Prescription drug costs and drug research

Hello all,

I have heard many people say things along the lines of “Canada leeches off US drug prices” and “90% of all drugs are developed in the US, the rest of the world gets a free ride”. What is the straight dope on the following counter-arguments?

[li]The USA and Canada are separate markets. The companies charge a profit-maximising price in each. What this price is in Canada has no impact on what it is in the USA. If it were unprofitable to sell drugs in Canada, then the companies would just pull out.[/li]
[li]Huge amounts of drug development are done by French and Swiss companies in particular. American drug development tends to the vanity pander to wealthy, decaying baby boomers. Drugs that help poor people are often left by the wayside.[/li][/ol]

I tend to think these are convincing, if overstated. But isn’t there some merit to the following?

[li]Drug development costs are sunk costs. Whilst it is profitable in terms of marginal costs (of production and shipping) to sell in Canada et. al., it is only the USA’s high prices which allow companies to recoup their sunk costs of research. If this USA-bonus weren’t available, companies would lose money on their research and have to scale it back.[/li][/ul]

This rings true, but hang on - companies don’t know in advance which drugs will be profitable. Patent periods are short, so developing new drugs is their raison d’etre - if companies stopped developing new drugs, they’d be out of business.

I have no answers, just questions.


Your questions are good. You would not expect higher drug prices in the rest of the world to lower US drug prices, for just the reasons you outline. However, higher world drug prices would make more research profitable. If the market were less fraught with weirdness* you’d be really confident that would mean better drugs. And on a very optimistic view, perhaps you would get lower prices in the US due to the development of more cost-effective substitutes for existing products.
*[sub]Perverse incentives, ignorance, irrationality and oligopoly in pharmaceuticals and downstream markets.[/sub]

[li]The USA and Canada are separate markets. The companies charge a profit-maximising price in each. What this price is in Canada has no impact on what it is in the USA. If it were unprofitable to sell drugs in Canada, then the companies would just pull out.[/li][/QUOTE]

You sound like a smart person but I have heard other smart people on these boards make this exact same argument and it doesn’t make any sense to me. The reason is that there is a huge difference between a drug’s total cost to market and just the manufacturing cost.

If a drug costs $1 billion to research, market, and manufacture, the drug company is going to need to get that money back plus some hopefully some profit. U.S. consumers are charged at the highest market rate possible to recoup all the costs associated with drug development.

In the meantime, the drug company knows that the actual manufacturing cost of the new pills are extremely cheap if you just ignore the other costs associated with the drug development. In countries like Canada, it might be profitable to manufacture the drug for $5 a script and sell it for $10 a script. This is basically free money because the U.S. is the one working on paying for the real costs of the drug while Canada is just paying for manufacturing costs much like the drug was already generic because of price controls.

If Canada was opened up as a more free market like the U.S. then U.S. and Canadian consumers could more closely share the total development cost of the drug. However, there will always be countries that are only willing to treat the drug like a generic and only pay for manufacturing costs plus some small profit to the company. This is what you call better than nothing but it doesn’t distribute the R&D costs well and Americans end up paying disproportionately more.

I’m not arguing, merely trying to understand an issue.

Why would the company decrease the cost in the U.S. under this condition? I mean, they’ve already set the price at the maximum profit level (as high as possible without losing sufficient customers that it decreases that profit). Why would the sales in Canada make them suddenly drop the cost?

Yes. that’s what I meant by the difference between sunk and marginal costs in my OP. Sorry if I wasn’t clear.

I guess two things spring to mind:

[li]Is Canada not a free market? I know Britain is, for drugs - it just tends to be a free market with only one major customer![/li][li]Suppose Canadian drug prices increased 20%, do you think US prices would be voluntairly decreased 20% (groan away, mathematicians)? Remember - the price as it is is assumed to be profit maximising. So this 20% drop would involve the drug companies saying No to free money for no good reason - isn’t that an illegal dereliction of duty to shareholders?[/li][/ol]

I guess hawthorne’s point strikes me as most plausible - more income from Canada means more to spend on research, not voluntary price drops for the USA. I guess this might be ‘fairer’, since as a % of drug development costs the US would bear less of the load.


Most drug research is done in the universities. When progress is made to a certain point the drug companies take it over. They help finance the schools but our tuition and taxes help defray the costs.

This strikes me as propaganda to be honest - even after universities identify a promising compound, the costs of taking it through an approvals process must be gigantic.


