Drugs - Researching The Rise In Prescription Drug Prices

The graph charts the rise in prescription prices from 1990 to 2001. The prices of both generic and brand name drugs went up, but brand name prices rose at nearly twice the rate of generics. According to the Pharmaceutical Research and Manufacturers of America (PhRMA), the cost of research and development (R&D) is one cause for the increase in brand name drug prices. Researchers at Tufts University Center for the Study of Drug Development found the average cost of bringing a new drug to market in 2001 was $802 million. Adjusting for inflation, that's a 166% increase from 1991, and a 469% increase from 1979. (A Public Citizen study, however, found that the average cost in 2001 was only $240 million.)

Why did R&D costs rise so much? The average number of clinical trials more than doubled from 1977-1994 (from 30 to 68) and the average number of patients per clinical trial nearly tripled (from 1,576 in 1977 to 4,237 in 1994). Every new drug goes through 7 stages of development. Discovery of substances that may be effective in treating illnesses usually takes about 2-10 years. Typically 5,000-10,000 drugs then go through laboratory and animal testing. About 250 of these drugs reach the Phase I clinical trial stage. Phase I testing involves about 20-80 healthy volunteers. At this stage safety and dosage is determined. Only about 5 drugs reach Phase II trials. These involve 100-300 volunteers for about 2 years. At this stage researchers determine efficacy and side-effects. Phase III trials usually last about 4-5 years. Adverse reactions and long-term side-effects are studied in about 1,000-5,000 patients. If a drug passes Phase III it goes through U.S. Food and Drug Administration (FDA) review for about 2 years and, if found safe and effective, the drug is approved for sale. The process doesn't stop when the drug is distributed to consumers. Post-consumer testing is a part of drug development also. That usually lasts about 2 years. Each of these stages incurs expenses that are then passed along to the consumer.

The passage of the Drug Price Competition and Patent Term Restoration Act of 1984 increased the time between FDA approval and patent expiration. But, significantly, it also decreased the time between patent expiration and the approval of generic copies of the branded drugs. Drug companies now had less than 12 years to recoup their R&D and to build reserves for future drug development.¹⁸ And drug companies are doing just that, in some cases. Lipitor, a cholesterol-reducing drug, was introduced in 1997. Sales from 2000-2001 totaled $11.5 billion, over 14 times the amount spent on R&D for a new drug in 2001 (or 48 times the amount, if the Public Citizen study was accurate). According to some estimates, this drug has the potential to make double that amount in the next 3 years. A month's supply of Lipitor ranges from $59.86 to $93.92 according to dosage.¹⁹This leads one to wonder about the continued need for such high prices on this drug.

Admittedly, not all drugs sales are as successful as Lipitor. A 1994 study by economists at Duke University revealed that only 3 out of 10 drugs introduced from 1980 to 1984 had returns higher than their average after-tax R&D costs. But, the study was done before 1997 when the regulations dealing with drug advertisement were relaxed. Since then, prescription drug sales have nearly doubled in the United States, from $78.9 billion in 1997 to $154.5 billion in 2001. The number of prescriptions filled, however, rose only 29.2%. Are drug companies pushing more people towards the newer, more expensive drugs? We'll look at the issue of drug advertising in the next panel.

Sources: Levitt, Larry. The Henry J. Kaiser Family Foundation. Prescription Drug Trends, February 2001. Retrieved July 24, 2002 from http://www.kff.org. "The Inflation Calculator." Retrieved July 24, 2002 from http://www.westegg.com/inflation. National Association of Chain Drug Stores. "Industry Statistics." Retrieved August 1, 2002 from http://www.nacds.org. Pharmaceutical Research and Manufacturers of America. Pharmaceutical Industry Profile 2000. Retrieved July 24, 2002 from http://www.pharma.org. "On its way to $10 billion: LIPITOR." PharmaBusiness.com. Retrieved July 17, 2002 from http://www.medadnews.com/pharma_month/flash/3011.asp. "Global Pharmaceutical Sales by Region, 2001." Retrieved July 18, 2002 from http://www.imshealth.org. Tufts Center for the Study of Drug Development. Outlook 2002. Retrieved July 25, 2002 from http://csdd.tufts.edu/InfoServices/OutlookPDFs/Outlook2002.pdf. National Institute for Health Care Management. Prescription Drug Expenditures in 2001: Another Year of Escalating Costs, May 6, 2002. Retrieved July 17, 2002 from http://www.nihcm.org. Department of Health and Human Services. Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices, April 2000. Retrieved July 25, 2002 from http://www.aspe.os.dhhs.gov/health/reports/drugstudy. National Center for Policy Analysis. "Costs to Develop New Drugs Soar." Daily Policy Digest, December 3, 2001. Retrieved July 24, 2002 from http://www.ncpa.org/iss/hea/pd120301b.html. Kris Hundley. "Trials and transformation." The St. Petersburg Times, April 8, 2002. Center for Drug Evaluation and Research. U.S. Food and Drug Administration. "Generic Drugs: Questions and Answers." Retrieved July 26, 2002 from http://www.fda.gov.