Let's Talk: Prescription Drug Prices

It's no secret that prescription drug prices are high in the U.S., but why are some more expensive than others?

One of our fellow Political Storm contributors, Blakes__Take, wrote an article recently discussing healthcare reform. He brought up a good point that prescription drug costs are very high for new medications on the market, and even for some that have been around for decades are too costly for some to afford. Let’s talk about WHY drug prices are so high, especially for new medications on the market.

Pretend that you believe that you have found a potential new medication, let’s call it aherpevir, that can treat and cure herpes… because let’s be honest, that stuff doesn’t stay in Vegas when you leave. Herpes is an STD that is caused by the virus HSV-1 and HSV-2 (Herpes simplex virus). There are currently no treatments to cure this disease, so only the symptoms can currently be managed. 1 out of every 6 people from 18-49 are infected with HSV-1 or HSV-2, so a drug that could cure it would be highly sought after by the public.

You have already spent the last 5 years working on the development of aherpevir, as well as testing it in various settings including lab animals to determine effective doses, toxicities, potential adverse effects, pharmacokinetics, and other possible issues associated with the medication. It is now time to move toward getting your drug to the market for use by the general public, but before that can happen, it must undergo a strenuous series of human tests called clinical trials, which are conducted in 3 phases.

Phase 1

Once you have shown that your aherpevir has the potential to treat HSV and you have completed the initial FDA requirements, you will begin Phase 1 of the clinical trials. This is conducted by a clinical researcher on approximately 20-100 healthy volunteers to determine if the medication is safe for use in humans. Side effects, dosage, and safety are all measured during Phase 1 and reported to the FDA. If your drug is part of the 77% of drugs that passes this phase, it will move on to Phase 2. Phase 1 can be summed up as the “Is it safe?” phase.

Phase 2

Once we know that the aherpevir seems to be safe for use in humans, Phase 2 begins. In this phase, 100-300 volunteers who have the disease in question – in our case, herpes, are given the aherpevir drug to see if it works to treat the disease. Some of the participants are given the actual drug, while others are given a placebo to see the differences in response to the real medication and control for other factors. Only 20-30% of drug trials pass this stage and move on to stage 3. Phase 2 can be summed up as the “Does it work?” phase and can cost upwards of $20 million to conduct.

Phase 3

Now that we know aherpevir does work on the intended disease, we need to find out if that drug works better than the current therapies on the market. This phase will use 3,000 or more participants all over the U.S. to compare the new therapy to the current “gold standard therapy”. This phase is the longest phase and the most costly due to the large number of individuals and centers involved in the testing. If it proves to be beneficial for market use, you will then prepare a “regulatory submission” for your new drug application with the FDA, where they will review all the data and determine if you will receive a license to market aherpevir to the public. Only about 50% of the drugs that make it this far actually pass the FDA approval process. Phase 3 can be summed up as the “Does it work better?” phase and can cost as much as $53 million to conduct.

Drug to Market

You have now been given the green light by the FDA to send aherpevir to the general public for treatment of HSV. Your company brands the drugs as Herpgon and begins to tell healthcare professionals about the benefits it can have in their patients. You run ads, send drug representatives to physician offices to inform them of your new medication and give them information on side effects, dosages, and other pertinent information they need to know before prescribing it to patients. At this post you actually begin Phase 4 of the clinical trials which is the “Post-Market Surveillance” phase. You regularly ask the healthcare professions for any reports of side effects and success with the medication and it is reported back to the FDA. If a medication shows other adverse effects, the FDA will pull it from the market.

You have now invested anywhere between $500 million and $2 billion dollars in the research, development and trial stages of your new medication and can begin reaping the benefits of sales to the public.

At this point, your company has sole rights to produce and market Herpgon for 20 years based on its patent. The problem is that the time clock on those 20 years started when you invented the drug a LONG time ago. The entire clinical trial phases can take between 10 and 15 years to complete, so you could only have 5 years left on your patent. Soon, every company in the industry can begin producing generic versions of the same drug you spend years and years to research and develop, for pennies on the dollar, because they didn’t invest anything into the original trials.

So, how do you recover the millions or billions of dollars that you just spent to make Herpgon? You charge high prices while you can because 5 years from now, other companies are going to seize the opportunity to jump into your market and make a quick buck with lower prices. Insurance companies will work with you on reimbursements for your drug, but there is no way they will agree to give you what you need to recover your initial investments. Most new drugs come with a discount card that provides you with the medication for something like $25 per month for the next year. This is an attempt by the company to get the medication into your hands at a reasonable price and then accepting anything they can get from the insurance company to help cover costs. The problem is that if it is a medication you need to take for the rest of your life, when that card expires in 1 year, you pay full price, no matter what.

The problem is multiplied for new drugs that treat rare diseases. It is easier for a company to recover it’s expenditures for R&D on a blood pressure medication because of the vast number of people with high blood pressure. But if we are talking about a rare blood disease that only affects 1 of every 60,000 people, there would be less demand for that medication, thus higher costs associated with the sales.