Again, this is laughably untrue. I’ve done research in a university, and I’ve done research in a biotech. No drug research is done in universities. To say that there is drug research done in universities is to say that there is television technology research done in physics labs.

My job as a scientist at a company is to peruse the literature and figure out ways that pathways and genes can be harnassed for a drug. Universities may figure out some of those pathways and genes (though less and less, as more of the important basic research is being done in companies every day), but they are NEVER going to do anything practical with them; they just aren’t wired that way. Academic scientists want to publish their findings in Science, Nature and Cell. Once it’s in there, they are done. That is the finish line and all they care about.
What are they doing then?

Not producing any drugs, thats for sure. Your three links (one to a place not even in the U.S., by the way) hardly support the notion that you proposed that “most drug research is done in universities”. The two links that are actually in the U.S. all discuss drug discovery from a genes and pathways standpoint, just as I said.
From your link:

“The Center for Education and Drug Abuse Research (CEDAR), funded by the National Institute on Drug Abuse (grant number 2 P50 DA05605) since 1989, has the overarching mission of delineating the origins and developmental pathways to substance use disorder (SUD).”

Bolding mine. Pathways. Genes. All helpful. All necessary. But, they are not producing any practical outcomes and without industry, they never will. They just aren’t set up for it. I have patents from academia. They will never see a clinic because no one there is equipped to do it.

Hell, it’s not even their goal (also from your link):

“The goal of this module is to identify the genetic factors contributing to the risk for SUD.” (bolding still mine) There are a million sites dedicated to university drug research. Drug research is also done in private labs.

And yet amazingly you aren’t citing them. This cite is a biotech and pharmaceutical magazine, not universities!

From your link:

"Drug Discovery & Development is the publication that provides the pharmaceutical and biotech research community with the latest drug discovery developments. "

P.S. your cite in your next link is from a pharmacy school whose mission statement reads:

" The Center for Advanced Drug Development performs a wide range of assays to obtain data for pre-approved active pharmaceutical ingredients, new molecular entities, drug products and excipients."

In other words they aren’t doing any research at all! They’re a contract assay running company for preformulated compounds!

None of your links have anything to do with your claim that
Go to almost any university site and you will find information on their drug research. Even small colleges are involved. University after university.

OK, I’m lost, how is a for-profit research company related to your argument that Universities are involved?

That’s the first cite to actual drug discovery going on in a university and it’s a grant for 1 million dollars. One million dollars will get you exactly nowhere in drug discovery. Add 499 million to it, and then I’ll be impressed.

By the way, your cite:

“These drugs have been tested on specific cancer cell lines and on mice. Though the drugs showed potency, Neamati said safety concerns must be allayed.”

That is about 1% of the way to a drug discovery. Cell lines and mice is nowhere. I can cite 1000 papers in the past six months with similar data and none of them will lead to a drug.

Regardless, this doesn’t constitute “most drug research”. I’ll tell you what, for every one million dollars you find going into genuine drug discovery research from a university, I’ll find 100 million from a company.

fiveyearlurker has it right gonzomax, no real meaningful research into drug discovery gets done in the university environment. There are some exceptions, which will steadily increase if the pharma industry continues to suck like it currently does, but the massive costs involved in drug development can only be bourne by major pharma. By major pharma, I mean the behemoth companies like pfizer, gsk, astrazeneca etc. The majority of biotechs even do not have the wherewithal to put a drug right through onto the pharmacy shelves, they’re looking to get it into the clinic then partner with one of the big boys to see it home, clinical trials cost that much.

The area where academica makes the most contribution, not currently mentioned in this thread, is in the latter stages of the drug development process, in phase 2 and 3 clinical trials. These are often carried out in university teaching hospitals, with medics who have substantial academic research interests. I don’t know how you could have a clinical trial without involving an academic clinician. You really need the top men in the field to endorse a clinical trial.

There are some notable examples of criminal lack of innovation in the pharma industry that leads people to believe that no real research is getting done there. Off the top of my head, lipitor, prilosec, and the azt debacle are all good examples of this. Coupled with the reluctance to address huge but unprofitible public health issues in the third world referenced in the OP (malaria, TB, most tropical disease), it all paints the familiar picture of evil avaricious pharmaceutical industry. This picture is well wide of the mark, the vast majority of new drugs developed to treat human disease are still invented and developed in the private sector.

