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High Drug Prices in US: R&D Investments Cause or Cover?

Posted By Louise Probst, Wednesday, June 7, 2017
It's well understood that pharmaceutical companies charge more for their medications in the U.S. than in other countries. This fact helps fuel charges of predatory pricing on the part of the pharmaceutical industry. Explanations for high drug prices are many and varied, yet, drug makers commonly rely on a seemingly compelling argument: Hefty prices are necessary to fund research for the next generation of innovative treatments.
 
But can the claim that research and development drives high U.S. drug prices be put to an empirical test? A recent study published in Health Affairs did just that.
 
Using data on prices and sales volume in the U.S. and abroad, researchers analyzed the 15 drug companies that manufactured the 20 top-selling drugs globally in 2015. List prices in the UK, Canada, Ireland, and Denmark averaged 41% of U.S. net drug prices for the 15 companies studied.
 
The researchers then calculated the amount of "excess" revenue companies earned by charging higher prices in the U.S. compared to Europe and Canada. Note the "excess" refers to the revenues created by the price paid in the U.S., above the amount Canadian or European customers paid for the drugs. Excess revenue for these 20 drugs was $116 billion.
 
The results: In total, companies spent just 66% percent of the excess revenue on global R&D. As the table demonstrates, excess revenues as compared to R&D spending varied by company, with Bristol-Myers Squibb's R&D costs claiming about three quarters of its excess revenue, and Biogen's excess revenue from U.S. customers equaling nearly 2.5 times its R&D spending.  
 
According to the researchers, if the excess prices charged to U.S. customers were reduced to cover only 100% of the industry R&D expenditures, the U.S. would have paid $40 billion less in 2015. That's a good chunk of change in a year when CMS reports that Americans spent a total of $325 billion on drugs.

Warm regards,

Louise Probst

BHC Executive Director

 

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