Now that you know the process involved with getting new drugs to the market, how do we work on keeping prices down? That, my friend, is the million dollar question (literally). The amount of money it costs to develop new medications isn’t going to change. We would be foolish to change the FDA clinical trial process because that is needed for safety and knowledge. One way that could help would be to change the patent process, allowing pharmaceutical companies to own the rights to their medications for a longer period of time so that they have more time to recover the investment before generic drugs are made available. This, however, would keep the availability of cheaper generic drugs from coming to market for a longer time, keeping prices up. Some suggest increasing government funding for the R&D process, but that money has to come from somewhere.

On the other side of the pharmaceutical spectrum is the rising cost of generic drugs. Many likely remember the highly publicized case of Daraprim (pyrimethamine) and Turing Pharmaceuticals CEO Martin Shkreli, where the cost for 1 pill of an old anti-parasitic medication rose 56 fold overnight. Daraprim used to be effective against Malaria, but has since gained a strong drug resistance, so it’s current use is to treat toxoplasmosis, cystoisosporiasis, and Pneumocystis jiroveci pneumonia, which are commonly found in HIV/AIDS patients. Prices went from $13.50 to $750 a tablet once Turing purchased the rights to manufacture the medication.

Side note: Society received a little poetic justice last month when Shkreli was convicted in Federal court of securities fraud steming from his time as a hedge fund manager, unrelated to Daraprim. He was sentenced to 7 years in prison forced to forfeit $7.4 million in assests.

According to the President of Truveris (not to be confused with Turing Pharmaceuticals), Bryan Birch, "Most generics are increasing in price by an average 10% a year, but we've seen some popular drugs increase by more than 650% in the last year (2013)." Experts say that one cause of the increase in prices is due to the reduction of competition between manufacturers. If fewer companies are making a drug, there are fewer reasons to keep the prices low to compete in the market.

Some economists believe that the prices of yesterday for generic drugs were actually priced too low. According to William Comanor, head of pharmaceutical economics at UCLA, “The prices we pay don't account for all the costs that come with running a drug company, such as having a steady supply." There doesn’t seem to be any consensus among experts as to how these issues would best be addressed, but President Trump has commented several times on the price of prescription drugs and his desire to negotiate prices with pharmaceutical companies. He is slated to give a speech later this month (April 2018) on drug prices, where he will discuss different policy ideas proposed by the Department of Health and Human Services as well as his Council of Economic Advisers. This was a big campaign topic for candidate Trump, so be looking for this issue to heat up over the coming weeks and months.

The truth is, there isn’t a perfect solution, and there definitely isn’t one that will please everyone. You can never drop the prices of medications to a point that no one will complain, unless you make it free. We all know that free is only subjective. I look forward to what the President will propose, as well as the intellectual debate over which ones will work and which ones will hurt.

For more on the FDA drug trials, see:

No. 1-10

There's a certain amount of competition, but the motive for competition is loss of profit for everyone. Lets assume it costs you 25 cents to produce, advertise, and ship Pill X to it's point of distribution. Pill X is a medication that's old enough that other companies are also able to produce it. Their costs are equivalent to yours within a few tenths of cent per pill. The original, name brand medication currently retails at $200 for a course 180 pills. Yours has the exact same molecule, ingredients, approvals, and quality controls as the original. Apart from you and the original producer there are 2 other companies producing the same medicine. Your cost for 180 pills is $45. You have options. A) You could sell your pills for the lowest price of all competing companies and corner the market by only charging $50 which is an 11% return. B) You could sell yours for $100 and only get 1/3 of the market which would mean you produce less pills but still make more money than would if you cornered the market. C) You could sell them for $150 dollars and get an unknown share of the market since you'd be competing against the 2 other generic producers of Pill X who also have a similar price point. Oddly, most companies will take option C. It's not because they're covertly in cahoots, but because they know that if they start a price war everyone loses money. Instead they have certain territories where their company does well, and since their brand is established there it's reasonably easy to accurately project production needs and earnings for each territory. Think of it like the ILLEGAL drug trade. You don't cut prices unless you're trying to expand your turf. If you can do it cheaper, then people will come to you, but only until the competition does the same thing. Why rock the boat when you can make money quietly and predictably?


I don't understand this. Drug prices may go high but won't competition at least drag it lower? Isn't there enough competition willing to pull prices down?



@ThreePatriots I get that R&D and the FDA approval cost a lot for pharmaceutical companies but that's not the whole story of why drugs are so expensive in the U.S. Other countries also have rigorous approval processes but people pay far less for prescriptions in Europe than they do in the in the States. In 2015 Reuters reported that drugs cost three times more in the U.S. One of the key differences is that the U.S. allows advertising of prescription drugs, which most other countries don't allow, and which costs money. But in the end the real reason that these companies charge what they do is because the U.S. government has decided to let free market economics govern the prices of medications that people need in order to not die.



Thanks @AveryCO! I'll have to work on getting some ideas on how to curb costs soon!