Why are our medicines so expensive? Spoiler: Not for the reasons you are being told…

Abstract

Often described as a natural economic trend, the prices that pharmaceutical companies charge for new medicines have skyrocketed in recent years. Companies claim these prices are justified because of the ‘value’ new treatments represent or that they reflect the high costs and risks associated with the research and development process. They also claim that the revenues generated through these high prices are required to pay for continued innovation.

This paper argues that high prices are not inevitable but the result of a societal and political choice to rely on a for-profit business model for medical innovation, selling medicines at the highest price possible. Instead of focusing on therapeutic advances, it prioritises profit maximisation to benefit shareholders and investors over improving people’s health outcomes or equitable access.

As a result, people and health systems worldwide struggle to pay for the increasingly expensive health products, with growing inequities in access to even life-saving medicines while the biopharmaceutical industry and its financiers are the most lucrative business sectors.

As the extreme COVID-19 vaccine inequities once again highlighted, we urgently need to reform the social contract between governments, the biopharmaceutical industry, and the public and restore its original health purpose. Policymakers must redesign policies and financing of the pharmaceutical research and development ecosystem such that public and private sectors work together towards the shared objective of responding to public health and patients’ needs, rather than maximising financial return because medicines should not be a luxury.

Introduction

In 2014, Gilead’s price of US$ 84,000 for a 3-month hepatitis C treatment (€77,628 at the current exchange rate), or US$ 1000 per pill (€924 at the current exchange rate), was considered unprecedented and excessive [1]. Today, we are no longer surprised when a new cancer or rare disease treatment is launched at €0.5 million to over 2 million [2], hailed as much by the financial press and investors as patient groups.

But why are new medicines so expensive? Drug companies go to great lengths to convince the public and policymakers that these high prices are justified because of the medical ‘value’ new treatments represent, or else that they reflect the high costs and risks associated with the research and development (R&D) process. They also argue that the revenues generated through these high prices are required to pay for continued innovation.

This paper will present evidence that high prices are instead artificial constructs that mainly serve to maximise revenues for investors and shareholders and reflect the growing financialisation of the pharmaceutical sector – prioritising financial return over improving people’s health. Current medicine pricing levels represent a sea-change compared to just two decades ago, without a concomitant increase in therapeutic advances. Predictably, people and health systems worldwide increasingly struggle to pay for the high prices being charged, with growing inequities in access to even life-saving medicines while the biopharmaceutical industry and its financiers have become among the most lucrative business sectors. This results from decades of policymaking to create a conducive business environment for global biopharmaceutical companies to thrive, with too little attention for ensuring it promotes health and equity.

Lessons not learnt - history repeating itself

For many years, unaffordable medicines and inequitable access were considered issues that primarily affected developing countries, whose highly indebted governments and poor citizens did not have the purchasing power to pay for medicines, especially expensive ones. This inequity sprung into the international spotlight in the late 1990s, when a breakthrough antiretroviral combination therapy transformed HIV/AIDS from a burgeoning deadly epidemic into a chronic manageable disease but only in wealthy countries [3]. The price companies charged for this lifesaving combination treatment was €10–15,000 per person per year (roughly double in today’s prices) – way beyond the financial means of developing countries, where the AIDS epidemic was ravaging communities [4].

The reason why drug companies charged the high prices was not because it was costly to produce those medicines. In fact, it soon turned out that the production cost was just a few hundred dollars or 50 times less than the sales price, and that they were sold at hefty profit margins [5]. The root cause was that the companies producing these drugs held patent monopolies (see Box 1), even if they were largely based on US government research [6]. For-profit companies thus controlled the production, availability and price of these life-saving medicines, and adopted marketing strategies that prioritised profit maximisation over people’s health: selling primarily to wealthy countries that were willing and able to pay a high price (with public health systems and/or health insurance schemes covering much of the costs) [3]. As many low-resource countries’ governments did not have the fiscal space to pay for such medicines, people in those countries who often pay medicines out-of-pocket were deprived access to these critical drugs [4]. As a result, in much of the developing world particularly sub-Saharan Africa, there was an explosion of people in the primes of their lives falling ill and dying of untreated HIV/AIDS and continued spread of the epidemic well into the 2000s [7].

Box 1.

What are patents, and how do they work?

