- Some drugs cost hundreds of millions of dollars to develop, but benefit relatively few people. The money for development costs comes from investors in pharmaceutical companies. The only way those companies can recoup their costs and hope to realize a profit is by charging extremely high prices for those drugs.
- Some drugs cost much less to develop, but the pharmaceutical companies charge high prices for them because they have a monopoly (usually the monopoly derives from them having a patent). That looks like gouging to most people, and sometimes it is – but sometimes those profits are helping subsidize the development of less profitable drugs.
- Government bureaucracies, most notoriously the U.S. FDA, dramatically drive up the cost of developing drugs by requiring the pharmaceutical companies to perform long, expensive tests of their prospective drugs for both efficacy and safety. Without special (and difficult to get) exemption, the drug companies cannot supply those drugs even to terminal patients in the U.S. before those tests are complete. Other countries have far less stringent drug approval processes, and it's common for new drugs to be available in Asia and Europe for years before they're available in the U.S. It's not as clear as you might think that foreign consumers have more risk because of the less stringent procedures there. It is very clear that new drugs that actually work are saving lives outside the U.S. before they can do so inside the U.S.
- One country in particular – India – has the technology to produce the most advanced drugs, but has a much stricter requirement for drugs to qualify for patent. Since most drugs are minor modifications of existing compounds (which don't qualify for patent protection in India), it's perfectly legal under Indian law for their pharmaceutical companies to produce them there – and of course, they are. This provides a means for people outside India to get access to drugs that would otherwise be too expensive for them. That sounds great – until you realize that that also means that the pharmaceutical companies who developed those drugs, at great cost, are not going to recoup their expenses, much less make a profit. The Indian companies, by and large, are not innovating – they're copying. Somebody has to pay for the innovation, or said innovation ain't gonna happen. If the Indian gambit significantly suppresses the revenue for such drugs, it's easy to predict that the pharmaceutical companies will stop developing them.
One favored by progressives is to fund drug research with public dollars. This, despite the fact that private pharmaceutical companies in search of profit out-perform every government institution that's ever tried their hand at drug development. The CDC, in the U.S., is a great example. While they've had a few successes over the years, the payback per dollar spent is trivial by comparison with what the pharmaceutical companies have done. In my own opinion, this course is a recipe for failure.
Another approach favored by some in every part of the political sphere is to (drastically) reduce the bureaucracy and regulation around drug approval in the U.S. Many schemes have been floated to do this. The naysayers (and there are many) have one easy line to attack them all: some variant of “These reformers want to kill your kids!” So far that line has stopped every attempt to reform the FDA's drug approval process.
Progressives have recently floated another proposal: to allow drugs to be imported into the U.S. much more freely (this is highly regulated today). This would, in particular, allow the Indian generics to be imported. This would rather dramatically change the financial equation for pharmaceutical companies with respect to financing drug development. Only those drugs that were clearly novel under Indian patent law would then be attractive for financing. Depending on who you want to believe, that's between 1% and 4% of all drugs currently being developed. That's something to think about very hard before implementation. One thing that scares me about that one: the immediate political consequences of such a program would all be positive. All of a sudden, a broad range of drugs would be drastically cheaper. The impact of shutting down the drug development pipeline might not be felt for 10 or even 20 years, so long is the development cycle. That sort of decision, to a politician, is unfortunately a no-brainer: they're going to go for the short term benefit.
I certainly have no easy answers for this one. It's an amazingly complicated problem that most people don't even think about. A lot of people – especially younger folks – seem to think that drug development should be a government function, and the profit motive should be eliminated. That notion scares me more than anything else, because all my own experience tells me that drug innovation would practically halt at that point. Government bureaucracies are motivated almost entirely by factors that don't affect their success on their mission – the U.S. Post Office being the canonical example. Private companies pursuing a profit, on the other hand, are motivated almost entirely by success in their mission. I'll take the latter every time...