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Pricing Pharmaceuticals, Part 1
"Well, it’s no trick to make a lot of money... if all you want to do is make a lot of money."
~Mr. Bernstein, Citizen Kane. Warner Bros.
Sovaldi™ is a drug that has been making headlines around the world for a couple of reasons. For one, it is a groundbreaking new drug, which cures up to 96% of certain hepatitis C patients in one course of treatment1. The second reason is that one course of treatment has been given a price tag of $84,000, equating to approximately $1,000 a pill.
Sovaldi™ costs $84,000 for one course of treatment
In a previous blog post, we talked about the good and bad of generic drugs and mentioned that generic drugs save consumers an estimated $8 to $10 billion dollars per year at the pharmacy. The reason why so much money is saved purchasing generic "equivalents" is because brand name drugs can be notoriously expensive. In 2012, spending on brand name drugs in the US made up over 75% of all prescription drug expenditures while only being about 22% of all prescriptions dispensed2, showing the huge gap in pricing.

The difference in price between generic and brand name drugs has been steadily increasing over time. Express Scripts, 2013.
The question that many consumers may ask themselves is, why in the world are drugs so expensive?
Futurama™, Fox Television
There are many reasons that companies use to explain drug prices. Of course, every company producing a new product has overhead, like facilities, employee salaries, and marketing. However, there are certain factors that impact pharmaceuticals more or differently than other industries. This post will be the first in a series about things that may influence pricing in the pharmaceutical industry. We will leave it up to the reader to determine whether or not the industry's reasons are justified.
1. R&D

Many people often look at how much a product costs versus how much the materials of the product cost. Of course, this a poor representation because much more goes on behind the release of a product. The biggest cost sink in development of these drugs is the process of research and design. For drugs, the R&D budget can often be a vast majority of the costs, as a company must take into account all of the preclinical experiments and clinical trials that led to a drug making it to the market. On average, this can be a 12 year process, with costs including salaries of the scientists, reagents, experimental animals, management of clinical trials, and many other things. The average cost of bringing a specific drug to market is nearly $1 billion3. Of course, just like in your lab, things don't always go smoothly, leading to the next point...

Also, a billion dollars. The Office, NBC Universal
2. Failure

Just because you spent 2 weeks working on an experiment doesn't always mean that data will go in a paper. Likewise, just because a drug company has spent a billion dollars developing a potential drug doesn't mean it won't fail in a phase 2 clinical trial. Science depends on experiments, and by definition that means you will not always know the outcome in advance. When a drug candidate fails, a company may have spent millions of dollars on that effort with nothing to show for it. So, when a drug makes it to market, drug companies will need to take into account the money lost in past failures when considering pricing. In essence, by paying for a pill, you could be paying for both the past and future failures of the manufacturer. After incorporating failed drug candidates into the cost of R&D, the cost per drug brought to market rises to nearly $6 billion for certain drug manufacturers3.

Hopefully you have SOME idea...
The two factors above cover a significant amount of the rationale behind how a drug is priced. In future posts, we will discuss additional reasons why drugs are priced the way they are (though some reasons maybe be less savory to the average scientist!). Stay tuned!

Doctor Who™, BBC.
Questions or suggestions? Let us know,
Contributed by Ed Chen, PhD.
If you want to learn more:
  1. Approval of Sovaldi, FDA
  2. Looking Beyond Generics to Reduce Drug Costs, Elsevier Gold Standard
  3. The Truly Staggering Cost of Bringing a Drug to Market, Forbes
  4. Economics of the Pharmaceutical Industry
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