Patents are a policy tool used by governments to incentivise (investments in) useful innovation for society by: Providing a temporary monopoly right on the exploitation of an invention that allows patent holders to exclude others from using or selling the invention for a limited time (to recoup investments and reward the risks taken and efforts delivered); In return for disclosure of the detailed methods (to foster follow-up innovation) Patents are not a natural right nor a true property. They were originally designed to strike a balance between public and private interests. They are a matter of national competency: every country enacts laws and policies to allow the patenting, and its enforcement, within its territory. What can be patented? ‘Inventions’ in any technological domain that satisfy the following three criteria: Novelty (not yet described anywhere prior) Inventive step (not obvious for someone skilled in the field of technology) Industrial applicability The main legal framework governing patents globally is the 1994 World Trade Organisation (WTO) Trade Related Intellectual Property Agreement (TRIPS) that came into effect on January 1st, 1995, and that globalised the minimum standards on patents. 1995: WTO TRIPS agreement: All countries must award and enforce patents on all technologies, including pharmaceuticals, for a minimum of 20 years, Limited transition period for LMICs, being extended for lowest-income countries 2001 Doha Declaration on TRIPS and public health: reaffirms the right of all countries to use flexibilities in the law to protect public health, e.g. compulsory licences But in practice … Pharmaceutical lobbies and countries with important pharmaceutical industrial sectors (such as US, EU countries, Switzerland, Japan) have strongly pushed back against their use, and exert pressure through trade agreements and other channels to adopt more stringent rules than required under TRIPS (‘TRIPS-plus’) Prior to 1995: Countries applied different degrees of patent protections in line with their technological capacity, industrial policy and/or public policy objectives, for instance: No patents on pharmaceuticals or only short-duration First establish technical capacity through copying; then protect innovation through patents Only process patents – no product patents (Switzerland till 1970s, India till 2005)

It required a major mobilisation of human rights and health activists all over the world to challenge the primacy of business interests over people’s lives, put HIV/AIDS patient rights before patent rights, and pave the way towards widespread availability of low-cost generic AIDS medicines [4,8]. It allowed to scale up access to HIV/AIDS treatment globally and made it possible for nearly 30 million people to be alive today on chronic antiviral therapy [9]. However, millions died in the 10-15 years it took to make these life-saving drugs available in the developing world.

Fast forward to 2021. Breakthrough Covid-19 vaccines that protected people in wealthy countries against severe disease were under monopoly control of a handful companies, with the power of deciding whom to sell first and at what price, effectively creating major inequities and delays in access for people in developing countries [10]. Those who imagined that the AIDS pandemic would have thaught us lessons about patents and equitable access to life-saving medical innovations were proven wrong [11].

Patents and access to essential medicines – a tricky balance

Patents are legal monopolies issued by governments with the objective of stimulating useful (technological) innovation for the benefit of society, which is often a mix between people’s interests and a country’s strategic and geopolitical interests (see Box 1: What are patents and how do they work?) [12]. As a policy tool, patents and other forms of intellectual property (IP), have been used for centuries to certain crafts and technologies, including in feudal and early industrial societies. They were initially designed to strike a balance between public and private interests within the economy: rewarding innovation and creativity by providing a temporary monopoly on the exploitation of inventions in return for disclosure such that society can benefit and follow-on innovation is encouraged [13]. With the emergence of the knowledge-based economy in industrialised countries, the use of IP became more prominent during the second half of the twentieth century, culminating in the 1994 World Trade Organisation (WTO) Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement that globalised minimum standards on patents in all economic sectors. Since then, WTO member states are expected to issue and enforce patents on pharmaceuticals for a minimum of 20 years, even if many countries had thus far excluded or limited such monopolies for public health reasons [12]. Not coincidentally, this agreement was largely pushed by the US pharmaceutical and entertainment industries, which foresaw the formidable commercial potential of a globalised IP regime to privatise and monetise knowledge [14]. With trade ministers and their departments negotiating the WTO TRIPS agreement, the focus was on commercial aspects of IP and the trade advantages of privatising knowledge goods, with health and other public interest concerns largely absent from the conversations [12,14].

