11 September 2016


Revised September 17, 2018

Research and development is expensive, but so are drug monopolies. In 2016, the trade association Pharmaceutical Research and Manufacturers of America (PhRMA) claimed that its members spent $65.5 billion on R&D[1], and non-PhRMA members have invested billions more. But, those same companies also earned significant revenues. In 2016, IQVIA estimated the U.S. market for prescription drugs at $453 billion, when measured at invoice prices, and $324 billion when taking into account off-invoice non-transparent rebates and other pricing concessions[2]. Global sales for the industry were estimated at more than one trillion dollars.[3]

In the U.S. market, the invoiced sole source patented medicines are on average 30 times more expensive than generic medicines in 2017.[4]

IQVIA estimated that non-transparent off-invoice rebates and other pricing concessions reduce the pricing differential. In 2016, IQVIA estimated that “net” revenues for drugs were $129 billion lower than the revenues based upon invoice prices. Assuming that the IQVIA estimates are accurate for 2016, and assigning all of the rebates to brand name drugs, the relative prices of patented medicines were 14.5 times more expensive than generics.[4]

In the United States, for 2016 alone, the high prices due to the monopoly increased the cost of brand name drugs by $335 billion, when measured at manufacturer’s’ invoice prices, and by $194 billion when using the IQVIA estimate for off-invoice rebates.[4]

These numbers underestimate the costs of the monopoly because they do not take into account the markups charged by distributors and the many inefficiencies in markets for generic drugs related to the system of monopolies. Furthermore, the estimates ignore the costs associated with access barriers, including persons suffering or dying prematurely because they could not afford or obtain insurance coverage for novel drugs that are expensive.

Globally, the cost of the monopoly is far more.

If the United States had already switched to a system of delinkage, the savings would have been significant.

Senator Bernie Sanders’s 2017 proposal for a Medical Innovation Prize Fund (S.495) would have required the United States to create a fund equal to 0.55 percent of U.S. GDP to reward researchers and drug developers. In 2016, this would have amounted to $102 billion. By eliminating the monopoly, the bill would have also eliminated restrictive formularies, high co-payments and other access barriers. The $102 billion in 2016 would have been LOWER than the premium the U.S. paid due to our current system of awarding drug monopolies. When measured by manufacturers’ invoice prices, the Prize Fund approach would have saved $225 billion in 2016. When measured by the net revenues, using the IQVIA estimates of off-invoice rebates, the savings would have been $92 billion in 2016.

The Sanders innovation prize fund bill required all entities that provide reimbursements or insurance coverage for drugs to share the costs of the cash rewards. The $225 billion to $92 billion in net savings would benefit everyone, as taxpayers, employers and consumers of health insurance premiums or drugs.

Would the $102 billion for medical innovation prizes in 2016 have been large enough of an incentive to replace the incentive now provided by the monopoly? Yes. In 2016, $102 billion would have been nearly twice PhRMA members reported R&D outlays in the United States, and 55 percent more than PhRMA members reported global outlays on R&D. $102 billion would have been equal to $4.6 billion per every novel drug approved by the FDA in 2016, and $3 billion per drug based on the average number of novel drugs annually approved by the FDA from 2010 to 2017.[5]

The $102 billion would also be in addition to the money for biomedical R&D already 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 2017, the United States represented 24 percent of global GDP, and 38 percent of GDP of countries the World Bank defines as high income.[6]

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.[7]

While R&D is expensive, it makes no sense to spend over one trillion dollars on drugs in order to finance much smaller investments in industry R&D when there are alternatives for providing incentives that are less expensive, more efficient in terms of innovation objectives, and lead to more equal access and eliminate much of the current financial toxicity associated with novel drugs.

[1] 2018 PhRMA Annual Membership Survey.
[2] IQVIA. Medicine Use and Spending in the U.S.: A Review of 2017 and Outlook to 2022. Institute Report, April 19, 2018. https://www.iqvia.com/institute/reports/medicine-use-and-spending-in-the-us-review-of-2017-outlook-to-2022
[3] QuintilesIMS Institute. Outlook for Global Medicines through 2021: Balancing Cost and Value. Institute Report, December 2016.
[4] James Love. The cost of drug monopolies in the United States. Harvard University Bill of Health, September 11, 2018. https://blogs.harvard.edu/billofhealth/2018/09/11/26404/
[5] http://drugdatabase.info/novel-drug-approvals/
[6] http://drugdatabase.info/economic-indicators/
[7] For example, if the U.S. Orphan Drug tax credit (which once subsidized 50 percent of the cost of qualifying clinical trials, but was cut to 25 percent in the 2017 tax reform legislation) was expanded to cover more trials or at a higher percentage, and was supported by more countries, the costs of conducting clinical trials would be lower, and consequently would lessen the amount needed for an incentive for companies to invest in a trial.