11 September 2016


Research and development is expensive, but so are drug monopolies. In 2015, the trade association Pharmaceutical Research and Manufacturers of America (PhRMA) claimed that its members spent $58.8 billion on R&D, and that non-PhRMA member spent tens of billions more. But, those same companies also earned significant revenues. In 2015, prescription drugs generated an estimated $413 billion in sales from the United States market alone[1], and more than one trillion dollars worldwide. In the U.S. market, sole source patented medicines are on average 19 times more expensive than generic medicines[2]. For 2015, the cost of the monopoly on drugs could be estimated at $283 billion, just in the United States.[3] Globally, the cost of the monopoly is far more. If the United States had already switched to delinkage, and spent $100 billion in that year to reward researchers and drug developers, it would have saved $183 billion and eliminated restrictive formularies, high co-payments and other access barriers. Moreover, even these calculations under-estimate the savings, since generic drug prices are undoubtedly higher than they should be because of the many inefficiencies in markets for generic drugs that are related to the system of monopolies.

Would $100 billion have been enough for the United States? Yes. $100 billion is nearly twice the PhRMA member reported R&D outlays for that year. $100 billion is more than $2 billion per new drug approved in 2015, a record year for approvals, and $4.8 billion per drug approved in 2010. The $100 billion would also be in addition to the money for biomedical R&D funded through U.S. government agencies. Moreover, the United States is only one country, and the costs of R&D would be shared with others. In 2015, the United States represented 24 percent of global GDP, and 38 percent of GDP in countries the World Bank defines as high income.

The estimated savings are even more impressive when you consider how much of the current R&D budget is wasted on developing drugs that match, but do not improve health outcomes, and on clinical trials that have little scientific merit, but are used to advance marketing objectives.

The amount of money needed to finance incentives is also related to R&D spending involving other mechanisms. If governments expand direct funding and/or subsidies for drug development, the amount needed for incentives would be less.[4]

While R&D is expensive, it makes no sense to spend over one trillion on drugs to finance tens of billions in industry R&D.

[1] IMS Health.

[2] In 2016, GhPA estimated that generic drugs represented 88 percent of all prescriptions filled, but only 28 percent of all revenue). The generic prescriptions were just [(28/88)/(72/12)] = 5 percent as expensive.

[3] 95 percent of 413 x .72 = $283 billion.

[4] For example, if the U.S. Orphan Drug tax credit, which covers 50 percent of the cost of qualifying clinical trials, was expanded to cover more trials or at a higher percentage, and supported by more countries, the costs of conducting clinical trials would be lower, and consequently, the amount needed for an incentive to companies to invest in a trial would be less.