When soon thereafter, the implications for health and access to medicines became obvious, for instance, around inequitable access to life-saving HIV/AIDS medicines, a public policy battle between health and human rights advocates that sought to put health rights before commercial interests, and those prioritising economic and industrial interests ensued that still continues today [3,4,12]. During the COVID-19 pandemic, pharmaceutical companies were allowed to keep monopoly control over the vaccines and drugs they produced, despite sizable public contributions to R&D, tax-payer investments in at-risk manufacturing, and advance market commitments by governments [15,16]. For instance, the US government alone is estimated to have spent at least US$ 31.9 billion, or €29.7 billion, for COVID-19 vaccines R&D, manufacturing and purchase, without leveraging this investment to ensure equitable access [17]. In October 2020, India and South Africa submitted an urgent proposal to the WTO to issue a temporary waiver on IP rights related Covid-19 vaccines, drugs and diagnostics to facilitate local production and timely global access. Supported by over a hundred, mostly developing countries, the proposal was blocked by wealthy countries that prioritised their pharmaceutical company allies, and then gutted to the point it was no longer relevant [18]. The resulting vaccine access inequities, in which wealthy countries hoarded most doses to vaccinate their whole population first, while even the most vulnerable developing countries couldn’t access the vaccines during the peak of the pandemic, was termed ‘vaccine apartheid’ by the WHO Director-General Tedros Ghebreyesus [19].

It hasn’t always been that way

The predominance of patents and monopoly pricing power as the main incentive to stimulate commercial medical innovation is a relatively recent development. Several major medical breakthroughs of the early twentieth century including insulin, penicillin, and the polio vaccine were developed without such patent and profit prospects. From the discovery of penicillin in 1928 to the golden age of new antibiotics and vaccines during the 1950s–1970s, a wide range of medical innovations were developed and made widely available and accessible to improve public health, including through government sponsored vaccination and primary health programmes. Many countries also invested in public vaccine manufacturing capacity to supply childhood vaccines, as a pillar of their public health system [20].

However, during the 1970s–80s, we saw a growing privatisation and commercialisation of medical R&D, supported by various laws and policies that encourage private investments in this sector, with publicly funded research serving to de-risk the private investments [21]. As private capital expects financial return, this move gradually shifted the driving force behind medical R&D from a health-needs to a profit-generation motive. This trend was part of a broader wave of neoliberal policies that assumed ‘markets’ were the best and most effective providers of goods and services needed in society – including medicinal products. It has led to a sliding away of public interest in the pharmaceutical R&D ecosystem, despite continued major investments into health research by governments and non-profit actors, at levels that are comparable with private investments [22,23].

From health needs to healthy business

Historically, infectious diseases have been a major health threat and as science progressed during the twentieth century, they were the primary target of pharmaceutical R&D. During the 1990s, a shift occurred in the R&D priorities and the business model towards chronic diseases for which life-long treatments could be prescribed (e.g. anti-hypertensive or cholesterol-lowering drugs). Concomitantly, drug prices started to climb, heralding the period of ‘blockbusters’ in the pharmaceutical sector. A term initially coined to describe exceptionally lucrative new drugs that generated sales in or above €1 billion per year, primarily based on high-volume sales, it soon became the norm and target for successful drug development, including for investors and shareholders [24]. As a result, R&D priorities and strategic pipeline decisions further shifted towards targets that could maximise shareholder value. This financialisation is exemplified by Gilead’s speculative acquisition of the hepatitis C drug candidate sofosbuvir for US$ 11 billion (€10.2 billion at current exchange rate) and subsequent pricing with a US market entry price of US$ 84,000 (€77,628 at current exchange rate) for a 3-month treatment, generating revenues of over €10 billion (€9.2 billion at current exchange rate) the first year alone [1].

In recent years, thanks to incentives and policy measures that make it financially attractive for companies to develop treatments for orphan or rare diseases, including willingness to pay very high prices, the business model has shifted from blockbusters to ‘niche-busters’, highly profitable treatments for low-volume niche markets [25]. In 2022, orphan drugs accounted for 54% of all new drug approvals in the US [26], while the median launch price for new drugs exceeded US$ 200,000 (€185,000) [27]. Such prices no longer bear any relation to the cost of R&D or production as is often claimed [28], but reflect the financial imperatives of shareholders and (speculative) capital investors, which are to maximise (short-term) financial return on investment [29]. However, the lack of transparency around R&D costs and pricing and justified by companies as ‘commercially sensitive information,’ precludes a societal debate about what fair prices for pharmaceuticals should look like [30–33]. Meanwhile, prices for new medicines keep increasing, with each breakthrough therapy pushing the boundaries of what is accepted, the latest being a new treatment for sickle cell disease priced at over €3 million [34]. At the same time, drug companies and their lobbies mobilise against efforts by policymakers to curb excessive drug pricing [35–38]. As detailed in Box 2 (Myths and realities on drug R&D costs and medicines pricing), pharmaceutical companies and their allies commonly use a range of narratives to defend the current business model, despite a growing body of evidence about its problems and inefficiencies.

Box 2.

