In the US, the drug sofisbuvir, brand name sovaldir, and used to treat liver disease hepatitis C, was launched with a price tag of $1000 a pill; and in the UK, the manufacturer Gilead recommended a twelve week course that costs £35,000.

There are roughly 160,000 people in the UK that require treatment and unprecedentedly the NHS chose to phase the drug in. This obviously has to do with the cost of the drug.

Why are so many pharmaceutical drugs so expensive?

  • 2
    $\begingroup$ Please do not ask multiple questions in a single post. Also, none of the four questions has anything to do with macroeconomics, the only tag of your post. $\endgroup$ – Herr K. Jan 25 '19 at 5:01
  • $\begingroup$ @herr k.: what would you suggest as a tag? $\endgroup$ – Mozibur Ullah Jan 25 '19 at 5:40
  • $\begingroup$ @Herr K.: if you don’t have any useful suggestions then maybe you can see why I left it as macro-economics. $\endgroup$ – Mozibur Ullah Jan 25 '19 at 7:34
  • $\begingroup$ @Herr. K: Well, I can’t split the question up into several questions since I’ve been locked out without any explanation; and besides don’t you think that would swamp the stack? I’ve edited it a little given your concerns. $\endgroup$ – Mozibur Ullah Jan 25 '19 at 7:37

Prices are high because drug firms have monopoly power, granted to them by the patent system. In addition the demand for the drugs is fairly inelastic because once you fall seriously ill you're often willing to pay a high price for the cure. If your insurance covers it, you won't even directly notice the price. So the companies can charge almost any price.

Now the patent system is there for a good reason: developing drugs is expensive and if not patented others may use your hard-obtained knowledge to their advantage, without paying for it. Therefore, if your patent is granted you get monopoly power for a while to recapture your investment, on the condition that when the patent expires the knowledge can be used by anyone.

There is no doubt that developing drugs is expensive but whether it justifies the prices charged is a different matter. The pharmaceutical industry is generally unwilling to reveal its costs for good reasons, and that makes estimating profit margins hard.

Part of the question is normative anyway because what would we consider "excessive" profit? What costs are justified when it comes to someone's health?

A fairly old article in the J of Economic Perspectives on this interplay can be found here: https://www.aeaweb.org/articles?id=10.1257/jep.7.3.97

As for tags: microeconomics would certainly be better suited as would monopoly


The answer of Maarten Punt describes the mechanism in action very well.

I'd like give my view your last question.

Q. Is there a cure for high prices in the pharmaceutical industry?

The high prices are based on the monopoly granted by patents. The patents are there to protect the inventor, but it can be argued that in the case of medicine they give too much power to the inventor. I'd say we want a system that is fair to both consumer and inventor.

What is fairness? That is subjective, but I can sketch an imprecise picture. In my opinion fairness means that the inventor makes a profit on the investment, similar to the profit ratios in other industries. For the consumer it means that he does not have to pay all his retirement money for a pill that costs a small fraction of that for research and production. In case of a public health insurance: taxes are not paid to let the pharmaceutical company CEO drive a Bugatti car.

How could this come about? Two ideas.

The most rigorous system change is removal of the patent system for medicines.
To still do the research needed for development of medicine, dedicated (state sponsored) laboratories could be set up.

Another option is that research and production are disconnected. Research institutes can sell the right to produce medicine at a certain price, where the maximum is set by a third party (sufficient to cover all research costs with one license). Exclusive licenses are not allowed. In that way, when a medicine is successful, another production company can buy the rights as well, effectively reducing the price for medicine. Due to the economics of scale, the research costs will only have a very limited effect on the price of the end product.

These are suggestions. However, I believe that after improvement and tuning both ideas could work better than the current system.


Not the answer you're looking for? Browse other questions tagged or ask your own question.