Do pricey medicines in the USA subsidise R&D for the rest of the world?

Question

A recent (February 2018) report by the US government Council of Economic Advisors makes the following argument (my highlights):

The United States both conducts and finances much of the biopharmaceutical innovation that the world depends on, allowing foreign governments to enjoy bargain prices for such innovations. This indicates that our current policies are neither wise nor just. Simply put, other nations are free-riding, or taking unfair advantage of the United States’ progress in this area.

An article in the International Business Times argues something similar:

Medicines in the U.S. frequently cost significantly more than the same versions in other advanced countries. ... But what often goes overlooked in these discussions is the fact that pricey medicines in the U.S. actually subsidize research and development for the rest of the world, and for all the proposals to lower drug prices in the U.S., a solution to this particular imbalance is nowhere in sight.

Though the same article reproduces evidence that the industry spends far more on marketing than on R&D (which could be interpreted as an argument that it isn't R&D that is being subsidised but excessive marketing, an issue addressed in this question here).

Update

According to some sources (eg The Daily Telegraph) the belief that US prices for drugs subsidise the world is going to impact US trade policy:

Alex Azar, the US Health and Human Services Secretary, has said Washington will use its muscle to push up drug prices abroad, to lower the cost paid by patients in the United States.

"On the foreign side, we need to, through our trade negotiations and agreements, pressure them," Azar said on CNBC.

"And so we pay less, they pay more. It shouldn't be a one-way ratchet. We all have some skin in this game."

Do US prices for pharmaceuticals subsidise R&D that benefits the rest of the world?

Answer 1

tl:dr

Yee-es?!? The pharmaceuticals in the US are subsidising something. But what that is is certainly not anything that benefits the rest of the world. The sentences in the claim in question are blatant lies. US prices end up as profits for a large part and are not reinvested, certainly not into research and development of new drugs, as the industry likes to claim.

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These lies are used, as the great philosopher DJ Trump once said: "to get away with murder."

Let's look at the developer centres in a what if scenario: The claim is based on implicit assumptions and indirect implications: that almost all the innovation comes from US based firms and that they throw the money at the problem of development. This overlooks gracefully that amount spent is not equal to either efficiency or effectivity in conducting research. It also overlooks gracefully that drugs from non-US companies are also often more expensive in the US than elsewhere. And it assumes that all the money going round in the US for research is the greatest amount anywhere. Is that the case? Let's ask some investors:

The top 10 pharma R&D budgets in 2016 Swiss oncology major Roche was tops in total terms, spending a massive CHF11.53 billion ($11.42 billion) last year, nearly 23% of its CHF50.57 billion in revenue. It also recorded a 20% jump in R&D spending compared with 2015, the biggest increase among the top 10, with most of this increase going into its pharmaceuticals divisions, the rest into diagnostics.

That does of course not prove whether US profits are also driving Swiss innovation, but it shows that the self-reported relation between revenue and R&D might not be always so much in favour of US based companies in this regard.

A recent analysis for some pharmaceutical companies found that US prices alone carry a hefty margin, unexplainable with any R&D:

R&D Costs For Pharmaceutical Companies Do Not Explain Elevated US Drug Prices (Health Affairs, 2017)
Excess Revenues Earned Through Premium Pricing Of Products In The US As A Percentage Of The Company’s Global Research And Development Expenditures, 2015

_{Comment: We found that the premiums pharmaceutical companies earn from charging substantially higher prices for their medications in the US compared to other Western countries generates substantially more than the companies spend globally on their research and development. This finding counters the claim that the higher prices paid by US patients and taxpayers are necessary to fund research and development. Rather, there are billions of dollars left over even after worldwide research budgets are covered. To put the excess revenue in perspective, lowering the magnitude of the US premium to a level where it matches global R&D expenditures across the 15 companies we assessed would have saved US patients, businesses, and taxpayers approximately $40 billion in 2015, a year for which the Centers for Medicare and Medicaid Services (CMS) reported that total US spending on pharmaceuticals was $325 billion.}

Revenues Earned From US Premium Pricing And Global Spending On Research And Development Of The 15 Pharmaceutical Companies Responsible For The World’s 20 Top-Selling Products In 2015

But these numbers above are based on the industry's own estimates, somewhat lacking in transparency and apparently erring on the inflated side. In reality the actual costs for developing a new drugs are very probably much lower:

Vinay Prasad & Sham Mailankod: "Research and Development Spending to Bring a Single Cancer Drug to Market and Revenues After Approval", JAMA Intern Med. 2017;177(11):1569-1575. doi:10.1001/jamainternmed.2017.3601
A common justification for high cancer drug prices is the sizable research and development (R&D) outlay necessary to bring a drug to the US market. A recent estimate of R&D spending is $2.7 billion (2017 US dollars). However, this analysis lacks transparency and independent replication.
The cost to develop a cancer drug is $648.0 million, a figure significantly lower than prior estimates. The revenue since approval is substantial (median, $1658.4 million; range, $204.1 million to $22 275.0 million).

