Pharmaceuticals and Their Outrageous Costs Explained

Nearly everybody faces the cost obstacle when it comes to medication. Prescription medication is often exorbitantly priced, especially brand name drugs. While generic versions often provide cost relief, they may not always prove to be the best medication for a given situation. As a result, spending on specialty drugs continues to increase as it reached $92 billion in 2012, with an expected $235 billion by 2018. Overall prescription drug spending rose 3.2% to $329.2 billion in 2013 due to fewer patent expirations, more people using health care services, and the introduction of new drugs. While spending continues to increase, so does the number of Americans who cannot afford their medications at approximately one in five.

Much of the cost of new drugs stems from a long and arduous clinical research process. Often, pharmaceutical companies spend many years, countless man-hours, and an enormous amount of money on drug trials—only to have a drug fail somewhere along the process. In fact, less than 1 in every 10 drug succeeds. According to Cutting Edge Information, a business intelligence firm, costs per patient during clinical studies vary per phase: Phase 1 at $15,700; Phase 2 at $19,300; and Phase 3 at $26,000. Overall, average drug development can cost a company upwards of $4 billion. The amount of time spent in the development process also takes away from potential earnings a drug could make in the market. In fact, the average lifetime of a drug on the market is only approximately 11 years, if the company is lucky enough to get its drug approved.

After many years, numerous resources, and billions of dollars, a drug that succeeds in clinical trials is ready to go to market. However, in order to introduce the drug, pharmaceutical companies must advertise. According to eMarketer, pharma spent more than $27 billion in 2012 on promotional expenditures. FDA labeling limitations complicate a drug’s introduction to market. Therefore, companies must consider the best way to market their products. The FDA label guidelines restrict the value products could create if companies were allowed to market products for a variety of indications. Companies must be creative and determine the best avenue to retain value when marketing their products.

Also, during the development process, a company must file for a patent in order to protect the innovation. Patents are expensive. One patent can cost between $10,000 and $50,000, and as much as $250,000. Defending patents is even more expensive. A typical patent lawsuit in the United States costs $3 million or more. Although expensive, patents provide critical value to pharmaceutical companies by keeping competitors at bay, providing rights in the event of willful infringement, and allowing for higher market prices. In fact, the most valuable patent in history turned out to be the pharmaceutical Lipitor, a cholesterol-lowering drug. While the Lipitor patent has expired and is now worthless, it is likely that Lipitor would not have been so successful if it did not have the patent to protect it to begin with.

As shown, the high risk and costs pharmaceutical companies have to expend to get a drug to market are stupendous. Even more sobering is that only about 3 out of 10 drugs that reach the market ever earn back money that exceeds or meets R&D. For these reasons, pharmaceutical companies charge high prices to make up for lost time, resources, and money. If consumers do not pay these high prices, the incentives for pharmaceutical companies to continue researching new solutions to life-threatening problems may cease. Although this explanation does not ease the cost burden on consumers, perhaps understanding the reasons behind the costs will provide consumers more peace of mind.