The way the media would have you see it, the pharmaceutical industry is made up of a bunch of greedy businesses trying to make a buck off of you and your ailing family members’ illnesses.
And the truth is that they are trying to make a buck, but only by curing your sickness. Critics allege that drug prices are set ‘arbitrarily’ high, but this neglects the fact that prices are a function of supply and demand. They also neglect that the greatest benefit to the consumers is the medicines themselves–and that the pharmaceutical industry only benefits when they deliver valuable products that promote your health.
The pharmaceutical industry functions according to the principle of voluntary exchange to mutual benefit. Sadly, this is rarely explained and in general poorly understood. Yet knowing the truth about how the pharmaceutical industry operates is so important that it is literally knowledge that will help you save your life.
When the media makes the claim that the pharmaceutical industry sets “arbitrarily high drug prices,” they have already fallaciously assumed that the industry is somehow able to work outside the constraints of the laws of supply and demand. On the supply side, drugs are costly to produce and investors demand hefty return for their very risky investment On the demand side, people are (or ought to be) willing to pay for medicines because of the incredible life-saving benefits.
Producing prescription drugs is extremely expensive and risky. In 2001, the pharmaceutical industry spent $30 billion dollars in drug research. Each therapy area (oncology, respiratory, neuroscience, etc.) produces, on average, 1 million new drug compounds yearly. Of those 1 million compounds, 250 will make it to pre-clinical trials and only 5 of those will make it to actual clinical trials. As if these barriers were not enough, there is still the ominous prospect of the FDA, which companies must pay to evaluate their products–and there is nothing to stop them from failing to approve these drugs in the end. The research and development (R&D) cost of a single drug usually totals $800 million.
Like any business, the pharmaceutical industry has to make a profit above these high costs in order to afford to continue to pay its hundreds of thousands of employees, compete within its extremely competitive market, advance technology, continue to reinvest in R&D, and return its investment to its shareholders. Unlike most industries, which reinvest 4 cents for every dollar they make, the pharmaceutical industry reinvests 18. Despite this tremendous investment, the fact remains that out of every ten drugs produced, only three will ever make enough profit to reinvest in R&D.
The point here is that pharmaceutical production is extremely risky. Drug production is a long-term task of trial and error which often ends in failure. When a major discovery is finally made it is an achievement that deserves profit. The pharmaceutical business requires both a large investment in productive effort and capital, which means that when it is successful it has earned its profits.
Of course it is not hard work that is the measure of an industry’s profitability, but the value of its products. The fact remains that while prescription drugs are expensive, the benefits far outweigh the costs. For every $1 spent on prescription drugs, hospital stay expenses are lowered by $3. In just the last ten years, nursing home admissions have declined by 200,000, even though the number of people 85 and older has increased. Since 1980 over 600 new drugs have been developed and marketed in the US, all of which help avoid more expensive treatments, such as hospitalization, surgery, and nursing home care, and reduce your need to see a doctor. Thanks to increased pharmaceutical treatment, life expectancy has dramatically increased from 69.7 percent in 1960, to 77.2 in 2001.
This should not be surprising because saving lives is the purpose of pharmaceuticals. Profits motivate the pharmaceutical industry to produce more effective medicines and technologies. The more life-saving products they produce, the more people will pay them to do it. As these facts illustrates, curing diseases is a mutually beneficial process wherein everyone profits.
In fact, the price consumers pay for medicine is relatively low compared to what companies pay to develop them. In effect, consumers gain much more than the pharmaceutical industry whenever they trade because they do not have to go through the difficult process of discovering and producing new drugs. Think about it: in comparison to the centuries of scientific advancement and the billions of dollars needed to create the drugs you need, the $100 or so per bottle that you pay is an enormous bargain.
Unfortunately, gratitude for these benefits is rarely forthcoming. Instead of thanking the pharmaceutical industry for their irreplaceable life-giving contributions, pundits and politicians envious of their profits demand that medicine be socialized, as in Europe. Yet the commonly held notion that Europe’s socialized healthcare systems help reduce drug prices is completely false. The fact is that drugs cost more in the United States because they cost less in Europe.
Nationalized healthcare systems, such as Britain’s National Healthcare Service (NHS), offer drugs to their citizens at exceptionally reduced prices, sometimes even for free. They are able to do this because their governments implement controls that set artificially low caps on drug prices. While this may reduce drug prices for the average European for the time being, it means that the pharmaceutical industry must charge more in the US to recoup those lost profits in Europe. They have to do this, of course, because the money to fuel new R&D has to come from somewhere. If the same socialized medicine were to come to the United States, these lost profits could not be recouped, and both Europe and America would lose important medicines they have both come to rely on.
The pharmaceutical industry recognizes the injustice of this situation but is powerless to stop it: there is no way to work around European regulations. It will take far more than objections to these regulations, however, to protect the viability of the pharmaceutical industry. The rising tide of demand from socialized systems is symbolic of a wider demand for the unearned, not only from abroad, but from critics at home, as well. Yet everyone must recognize that is in their interest to protect this industry from price controls and the socialist systems that necessitate them, because these very measures hinder the availability of healthcare in the United States–health care on which the rest of the world depends.
The most important thing to understand about the pharmaceutical industry is the way in which it operates through voluntary trade to mutual benefit. The incentive for profit is what leads this industry to continue its quest for creating and supplying the world with better life-saving drugs that offer a quick fix to diseases that have devastated the globe for centuries. The price you pay in comparison to all the work and investment that goes into drug production is minimal.
The more that people understand the truth about how the pharmaceutical industry operates, they less likely they will hinder its progress. The people who work for this industry should be applauded for their honesty, integrity, and productivity at a time when they are misunderstood and yet continue to work every day in the pursuit of saving millions of lives. By recognizing the value of the pharmaceutical industry, and how integral making a profit is to ensuring its success, there is hope that this industry will be left free to continue to discover and create new drugs. As long as there is disease on this earth, we should be thankful that there is someone with the ingenuity and the drive to profit from curing it.
Jessica Wilson is a senior at Duke University. Next year she plans to attend law school, where she will begin her training to defend the pharmaceutical industry from unjust attack.