There’s a few things you have to realize. First, the U.S. does not have a free market when it comes to prescription medications. What it has is thousands of government-sponsored monopolies. A patent is essentially a monopoly granted by the government, although patents are temporary in nature, they last for a significant amount of time.

I’m not saying patents are bad things, but a patented drug is not being sold on the free market, it’s being effectively sold in a highly regulated market, sometimes with no competitors at all. Sometimes there are competitors, but because of the nature of prescription drugs sometimes two medications that try to treat the exact same thing (say, erectile dysfunction) may not actually be in direct competition as drug A and drug B may be prescribed exclusively to persons with non-overlapping forms of ED (this is just an example, I know nothing about ED drugs in general.)

In Canada, the government puts price ceilings in place in order to regulate how much the companies with government-sponsored monopolies can sell their drugs for in Canada.

Big drug companies are okay with this for two reasons:

  1. They still make a profit in Canada

  2. They have to do this in order to protect their patent. If they refuse to play by the Canadian price-board’s controls, they lose their Canadian patent, Canadian companies can start producing generic versions of the medication and then people in the U.S. will start ordering that cheap, generic version from Canadian pharmacies. This has wide-reaching effects that more significantly hurt a pharma company than the paltry loss of profits in Canada.

Saying drug companies make a profit in Canada is counterintuitive. Drug companies typically need to make a huge amount of profit from drugs before their patent expires and generics start flooding the market. It’s a relatively short window, and that means they can’t afford to “just sell at a profit.” If you appropriate the costs of research into the equation, then drug companies couldn’t survive if there were price controls globally like there are in Canada. Sure, they’d make money on a pill-by-pill basis, but not near enough to recoup the massive research costs before their patent expired.

It’s not a direct association that higher drug prices in the U.S. are caused by Canadian price controls, but they do have an affect on the U.S. drug market and the decision making of pharmaceutical execs. If the Canadian price controls were removed, our prices wouldn’t drop, Canadian drugs would just become more expensive–the pharmaceutical companies will always work to maximize profit, and they have no reason to reduce prices in the U.S. when they already know people are buying at the current price (many prescription drugs have very inelastic demand, ie demand not easily influenced by price fluctuations, because certain drugs people HAVE to have, and will make significant sacrifices to obtain them up to a certain point when they just simply cannot afford the meds despite their best efforts.)

The best solution is probably, believe it or not, more regulation of the drug companies and a global price control scheme that is agreed upon by all major pharmaceutical consuming countries. Drug companies would also be required to reduce the amount of money they spend on advertising. The idea of direct-to-consumer advertising for prescription medication is kind of dubious at best. Medication isn’t like soft drinks or clothes. If you see a medication that you think you could use, it’s not like you can simply say to your doctor, “hey, I like this can you prescribe it for me?” Doctors make the decision to prescribe medications based on your condition (or if you’re a cynic based on which pharmaceutical rep is giving them the best perks/kick backs), any allergies you may have to certain medications and et cetera. More outside research.
My brother works in the pharm field. A few years ago he emailed me after the drug companies rewrote the cholesterol standards for Americans. They were set at a level that almost no one could achieve without taking drugs. The standards were written by drug companies not doctors.He said I bet they get away with it.

Certainly significant portions of basic science research is done in academia (and patents sometimes placed) but as already noted, the very expensive large clinical trials are not. And those large expenses are the bets that Pharmas make, that academia cannot afford (at least without Big Pharma help).

Price is whatever each market will bear so long as it at least covers marginal costs. (With the caveat that it is sometimes hard to define seperate markets …)

Company survival and prosperity demands that enough of those bets are jackpots enough to cover not only that drug’s research costs but the losing hands’s fixed costs too and then some. They’ll still play a hand that doesn’t cover its sunk research costs so long as it covers marginal costs. But they will not last long if they do not have something else on the shelf or in the pipeline that will cover those culmative sunk costs, and they unlikely to bet big on something that has little chance of being a jackpot. If the American market provides those jackpots … well they’ll milk it for all they can. And they’d milk it just as hard if other markets had a jackpot pay-out too.

That’s the system. Researchers in Big Pharma can get some basic science done if they can sell it as likely to have a blockbuster pay-off down the road. But big investments in medicines with relatively small, albeit critical, potential markets won’t happen. For example relatively little research is being done to develop new antibiotics despite the looming critical need - the pay-off is too small for the investment required compared to a lifestyle drug that a patient needs to take for the rest of their lives or at least for years.