CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Free Trade: The Answer to the Question of "How do you pay for a drug that costs $84,000?"

Free Trade: The Answer to the Question of "How do you pay for a drug that costs $84,000?"

Wednesday, 16 July 2014 12:58

Wonkblog let down its readers badly in a piece on Sovaldi, the hepatitis C drug that Gilead Sciences is marketing in the United States at the price of $84,000 per treatment. While the post is headlined with the question in the title, it never makes the obvious point that the drug really doesn't "cost" $84,000.

This is the price that Gilead Sciences charges. It is able to get away with charging the price because the government gave it a patent monopoly, which means that any competitors would be arrested. In India, where the government ruled that the drug did not deserve a patent (it is a combination drug, not a new chemical compound) the generic version is sold for less than $1,000. "How do you pay for a drug that costs $1,000?" is a much simpler question to answer.

Of course if we did not give drug companies patent monopolies we would need an alternative mechanism for financing research, but such alternatives do exist as people know who have heard of the National Institutes of Health, which get $30 billion a year from the government. (The Defense Department provides another example of how research and development can be paid for upfront, rather than recovered through patent monopolies.)

If the research was financed up front we would not have to deal with Wonkblog's $84,000 question. We also wouldn't be giving drug companies an incredible incentive to lie, cheat, and steal in order to maximize the sale of a product on which they have a mark-up in the neighborhood of 10,000 percent.


Note: Typos corrected, thanks to Robert Salzberg.

Comments (6)Add Comment
Yes, drug companies are evil
written by Dave, July 16, 2014 1:54
Not one of the drug companies will spend any money on one of the worst problems facing humanity now: antibiotic-resistent bacteria.

If this model hasn't failed, can somebody please show me what a failure looks like?
from a 1990's ralph nader letter
written by djb, July 16, 2014 2:02
"Fortunately, countries have other options available to promote public health objectives. Governments can and do directly subsidize pharmaceutical R&D, and have the option of compelling companies to reinvest a portion of revenue from drugs sales into new R&D.[10] The best policies are those that accomplish public health objectives most efficiently -- at the lowest costs to consumers and taxpayers -- and equitably share the burden of financing worldwide health care R&D.

Outside of the United States, many governments have used either price controls or compulsory licensing programs to control drug prices. Under a compulsory licensing regime, countries retain the right to require patent holders to issue licenses to manufacture and sell a drug to one or more of their competitors. A compulsory licensing program may require the firm receiving the compulsory license to pay royalties to the patent holder as compensation for the license. Many countries express preference for compulsory licensing over price controls, because it is easier to administer -- the government is not required to independently determine a price for the drug -- and it encourages the development of a vibrant domestic generic drug industry."

Keep Kidnapping Legal
written by Last Mover, July 16, 2014 3:04

When kidnappers demand a ransom for return of their victim, the price they set must recover cost or it's not worth it.

Same applies to Big Pharma. Kidnapping patients and holding them ransom for the highest payoff must cover costs incurred. For example, the cost of lobbying alone is huge and must be recovered as a cost of business to keep kidnapping legal, lest depraved socialists succeed in criminalizing it.

Of course there's also the substantial cost of funding the 24/7 sock puppet outrage machine to divert attention away from these perfectly legal kidnappings by Big Pharma - to other similar kidnappings and crimes against Americans long treated by the conservative right as justification for immediate and severe retaliation by, well you know, the very heavy hand of government law and order itself.

Then there's the cost of lying. Lying about how high the price must be to incentivize creation of the drug. Lying on how Americans must subsidize the drug with higher prices so others can get it at lower "subsidized" prices.

Uh huh, like the American price would drop like a rock if only those subsidized prices were increased. Like Big Pharma would actually leave money on the table and not continue charging whatever the market will bear in America.

Dean Baker is correct, sometimes price can exceed cost. But not this time. Do read the ransom note inside the container of any drug priced at $84,000/treatment. It will explain clearly why the price covers cost and not one penny more.

Then raise your hands to the sky and give thanks that were it not for a deregulated free market of kidnappers and ransom prices that allocate drug costs efficiently, well you know, you could have obtained the same treatment for $1,000 and had $83,000 left over to buy some food, clothing and shelter.
R&D vs. Marketing Expense
written by Frank Shinneman, July 16, 2014 6:03
For the past 3 years SG&A has been equal to R&D expense at an average of 17% of sales.
Why is R&D always trotted out as the reason prices must be high? Marketing expenses (without patent and lobbying expenses) are almost as high.
Let's be clear ...
written by John Puma, July 17, 2014 1:30
The published scientific findings made possible by NIH grants (and those of other government agencies) have always been readily accessible to drug companies.

Most, if not all, companies are founded based on government funded research results by former and/or continuing academics.

The corporate/government "partnership" is virtually all encompassing and it is NOT for the benefit of the general populace.
Drug Costs Likely to Spike
written by Robert Salzberg, July 17, 2014 5:42

The ACA established 12 year patent protection for biologics/biosimilars. The EU has 10 year patent protection for biosimilars. It's common for these biosimilars to cost $100,000 a year. So the real question is can America and the EU afford this wave of new innovative drugs?

The May, 2014 summary from the European Commission on proposed principles for the TTIP regarding pharmaceuticals mentioned harmonizing the approval methods for biologics and for generic biologics but doesn't mention harmonizing the patent protection periods of the EU and the the US.

The title of the EU's TTIP summary is:

"Towards an EU-US trade deal Making trade work for you"

Methinks the EU doth protest too much. "You" ain't about you unless you represent industry.


Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.