Public debates regarding new drugs tend to focus on the high prices we as consumers or taxpayers have to pay to gain access to them. But we should not forget one basic reality: the development of new drugs is a risky and extremely expensive gamble.
Very few of the attempts - one of 10,000 molecules being studied - result in viable drugs. The prospect of being able to sell these new drugs at high enough prices to recover costs and make a decent profit is the main driver behind pharmaceutical innovation.
Hence, attempts by government to reduce the prices of drugs through various forms of regulations and price controls will ultimately backfire because the incentives for development will have vanished. Moreover, with fewer drugs and thus less competition between drug manufacturers, the natural market mechanism for bringing down prices is not allowed to work.
One study estimated that if the U.S. government had attempted to contain prices, research and development spending would have been 30% lower, and between 330 and 365 new drugs would not have been introduced in the United States between 1980 and 2001. This represents one-third of all drugs introduced in that period.
Recent attempts by governments in Canada and elsewhere in the world to reduce the prices of drugs have most likely had this very effect.
From the mid-1980s to the mid-1990s, there was a surge in the number of drugs introduced. During that period, the stock market performance of big pharmaceutical companies rose to impressive heights. That's not just good for investors; it also means easier access to capital for the companies.
However, estimates suggest that the returns on research and development amongst the leading drug companies were cut by half during the two decades after 1990 and stood at 10% in 2010, which is the minimum needed to cover capital costs.
Since the turn of the century, the introduction of new drugs has either stagnated or declined as firms were forced to squeeze their innovation budgets. During the same period, most pharmaceutical companies have seen their stock market performance plunge dramatically - regardless of the financial crisis.
By continuing to push for lower prices, we might thus be preventing the introduction of potentially beneficial drugs because pharmaceutical companies can't cover their costs. In short, we are harming ourselves. This is because the high prices of new drugs actually come with reduced medical expenditures.
The introduction of pharmaceutical therapies has allowed doctors and hospitals to use them as more successful (and more efficient) substitutes to a large array of costly medical (and less efficient) medical treatments. According to major studies conducted in the United States, every dollar in pharmaceutical innovation has generated net savings ranging between $2 and $2.65 for the entire health system.
New drugs also improve our health and increase our life expectancy, and as a result, we can spend more years earning an income. It is estimated that pharmaceutical innovations are responsible for 75% of the increase of life expectancy in 30 developed countries in the last 10 years.
Yes, we may be able to save money in the short term with cheaper drug prices. But we should be aware that we end up being losers in this trade-off.
Michel Kelly-Gagnon is president of the Montreal Economic Institute (www.iedm.org). The views reflected in this column are his own.