The latest issue of Essential Action’s Global Access to Medicines Bulletin discusses the pharmaceutical industry’s most frequent justification for high drug prices in the developing world: the cost of research and development (R&D) for new treatments.
Our conclusion? That Pharma’s R&D cost estimates are often overblown, and that generic competition in the developing world will not significantly undermine industry’s ability to develop new drugs.
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Global Access to Medicines Bulletin
Issue No. 2, February 14, 2008
Whenever developing countries seek to improve access to essential medicines by hastening the introduction of generic competition and reducing prices, they invariably must confront a single overriding claim: their actions will undermine incentives for research and development (R&D) of important new drugs.
“PhRMA is deeply troubled by the recent trend toward the issuance of compulsory licenses for pharmaceutical products,” said Billy Tauzin, President and CEO of PhRMA, the U.S. pharmaceutical companies’ trade association, in 2007.Tauzin’s statement followed Thailand’s decision to import significantly cheaper generic versions of three life-saving drugs and Brazil’s decision to use the generic version of a key treatment for HIV/AIDS. “This misguided focus on short-term ‘budget fixes’ could come at a far greater long-term cost, potentially limiting important incentives for research and development that are necessary to positively impact the lives of millions of patients worldwide.”
It is expensive to develop new drugs, but not nearly as costly as the pharmaceutical industry suggests.
Pharma R&D by the Numbers
Numerous independent studies and investigations show that the world’s largest drug companies’ R&D spending claims are misleading and overblown, and that they spend much more on marketing than on R&D for new products. These findings undermine the pharmaceutical industry’s repeated assertion that high drug prices are justified by the cost of research, and that generic competition in the developing world will undermine the industry’s ability to develop new treatments.
Although PhRMA asserts that U.S. brand-name pharmaceutical companies invest more in R&D than marketing, independent investigators reach different conclusions. A January 2008 article, published in the peer-reviewed journal PLoS, concluded that U.S. drug companies spent almost twice as much on marketing as on R&D. Researchers Marc-Andre Gagnon and Joel Lexchin of York University in Toronto, found that U.S. companies spent 24.4% of their U.S. sales on marketing and 13.4% on R&D in 2004. U.S. sales that year totaled US$235.4 billion. Gagnon and Lexchin based their findings on data and estimates drawn from industry sources.
“These numbers clearly show how much promotion predominates over R&D in the pharmaceutical industry, contrary to the industry’s claim,” wrote Gagnon and Lexchin. “[This] confirms the public image of a marketing-driven industry and provides an important argument to petition in favor of transforming the workings of the industry in the direction of more research and less promotion.”
And while companies argue that high drug prices are necessary to cover the cost of R&D – implying that companies make only modest profits after the cost of R&D is paid for – pharmaceuticals remain one of the world’s most profitable industries. The industry’s 2006 return on investment was 19.6 percent, according to Fortune, second only to the oil and mining industry. Pharmaceuticals almost always rank in the top three industry sectors by this measure.
Current R&D incentives often result in limited health benefits as well as high prices
The investments that Big Pharma does make in R&D are driven by market demand, not public health need. One result is a surplus of “me-too” drugs, treatments that are similar to existing products and offer limited therapeutic benefits over existing medicines.
When new drugs are submitted to the U.S. Food and Drug Administration (FDA) for marketing approval, the agency classifies them as meriting either “priority review” (conferred for drugs that offer “major advances in treatment, or provide a treatment where no adequate therapy exists”) or “standard review” (applied to a drug that offers “at most, only minor improvement over existing marketed therapies”). Only about one third of FDA approvals are “priority.”
Other reviews find that only about one in ten new drugs offer substantial therapeutic gains:
* Between 1999 and 2004, 122 new active substances were introduced into Canada. Only 10 percent were designated as major therapeutic advances or breakthrough products, according to a report by the Patented Medicine Prices Review Board of Canada.
* Since 1981, Prescrire, a leading review offering independent comparative information on drugs and other therapeutic interventions has been evaluating new drugs and new indications for older drugs. By 2003, it had done almost 2900 such assessments and found that only 11 percent of medications constituted substantial advances.
Developing country markets only a fraction of Pharma’s sales
Big Pharma is very concerned about developing country markets, where drug sales are growing at a faster clip than in rich countries. However, it remains the case that developing countries represent only a small fraction of Big Pharma’s revenues. Developing country markets account for less than 13 percent of global pharmaceutical sales, according to IMS Health. Slightly more than 1 percent of sales are attributed to Sub-Saharan Africa, the world’s poorest region.
Any lost revenue from developing countries therefore by definition can only have a limited impact on Big Pharma’s capacity to undertake R&D.
The limited contribution that developing countries are now making to Pharma’s R&D budget opens the possibility of exploring new methods of funding R&D. Developing countries should be able to pay a fair share of drug development costs through means other than high drug prices unaffordable to most people in those countries.
Published by Essential Action’s Access to Medicines Project
P.O. Box 19405, Washington, DC, 20036, USA
Tel: (1) (202) 387-8030
Editors: Sarah Rimmington [email protected]
Robert Weissman [email protected]
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