Food and Drug Administration commissioner Dr. Scott Gottlieb is concerned that pharmaceutical companies aren’t making enough money. In a speech last week to the members of the Regulatory Affairs Professional Society, Gottlieb bemoaned the high costs of drug development and warned that “we need to do something now to make the entire process less costly and more efficient” if we want drug companies to continue to develop new medicines. Gottlieb also asserted that bringing down the cost of developing drugs would naturally translate into lower drug prices, a process STAT‘s Damien Garde referred to as a “sort of trickle-down theory of pharmaceutical regulation.”
Gottlieb’s speech is a curious edition to the ongoing debate about drug development costs and drug prices. As Garde notes, the FDA by law has no role in lowering drug costs or pharma profits, making Gottlieb’s address a departure from previous commissioners’ statements. His speech also coincides with new research challenging the narrative that high drug prices are necessary to make up for spending on research and development.
For example, the Institute for New Economic Thinking released a working paper a few months ago examining how much 18 major drug companies spent on developing new drugs between 2006 and 2015. They found that these companies spent $50 billion more on stock buybacks and dividends than on research and development. The companies spent $261 billion on stock buybacks alone, which could have been returned to households in the form of lower drug prices without any negative impact on R&D.
Another study published this week in JAMA Internal Medicine looked at the development costs of 10 cancer drugs compared them to revenues. Researcher Vinay Prasad and colleagues found that the median cost for research and development of one cancer drug was $757 million (including the costs to develop other drugs that failed during that time). The median revenue from selling these drugs was $1658 million, more than twice as much as R&D costs.
Prasad’s study and the INET working paper together create an alternative to the conventional wisdom around drug prices. The evidence shows a pattern of pharma pricing drugs not based on research and development costs, but based on what the market will bear. These profits are then given to stockholders in the form of buybacks and dividends rather than invested in more research. We have to better regulate drug prices and stop rewarding companies that take advantage of the system, not shore up pharma profits in hopes that savings will “trickle down,” as Gottlieb suggests.