NCPA - National Center for Policy Analysis

Plain Talk About Drug Pricing

July 22, 2002

Since the whole issue of prescription drug costs has been demagogued in Congress and certain sectors of the press, it's high time to set forth some economic realities, critics contend.

First, it costs anywhere from $250 million to $800 million to research and develop each new drug. These are sunk costs, which must be recovered in the price of the drug.

Cost for actually producing the pills -- the marginal costs -- are far less.

  • Foreign governments usually impose price controls on U.S.-developed drugs -- which account for 45 percent of new drugs sold globally -- with the legal price set near marginal costs.
  • This leaves U.S. consumers to pay the bill for development costs.
  • And within the U.S., various parties are attempting to shift the costs: companies find themselves bargaining over bulk purchases by insurers, managed-care organizations and state Medicaid agencies -- all pressing for marginal pricing, with none of them wanting to share in development costs.
  • Now Congress is set to have the federal government bargain with drug companies for everyone over 65 -- regardless of personal wealth or drug insurance coverage.

Is nobody willing to acknowledge the need to compensate manufacturers for those sunk, development costs? And how long will outlays for research continue if they are not acknowledged?

The pharmaceutical industry is not nearly as profitable as some statistics suggest.

A 1994 study by the Congressional Budget Office found that the companies spent three times as much on research and development as average companies, and that "properly measured," their profits were "only slightly above the average for companies in all industries."

Source: Robert L. Bartley, "Drug Prices: A Much-Needed Primer," Wall Street Journal, July 22, 2002.

For WSJ text,,SB1027290215817036440,00.html


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