Unregulated markets lead invariably to crisis and failure.

Markup of Select Prescription Drugs   
                Consumer Price for 100 Tablets  
                         Cost of Active Ingredients 
                                  Percent Markup
Xanax      1mg  $136.79  $0.024 569,958%
Prozac    20mg  $247.47  $0.11  224,973%
Norvasec  10mg  $188.2   $0.14  134,493%
Claritin  10mg  $215.17  $0.71   30,306%
Celebrex 100mg  $130.27  $0.60   21,712%
Keflex   250mg  $157.39  $1.88    8,372%
Lipitor   20mg  $272.37  $5.80    4,696%    

Source: The list was published by members of the U.S. Department of Commerce and the Bureau of Economic Analysis.

Xanax, or Alprazolam is covered under U.S. Patent 3,987,052, which was filed on 29 October 1969, granted on 19 October 1976, and expired in September 1993. Market prices for this drug do not reflect recent development costs.

If the situations in Europe and America are compared, correlations between anything like manufactures, developers or researcher and market prices of drugs are very hard to find. –– But a big correlation exists in how the local government policy plays out: Olivier J. Wouters & Panos G. Kanavos & Martin Mckee: "Comparing Generic Drug Markets in Europe and the United States: Prices, Volumes, and Spending", The Milbank Quarterly, Volume95, Issue3, September 2017, Pages 554-601, https://doi.org/10.1111/1468-0009.12279

Meanwhile, telling “innovation crisis” stories to politicians and the press serves as a ploy, a strategy to attract a range of government protections from free market, generic competition.

How much does research and development cost?
Although the pharmaceutical industry emphasises how much money it devotes to discovering new drugs, little of that money actually goes into basic research. Data from companies, the United States National Science Foundation, and government reports indicate that companies have been spending only 1.3% of revenues on basic research to discover new molecules, net of taxpayer subsidies. More than four fifths of all funds for basic research to discover new drugs and vaccines come from public sources. Moreover, despite the industry’s frequent claims that the cost of new drug discovery is now $1.3bn (£834m; €1bn), this figure, which comes from the industry supported Tufts Center, has been heavily criticised. Half that total comes from estimating how much profit would have been made if the money had been invested in an index fund of pharmaceutical companies that increased in value 11% a year, compounded over 15 years. While used by finance committees to estimate whether a new venture is worth investing in, these presumed profits (far greater than the rise in the value of pharmaceutical stocks) should not be counted as research and development costs on which profits are to be made. Half of the remaining $0.65bn is paid by taxpayers through company deductions and credits, bringing the estimate down to one quarter of $1.3bn or $0.33bn. The Tufts study authors report that their estimate was done on the most costly fifth of new drugs (those developed in-house), which the authors reported were 3.44 times more costly than the average, reducing the estimate to $90m. The median costs were a third less than the average, or $60m. Deconstructing other inflators would lower the estimate of costs even further.

Myth of unsustainable research and development
Complementing the stream of articles about the innovation crisis are those about the costs of research and development being “unsustainable” for the small number of new drugs approved. Both claims serve to justify greater government support and protections from generic competition, such as longer data exclusivity and more taxpayer subsidies. However, although reported research and development costs rose substantially between 1995 and 2010, by $34.2bn, revenues increased six times faster, by $200.4bn. Companies exaggerate costs of development by focusing on their self reported increase in costs and by not mentioning this extraordinary revenue return. Net profits after taxes consistently remain substantially higher than profits for all other Fortune 500 companies.

This hidden business model for pharmaceutical research, sales, and profits has long depended less on the breakthrough research that executives emphasise than on rational actors exploiting ever broader and longer patents and other government protections against normal free market competition. Companies are delighted when research breakthroughs occur, but they do not depend on them, declarations to the contrary notwithstanding. The 1.3% of revenues devoted to discovering new molecules compares with the 25% that an independent analysis estimates is spent on promotion, and gives a ratio of basic research to marketing of 1:19.

