No matter who one is, there is a chance that they have gone into the drug store to get a prescription drug and been amazed by the price. Within 2012, the average price for prescription was $268.1 Some might even argue that the prices are too high and are only present due to the ability to monopolize the market through patents. Such a discussion is for another day, instead of focusing on this issue, instead this post will attempt to bring to light some of the reasons why the prices are such as they are.
In every market, companies desire to maximize their profit. This means that within any market a company is try to have their revenues exceed the costs that are put into producing a given product. These costs are usually divided into two parts, fixed costs and variable costs. As suggested by the names, fixed costs deal with costs that have to do with long term aspects of the company (such as rent for the land, machinery for production), while variable costs are associated with the actual production. The pharmaceutical market is unusual in its costs distribution, the vast majority of costs for the drug are within the fixed costs. This is largely due to the developmental costs that go into producing a new drug, even if you’re a well-established company.
For pharmaceutical companies, there are a number of factors which go into this fixed cost. The first of which, and perhaps the most sizable portion is research and development of the new drug. This is a large area of the costs since it covers not just the intellectual and concept aspects of the drug development, but also includes the costs associated with the testing of the drug itself. In a ten year span, two of the biggest pharmaceutical companies, Bayer and Pfizer, spent $33,118 and $77,786 million respectively simply within R&D. These values equate to $6,624 and $7,779 million per new drug resulting solely from the R&D of the drugs.2 This puts a massive amount of costs, which the company must recoup if it expects to stay in business for any length of time.
This result of the fixed costs to producing the new drugs has gotten to a breaking point recently. Partially this is due to the fact that 95% of experimental medicines studied end up being either ineffective or not safe.3 This has led to companies having to load off even more expenses onto the consumer. After taking into account responsibilities towards investors, it is still likely that when a drug makes it through the process and is successful that the company will end up taking a net loss. Studies done on the costs for drug production have indicated that the total costs for bringing a drug from inception to market has an estimated cost of $1.104 billion (in 2013 dollars). This doesn’t include the costs associated with the time spent developing the drug itself, which can push the cost of designing a drug to around $2.600 billion.4 This value has risen dramatically in the past 20 years and shows few signs of being slowed down.
Due to the costs of development and research into new drugs prior to them coming to market, don’t expect the price of prescriptions to come down anytime soon. Despite this, there is reasonable hope for the future as with new computer models and synthetic techniques for the drugs, there are expectations to limit both the number of failures of the drugs tested and reduce the costs associated once the drug has been put into production. Potentially these can reduce dramatically the costs put onto the drug companies, and by extension the consumer as well.
- Spending on Prescriptions in 2011. (2012).
- The Cost Of Creating A New Drug Now $5 Billion, Pushing Big Pharma To Change. Forbes at <http://www.forbes.com/sites/matthewherper/2013/08/11/how-the-staggering-cost-of-inventing-new-drugs-is-shaping-the-future-of-medicine/print/>
- How Much Does Pharmaceutical Innovation Cost? A Look At 100 Companies. Forbes at <http://www.forbes.com/sites/matthewherper/2013/08/11/the-cost-of-inventing-a-new-drug-98-companies-ranked/>
- Cost to Develop New Pharmaceutical Drug Now Exceeds $2.5B. at <http://www.scientificamerican.com/article/cost-to-develop-new-pharmaceutical-drug-now-exceeds-2-5b/>