The Value of Drugs

Published January 1, 2005

Just as the price of a Rolex watch is not solely determined by the cost of its materials, the price of a prescription drug is not simply the cost of its ingredients.

Like other products resulting from research, medicines are really made of knowledge–a kind of intellectual property capable of preventing and curing diseases as well as relieving the pain of a headache.

For every 5,000 medicines developed, only five make it to clinical trials. Only one of those is eventually approved for use. Revenues from the one successful medicine must cover the research and development cost of the 4,999 that don’t make it. The average cost of R and D is close to $1 billion, and it takes between 12 and 17 years–much of that time is spent complying with government regulations.

The time a brand-name drug has to recoup the cost is shrinking. The patent protection clock starts ticking when a drug first goes into R and D. For a drug taking 12 years to develop during a 15-year patent agreement, the pharmaceutical company has just three years to recoup its investment. As the population ages the costs of caring for more people will escalate.

Every government proposal impacting health care policy should be judged on whether it would encourage or discourage the remarkable progress brought about by drug research.

IT’S YOUR HEALTH is written by Conrad Meier, senior fellow in health policy at The Heartland Institute. This program is produced as a public service by Radio America. Meier passed away unexpectedly on March 18, 2005.