The true crisis in pharmaceutical research

• The number of new drugs licensed remains at the long term average range of 15-25 a year
• However, 85-90% of new products over the past 50 years have provided few benefits and considerable harms
• The pharmaceutical industry devotes most research funds to developing scores of minor variations that produce a steady stream of profits
• Heavy promotion of these drugs contributes to overuse and accounts for as much as 80% of a nation’s increase in drug expenditure
• Overinflated estimates of the average cost of research and development are used to lobby for more protection from free market competition

From: Donald W Light & Joel R Lexchin: "Pharmaceutical research and development: what do we get for all that money?" BMJ 2012; 345 doi: https://doi.org/10.1136/bmj.e4348 (Published 07 August 2012)

Prescription drug prices in the United States have been among the highest in the world. And given the facts available, that is not easily interpreted in any other way as U.S. Prescription Drug Costs Are a Crime.

The United States, which leaves pricing to market competition, has higher drug prices than other countries where governments directly or indirectly control medicine costs.
That makes it by far the most profitable market for pharmaceutical companies, leading to complaints that Americans are effectively subsidizing health systems elsewhere.

Many of the biggest differences were evident for older drugs, reflecting the fact that prices are typically hiked each year in the United States, said University of Liverpool drug pricing expert Andrew Hill.
"It shows the U.S. drug pricing situation isn't just a matter of isolated cases like Turing Pharmaceuticals," he said.
The latest furore over U.S. drug costs was prompted by the decision by unlisted Turing to hike the cost of an old drug against a parasitic infection to $750 a pill from $13.50. It has since promised to roll back the increase.
The same medicine is sold in Britain by GlaxoSmithKline for 43 pence (66 cents).
(From: Ben Hirschler: "How the U.S. Pays 3 Times More for Drugs", Scientific American )

Looking at the relationship between advertising, promotion on one side and the actual development put forward with increasingly abysmal results for US based innovations makes it much more urgent to look at other reasons for price increases. One reason often heard is that pharmaceutical companies are very simply not non-profit-organisations.

Paying for Prescription Drugs Around the World: Why Is the U.S. an Outlier?
One reason U.S. prescription drug prices are higher may be the relative lack of price control strategies. Unlike the U.S., many other countries employ centralized price negotiations, national formularies, and comparative and cost-effectiveness research for determining price ceilings. In the U.S., health care delivery and payment are fragmented, with numerous, separate negotiations between drug manufacturers and payers and complex arrangements for various federal and state health programs. And, in general, the U.S. allows wider latitude for monopoly pricing of brand-name drugs than other countries are willing to accept.

Summary

Most of the research and development is financed from external, public sources. The money that is captured via US prices is not spent on research, but on manipulation, mergers, and maximum payouts. Why are they doing this? Because they can.

What are the drug prices in the US subsidising?

Profits.

Answer 2

Arguably the modern drug era started with the discovery of penicillin in Alexander Fleming, Professor of Bacteriology at St. Mary's Hospital in London in 1928 with purification developed in Oxford

It was Howard Florey, Ernst Chain and their colleagues at the Sir William Dunn School of Pathology at Oxford University who turned penicillin from a laboratory curiosity into a life-saving drug. Their work on the purification and chemistry of penicillin began in earnest in 1939, just when wartime conditions were beginning to make research especially difficult. [1]

We can't examine all the claims regarding drug development but it is clear that for many drugs it is an international collaboration.

Centocor may have developed infliximab, the first monoclonal antibody used in the treatment of rheumatoid arthritis but if we look at the co-discoverer's notes

In 1979, Junming Le, PhD, was one of the first Chinese citizens to receive a United Nations fellowship for study in the U.S.

...

After five years in New York working from 9 a.m. to midnight in labs at Memorial Sloan Kettering and New York University School of Medicine, living on ramen noodles and struggling to pay the rent, he completed his studies. His wife, who adopted the name Iris, joined him at last. Within a year, they had a daughter, Daniella. Within 10 years, at the New York University School of Medicine, Dr. Le helped pioneer a new kind of drug with monoclonal antibodies – molecules produced to mimic natural disease-fighting antibodies found in human immune systems. [2]

At that time anti-TNF drugs were being studied to treat sepsis but it was in the Kennedy Institute, Charing Cross Hospital in London that anti-TNFs were shown to be unexpectedly successful in treating rheumatoid arthritis.

