Drug Prices - Part II
For the complete story, read my previous blog: Drug Prices - Part I, posted on December 16th before you read this.
Generic drug manufacturers can offer their products at lower prices than the company that initially developed a given drug because they aren't required to repeat costly animal and clinical research on ingredients or drugs already approved. In 2002, generic sales accounted for over 50% of all prescriptions in the US and in the next five years several highly successful drugs will go off patent opening the door for more generic entrants.
The ascent of generics wouldn't have such a big impact on the bottom line of drug companies if research labs were turning out a stream of successful new drugs. But while the annual R&D spending between 1993 and 2004 increased almost 150% from $16 to nearly $40 billion, the number of new drug applications submitted to FDA only grew 38%, and has generally declined since 1999.
So with a lack of new products, from where does the money come to support R&D? The industry is investing more to maximize revenue from existing products, e.g., increasing marketing efforts and studying potential new indications, dosage forms, and/or combinations of old drugs. Some companies have raised drug prices. Others are forming alliances with other firms to jointly develop potential drugs and share the costs or entering the generics business. Most are cutting internal costs while others are outsourcing some research and manufacturing work to other countries with lower labor costs.
Another important question is why do U.S. consumers pay significantly more for drugs than citizens of other countries? It's true that brand name drugs are generally more expensive in the U.S. because governments in most other countries play a role in setting prescription drug prices and regulating profits. While there is debate whether prescription costs in the U.S. should have government regulation, some argue that this will not guarantee lower prices and may have unintended consequences, particularly if industry incentives to invest in research for new products are stifled.
But according to an economics analysis reported in 2004, it's not accurate to say that the U.S. has higher drug prices than other countries across the board. While brand name drugs still under patent protection were 25% to 45% more expensive in the U.S., generic drugs in the U.S. are among the cheapest in the world because multiple generic companies usually market a drug once its patent expires and there is intense price competition among them. In addition, when prescription drugs were converted to over-the-counter status (can be purchased without a prescription), no other country comes close to the low prices in the U.S. The conclusion was that Americans pay more for drugs when they are first introduced and less as the compounds get older, while citizens of other countries pay less in the beginning and more later on.