The $800 Million Pill Revisited

Sociologist Donald Light of Princeton University has just published a major critique of a year-old Congressional Budget Office study that endorsed the drug industry argument that it costs nearly a billion dollars to develop a new drug.

The review, which can be found on this website, analyzes drug company tax returns to show that R&D costs are well below the common $1 billion claim. Arguing that the drug industry-funded study by the Tufts Center for Drug Development, which CBO relies on, uses a biased sample comprised of only the most costly drugs, Light suggests the median cost for new drug development is closer to $300 million.

Why? Half of the larger sum is estimated profits that would have been made had the research not been done. But since R&D is an expense fully deducted every year, a third of those profits would have been eaten up by the tax man. “Companies cannot have it both ways,” Light writes. “They can’t say that research is a long-term investment to justify high prices and then treat them as just another business expense.”

So now we have a sociologist and a journalist (me) pointing this out. When will the business school and accounting professors chime in? When I wrote my book, every business school prof I spoke with admitted that the Tufts number, which is repeated ad nauseum in the health care economics literature and the press, was bogus.

Light also challenges the widely cited industry claim that lower profits will result in less research. “No other research-based industry makes this argument. When they find their profits declining, they redouble their R&D efforts.”

As I put it in my book: until I covered the drug industry, every CEO I ever interviewed or listened to insisted that his company was preparing for the future by investing heavily in R&D. If it didn't, the company would wither and die. Only the drug industry says if it doesn't get high prices, it will refuse to invest in R&D.

The drug industry argument is the intellectual equivalent of the little boy who says: "If I don't get my way, I'll hold my breath until I die." Oh grow up already.

To be fair, the industry isn't relying on this argument as much as it used to. It now justifies high prices as "value" pricing, claiming that $3 a pill for an aspirin-equivalent is justified by its medical value. Light takes on this argument, too, in his paper by pointing out that most new drugs are no better than what's already on the market.

There's not much new in Light's critique. But it's nice to see the academic literature being seeded with alternatives to the drug industry-funded conventional wisdom.