only modest amounts, the pattern sug-
percent of prescription drugs is private
gests that pharmaceutical industry
industry. It has never been demonstrated
R&D is best described by a virtuous
that government labs can take the initiative
all the way."69
opportunities rent-seeking model.
That is, as profit opportunities ex-
The Rising Cost of Risky Investments in
pand, firms compete to exploit them
Drug R&D
by increasing R&D investments, and
perhaps also promotional costs, until
R&D spending by U.S. pharmaceutical
the increase in costs dissipates most, if
firms, as a percentage of sales, has grown
not all, supranormal profit returns.64
from 11.4 percent in 1970 to an estimated
17.7 percent in 2001.70 Private-sector financ-
Many people appear to believe that phar- ing of drug industry R&D averages more
maceuticals fall from the sky rather like than four times as much (as a percentage of
manna from heaven. In their view, employees sales) as average R&D spending for all U.S.
of the evil drug companies got up before any- industries.71 If adjusted for the prolonged
one else and grabbed the manna, and then time period that it takes for drugs to be fully
sold it at outrageous prices.
approved for sale, the R&D share of drug
Higher-than-
If only it worked that way.
industry spending represents almost one-
expected profits
American pharmaceutical makers spent third of total costs.
more than $26 billion in 2000 and some $30
The industry estimates that drugs cost an
are a result of
billion in 2001 to find medical needles in average of $500 million to develop. Most
higher-than-
haystacks. The National Institutes of Health independent analyses run far higher, and
average R&D
(NIH) also plays an important role, a fact they report a steadily increasing price tag for
emphasized by some industry critics.65 But successful development of a new drug. Three
investments.
more than half (54 percent) of government studies in the 1980s figured the average drug
There simply is
R&D expenditures for health care primarily cost to run between $108 million and $231
fund basic research, and they represent only million; one estimate in the 1970s ran $120
no free lunch.
about a small fraction of drug R&D.66 Even million.72 In 1993 the congressional Office of
Public Citizen admits, "NIH officials claim Technology Assessment figured the cost at
[tracking pharmaceutical research spending $194 million (after tax) and $359 million
is] a tough task because so much NIH work (before tax), in 1990 dollars.73 More recent
is basic research into diseases that is convert- estimates by Lehman Brothers and the
ed years later--often through several other Boston Consulting Group are $608 million
related discoveries that build on one anoth- (after tax) and $880 million (before tax).74 A
er--into a marketed drug."67
new study from the Tufts Center for the
Indeed, private companies are responsible Study of Drug Development matches the lat-
for moving products through testing and ter estimate, calculating that "between the
development before they can reach the mar- time research begins to develop a new pre-
ket. Firms are generally credited with the dis- scription medicine until it receives approval
covery and development of about 90 percent from the FDA to market the drug in the
of new medicines, while the NIH played a United States, a drug company typically
role in the remainder.68 Explains Henry spends $802 million over the course of 10 to
Grabowski of Duke: "Government-support- 15 years."75 Real R&D costs per drug prior to
ed research gets you to the 20-yard line. FDA approval have increased two-and-a-half
Biotech companies get you to the 50-yard times over the past decade or so.76
line and [the big pharmaceutical companies]
Public Citizen recently contested the
take you the rest of the way to the goal line. above estimates of the cost of new drug devel-
By and large, government labs don't do any opment, pegging it at $110 million.77 But,
drug development. The real originator of 90 according to Ernst and Young:
9