Myths and realities about R&D costs and drug pricing

No relation between cost and price For many years, medicine pricing was analysed through classic market dynamics and commodity price structuring. It suggested that the price companies charge for new medicines reflects the combined production cost, and the investments and risks taken for developing the new medicines, with a profit margin, subject to the laws of competition, supply and demand. Patent monopolies were thought to allow recouping the costs of investments in R&D. However, the recent price hikes and excessive prices have clarified that medicine prices are largely based on what companies can get away with, independent of production and R&D costs [28,39]. Especially in the US, pharmaceutical companies exert unilateral market power to set prices and have been shown to take advantage of that systematically [56]. Moreover, there is a general lack of transparency on who pays how much for (new) medicines, further undermining the potential for market efficiency [30,31]. With official list prices at unprecedented heights, companies negotiate secret purchase agreements with different buyers (can be government, region, hospital, health insurance company) striking deals that combine commitments on volume, bundles with other products, price, market exclusivities, and even liability waivers as we have learnt from leaked contracts during Covid-19 [57,58]. Secrecy as the ultimate protection of commercial interests In addition to the opacity around medicines pricing, there is also a lack of transparency about how much it actually costs to develop new drugs, with estimates ranging from several € 100 millions, to multiple billions, with much of the R&D being based on prior publicly-funded research or directly supported by additional governments grants or otherwise subsidised [23]. However, without transparency on who has paid for the R&D, how much, and how prices are being structured and justified, it is tough to have an informed societal debate about what ‘fair’ medicines pricing would look like, despite best efforts from the World Health Organisation [30,37]. High prices and revenues are (not) required to pay for continued innovation The most used justification for high prices is that the revenues generated through them are critical to pay for future innovation. However, despite the well-guarded secrecy around how much medical innovation costs, studies have shown that drug companies often spend more on marketing than on R&D, while a similarly large portion of the profits goes to shareholders and investors, through dividend payments and stock buy-backs and only a modest fraction is re-invested in R&D [39,51]. Moreover, most newly registered treatments do not provide added therapeutic benefit compared to what we have already, a figure that did not increase over the years despite higher drug pricing levels and a continued high-profit margin for the pharmaceutical industry as a sector [39,46,48]. Alongside the related pharma argument –or threat– that ‘Cutting drug prices will hurt future innovation,’ this purported link between revenues through high prices and investments in therapeutic advances is not supported by evidence. High prices reflect the societal value of a medicine A final myth to debunk is that critical or life-saving treatments are ‘worth’ their high price, either because it would save even higher costs of additional treatments or hospitalisation, or simply because a willingness to pay is a price reflection of ‘value,’ translated in monetary market value, or price. Gilead used the former argument to justify the price of US$ 84,000 (€ 77,628 at current exchange rate) for a hepatitis C cure (cheaper than liver transplantation that might be needed if left untreated), while the latter is at the core of the industry-driven narrative of ‘value-based pricing.’ In that logic, which confounds medical or personal value with monetary market value [59], water and other vital products and utilities should be expensive too, and be allowed to become commercial luxury products instead of the basic elements of life to which all people should be entitled, as enshrined in the Universal Declaration of Human Rights [60].

Patents are not designed to foster medical innovation

In the current economic model underlying pharmaceutical innovation, patents are considered the key incentive mechanism, with the associated monopoly rights providing market and pricing power to generate revenues and drive further investments (in addition to rewarding the investors and shareholders). Yet historically, patents were not created to drive medical innovation specifically. In fact, the criteria to obtain a patent are agnostic to improving health outcomes and are based strictly on novelty, inventiveness, and industrial applicability or usefulness more generally. Nothing in patent law or related policy incentives requires patent applications to demonstrate addressing unmet medical needs, show therapeutic benefit, or ensure access or affordability. This means that by design, patents are not a proper incentive to stimulate and reward contributions to improve people’s health.

However, pursuing patents and market opportunities prevails in today’s pharmaceutical business model reflected in companies’ R&D priorities and market tactics. While many areas of unmet need remain neglected, a new and patentable product in an established and profitable disease area can serve to generate sizable revenues even if it does not represent a therapeutic advance (a so-called ‘me-too’ drug) [39,40]. Meanwhile, pursuing me-too indications takes valuable resources away from true medical innovation that focuses on health value [41].