We were not able to convince any of these companies in the UK, but when a small US biotechnology company, Centocor, hired my ex-student, Dr James N. Woody as Chief Scientific Officer, we had an ally who understood both the science and the medical implications. The crucial first proof of principle clinical trial was performed at Charing Cross Hospital, London, with Ravinder Maini and Marc Feldmann as Principal Investigators, with Centocor providing the ‘drug’, cA2, a chimaeric (mouse anti-TNF FAb linked to human IgG1) antibody developed from a hybridoma made in Jan Vilcek’s laboratory at New York University, and a small grant to the Kennedy Institute, which was then in London on the Charing Cross Hospital campus.

Centocor did not even provide their expert clinical group, which was at the time pre-occupied with anti-CD4 mAb therapy, so James Woody was the Centocor clinician in charge for the vital proof of principle trial, which succeeded dramatically and thus subsequently led to randomized, placebo-controlled trials and registration: an excellent, if perhaps not so common, example of effective academic–industrial interaction [3]

So, infliximab, drug that was developed and first trialled in patients in 1992 was reported to cost

In the United States, Remicade/infliximab can cost $19,000 to $22,000 a year per patient, according to Centocor in 2007 [3]

But in 2016

Reuters found Johnson & Johnson’s drug Remicade (infliximab) price increased 63%. Caroline Pavis, a spokesperson for the company, told the news organization “average selling price increases were closer to 5.4% per year.” [4]

It's clear prices in the USA far exceed those elsewhere. For example, Humira costs $48,000 per year yet in NZ that price is likely closer to under $10,000 per year to the NZ Government. However, the exact contract price is a commercial secret.

As expensive as these drugs are, and extremely expensive anti-cancer agents, it could be argued that the world does not depend on these drugs. Yes, patients would be worse off, but we are not talking huge numbers and often not life saving. And in the case of anti-cancer drugs we are often talking about life extension of only a few months.

However, the flu vaccine is life saving and countries depend on its existence. But the vaccine is developed in 5 centers worldwide as a collaborative effort.

All year long, 142 national influenza centers in 113 different countries collect data on the flu viruses impacting the world’s population. Specifically, they monitor which strains of the virus are making people sick, how efficiently those strains are spreading, and how well previous vaccines have worked to combat their targeted viruses.

All of these smaller centers then pass the results from their wide-reaching investigations to one of five World Health Organization Collaborating Centers for Reference and Research on Influenza: the Centers for Disease Control and Prevention (aka the CDC) in Atlanta, Georgia; the National Institute for Medical Research in London, UK; the Victoria Infectious Diseases Reference Laboratory in Melbourne, Australia; the National Institute for Infectious Diseases in Tokyo, Japan; and the National Institute for Viral Disease Control and Prevention in Beijing, China. [5]

Artemesin, the basis of a new class of anti-malarial drugs, was actually discovered in China. [6]

Critical progress was subsequently made by Youyou Tu, who was inspired by the detailed methods of Artemisia usage described in ancient Ge Hong’s book “Zhou Hou Bei Ji Fang”. The book reads: for the treatment of malaria “a handful of Artemisia soaked in two liter of water. Take the pressed juice.” She deduced that the disuse of decoction (by boiling) may imply thermo-instability of active principles, which nonetheless may be lipophilic. Therefore, she switched from ethanol to ether as the extraction solvent. After removing the acidic principles, white solids were isolated from the neutral ethereal extraction, which exerted 100% inhibition against mouse P. falciparum. The white solids were later identified to be artemisinin (1) (Fig. 1). The discovery of artemisinin from the ethereal extraction certainly played a critical role in opening new therapeutic means and saving millions of lives from malaria illness. It also justifies Youyou Tu’s sharing of the 2015 Nobel Prize for Physiology or Medicine.

So, modern medicine and drug discovery is an international collaboration, and the rise in price of drugs in the USA appears to the cynical to be driven by other factors than just paying for past research and development.

1. https://www.acs.org/content/acs/en/education/whatischemistry/landmarks/flemingpenicillin.html

2. http://giving.clevelandclinic.org/articles/le-foundation-benefits-innovative-technology

3. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4279876/

4. http://www.pharmtech.com/report-examines-price-increases-most-widely-used-drugs-us-0

5. https://www.scientificamerican.com/article/how-are-seasonal-flu-vaccines-made/

6. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4788711/