Pharmaceutical Pricing When Success Has Many Parents

Abstract

Pharmaceutical companies claim that high prices for drugs are needed to offset the costs and risks associated with research and development. In most instances, though, the initial (basic) research that leads to new discoveries is conducted at public institutions and paid for with public funds. Drugmakers tend to take over the process of bringing new drugs to market when the prospects for gaining regulatory approval seem good. Because the public helps cover the cost of research, many people believe that it pays twice for drugs—once when tax dollars support research and a second time when patients buy drugs for personal use. This Article takes a hard look at this “paying-twice” critique. We present case studies of two expensive drugs, Sovaldi and PrEP, that were developed with a combination of public and private support. We then survey the broader literature that attempts to quantify and assess the relative importance of both contributions. We then discuss the general problem of evaluating the importance of multiple contributions to productive activities in the absence of market-based allocations of the resulting revenue streams. Finally, we discuss the possibility of protecting consumers from high drug prices and deadweight losses by using prizes instead of patents to incentivize drug development. A prize regime would take the sting out of the paying-twice critique as well.