Growing misalignment

The prominence of patents and profit-motive as driving forces behind pharmaceutical development thus both affects pricing and has major impact on R&D priority setting, with large areas of unmet medical need increasingly abandoned. Poverty-related diseases such as tuberculosis or so-called tropical diseases such as malaria, leishmaniasis or sleeping sickness have long been neglected by commercial drug companies because patients lack sufficient purchasing power to attract their attention [42]. Despite increasing antimicrobial resistance globally, we also have a dearth of new antibiotics with companies abandoning the field for lack of profitability prospect in comparison to other areas [43]. Even the availability of critical older (often cheap) antibiotics is no longer secured, partly because it has become much more profitable for companies to focus on higher ‘value-add’ products [44]. For the private sector to engage in the development of vaccines and treatments for emerging epidemic diseases such as Ebola or COVID-19, companies expect public financing and other de-risking incentives such as advance purchase commitments, and even then, they are reluctant to commit to public health goals such as equitable access [17,45].

Importantly, despite a widely promoted discourse of major medical breakthroughs and innovation in the pharmaceutical sector, the reality is that more than half of newly approved drugs show no evidence of added clinical benefit compared to already existing treatments [39,46,47]. This means that current incentives are not driving useful medical innovation. Instead, most newly developed drugs are no better than what we already have, a symptom of a highly inefficient health innovation ecosystem. Still, through marketing efforts that roughly equal the spending on R&D, the pharmaceutical sector can thrive financially based on the development and sales of products with no or little added therapeutic value [39,40], and remain among the most profitable industrial sectors [48,49].

Meanwhile, because of the premise that medical innovation serves a health purpose, the pharmaceutical business model is largely subsidised by public (taxpayer) finance: from substantial funding for early research at universities from which the industry cherry-picks discoveries to licence, to tax-credits and other subsidies to reward companies investing in R&D, to generous IP and market exclusivity policies to—last but not least—various health insurance systems that cover part of the price of medicines and minimise out-of-pocket spending by households (mainly in wealthy countries). These public policies primarily serve to ‘de-risk’ the private sector and their investors, however without ensuring that the public interest is being safeguarded, for instance through conditionalities on equitable access and technology sharing and an emphasis on common good governance [39,50]. Instead, the benefits and rewards of the collective R&D efforts are privatised through IP and other monopolies and used to maximise revenues, which increasingly flow to shareholders and investors [29]. This results in a stark misalignment between expected medical innovation objectives based on health needs and the drivers of pharmaceutical companies (Figure 1).

Figure 1.

The misalignment between expected medical innovation objectives based on health needs, and the drivers of pharmaceutical companies. Illustration by Piero Olliaro.

The extractive nature of this financialisation is best illustrated by the phenomenon of share buy-backs, through which companies use their profits not just to pay out dividends but to buy back their own shares, thus artificially keeping stock prices high to the financial benefit of shareholders, investors, and senior management, a widely used tactic in the pharmaceutical industry [51,52]. In recent years, major pharmaceutical companies spent more on buying back their own shares than on investing in R&D [39,51].

Conclusion

The continual shifts in privatisation, monetisation and financialisation of medical R&D has led to a major misalignment between health needs and the economic and financial interests that have come to dominate and drive the business model, with detrimental impact on both the direction and quality of medical innovation. Unfortunately, many researchers, health practitioners and policymakers still believe there is a win-win in this economic model, that it is the best possible option, the price to pay for medical innovation.

A deeper analysis of the pharmaceutical business model and their outcomes shows a different reality. Medicines are expensive because, as a society, we have chosen to rely on a for-profit business model for medical innovation that prioritises profit maximisation for the benefit of shareholders and investors over health purpose to the detriment of true therapeutic advances and equitable access. In terms of addressing health needs, the current medical innovation ecosystem is thus increasing unfit-for-purpose: we don’t get what we need, most of what we get does not provide added therapeutic value, and the few medical breakthroughs are overly expensive, precluding access except for the wealthiest. The growing financialization further shifts the direction of R&D from addressing people’s health needs, to selling products as ordinary or luxury commodities.

But it does not have to be that way. Catalysed by the COVID-19 pandemic, and building on a growing realisation by the public that the social contract between the pharmaceutical sector and governments responsible for public health is broken, multiple policy reform processes are underway that can tackle these issues [22,53]. As was the case in the past, governments can set rules differently to redefine the contours and objectives of that social contract and address people’s health needs equitably back to the centre [22,54]. It requires rethinking and transforming the pharmaceutical R&D ecosystem such that public and private sectors work together towards the shared objective of responding to public health and patients’ needs and ensure financing that is productive rather than extractive – invested in collaborative R&D projects that address priority health needs, share data and technology for maximum health benefit, and deliver medical innovation that improves people’s health for the common good [50,55], because medicines should not be a luxury.

Disclosure statement

No potential conflict of interest was reported by the author(s).