Big Pharma lies about R&D costs to justify illicit profits
by Ethan A. Huff
(NaturalNews) If you listen purely to the industry side of the story, you might think that drug companies are more than vindicated in selling brand-name drugs for sometimes thousands of times more than they cost to produce, and raking in billions of dollars in profits every year. After all, much of that profit covers research and development (R&D) costs, right? Wrong. According to a new study by Prof. Donald W. Light from the University of Medicine and Dentistry of New Jersey, and Rebecca Warburton from the School of Public Administration at the University of Victoria, the average R&D costs to bring a new drug to market are a mere four percent of what Big Pharma claims they are — and that is a generous estimate.
Drug companies constantly whine in their defense that the cost of producing a new drug tops $1 billion. They derive this lofty figure from a 2003 study by Joseph DiMasi from Tufts University, Ronald W. Hansen from the University of Rochester, and Henry Grabowski from Duke University. The study, which was published in the Journal of Health Economics, was conducted out of the Tufts Center for the Study of Drug Development (TCSDD), a drug industry-funded group that “advocate[s] on behalf of initiatives and issues that further the cause of pharmaceutical innovation”.
Let’s face it. Any study out of TCSDD is about as unbiased and credible as a court decision reached with the defendant sitting on the jury. The TCSDD study used by the drug industry to defend its billion-dollar drug production claims is based on an arbitrary sampling of drugs produced by ten pharmaceutical companies. These drugs are confidential, of course, and the 12 other firms that were invited to participate in the survey did not participate, according to reports.
So TCSDD basically produced a drug industry-funded study that contains drug industry-favored results. It includes a small and random sampling of unnamed drugs, and claims that such drugs cost an average of $802 million a piece to produce in 2000, or $1 billion in 2011 dollars when accounting for inflation. But the precise numbers and details are all but missing from the report. So how anyone in the scientific or regulatory community can willfully accept the report as anything other than hearsay is anyone’s guess.
According to a recent piece in Slate, the Pharmaceutical Manufacturers Association (PhRMA), a pharmaceutical and biotechnology industry trade group, says that average drug development costs are even higher, having allegedly topped $1.32 billion in 2006. Based on this number, PhRMA is claiming that such costs increased by a whopping 64 percent in just six years, which is more than double the normal medical inflation rate.
The Light and Warburton study, which has been published in the journal BioSocieties, says that these figures are greatly overblown, and are simply not based in reality. The Slate piece cites additional research noting that 84 percent of the costs associated with the first research phase of drug development is covered by taxpayers via government grants. Add to this the report’s estimate that the drug industry uses a little more than one percent of its sales revenue on basic research, and the costs in this department are very minimal.
Another little-known fact is that drug company R&D costs are tax exempt. They do not depreciate like normal investments do, either. When accounting for the many other tax breaks that drug companies receive, their actual net costs are cut by at least half of what they claim, according to the report. And when adjusting for “cost of capital,” that amount should be cut in half again if it is to even approach an accurate estimate for R&D costs. After all, if drug companies are not willing to take a risk in the R&D department — which is part of what running a business is all about — then they should not be in business at all, right?
Apparently drug companies feel as though they are entitled to massive profits, even if they fail to produce a valuable product. No other industry receives the benefits that Big Pharma does in the name of public health, and yet the industry is constantly whining and threatening that unless it can keep riding the gravy train and receiving special treatment, the production of drugs will cease. This, of course, takes place as the industry marks up its drugs as much as 569,000 percent over cost, bilking insurance companies and the government out of billions.