceptually is much more sound).
The important thing is to avoid the compulsion to look at pharmas as innovators. they are not. They are banking, ultimately, on luck. This is why small companies can grow hugely almost overnight, and huge companies start shrinking even though their “research costs” are many times larger than the ones who just exploded on the market.
I hope the above drives what I would like to say is my conclusion: until drug development becomes a science itself instead of divination with the trappings of science, there is no sense in which research is subsidized. Drug prices are not a part of research (because there is no ultimately meaningful way to quantify it – not that that doesn’t stop some, but this phenomena is well-known to people who report about the industry), and more research does not necessarily lead to more drugs. Innovation in research in fact takes place outside of pharmaceutical companies, in those places that work to manufacture tools the pharmas will utilize. Sales of said tools are not significantly lower to companies outside the US (eg in Europe), except in that, due to external economic reasons, there are less pharmas outside the US. This has nothing to do with drug pricing, however.
I want to clarify that I’m not saying companies don’t quantify research. As I mentioned, they have to for tax reasons (well, they desire to for tax breaks :)). It is that the numbers they can utilize for tax purposes are not a function of what they spent to develop any particular drug.
Until there is a definite relationship between money spent on research and the number of drugs produced, the question of subsidy is unanswerable (it is not that the answer is: it doesn’t happen).