Medicare Drug Pricing: Does Pharma Spend Justify its Prices?

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Medicare Drug Pricing

Drug pricing for those on Medicare is negotiated primarily by insurance companies. Many have argued that passing H.R.3-The Elijah E. Cummings Lower Drugs Cost Now Act, which would grant the HHS secretary to negotiate with pharmaceutical companies and establish references for drug pricing (read more in part I), would lower the price of medicine considerably. 

In this article, the Zero Theft Movement will take a deep dive into the pharmaceutical market and spend. You can decide whether the spending by pharmaceutical companies justifies the U.S. having the most expensive drug pricing by far.

Pharmaceutical Market Size

The global pharmaceutical market was worth about $1.3 trillion in 2019. 

The 10 largest pharmaceutical companies earned a collective $392.5 billion in revenue, accounting for around a third of the global market.  

  1. Pfizer — $51.75 billion
  2. Roche — $50 billion
  3. Novartis — $47.45 billion
  4. Merck — $46.84 billion
  5. GlaxoSmithKline — $43.54 billion
  6. Johnson & Johnson — $42.1 billion
  7. AbbVie — $33.27 billion
  8. Sanofi — $27.77 billion
  9. Bristol-Myers Squibb — $26.15 billion
  10. AstraZeneca — $23.57 billion 

From The Pharma Letter via Becker Hospital Review

Per a study published by JAMA, 35 large pharmaceutical companies, from 2000-2018, generated a net income/earnings of $1.9 trillion (13.8% of gross profit). 357 non-pharmaceutical companies in the S&P 500 Index generated a net income/earnings of $9.4 trillion (7.7% of gross profit). The study suggests large pharmaceutical companies are significantly more profitable (6.1%) than leaders in other industries.


While 6.1% sounds insignificant, we are dealing in millions, billions, and even trillions with these companies.

It is important to note the authors of the JAMA study qualified the results, stating, “Large pharmaceutical companies were more profitable than other large companies, although the difference was smaller (3.6%) when controlling for differences in company size, research, and development expense, and time trends.” 

Per the Commonwealth Fund, “the average U.S. resident paid $1,122 out-of-pocket for health care, which includes expenses like copayments for doctor’s visits and prescription drugs or health insurance deductibles.” Does the US healthcare system need to be so expensive?

Medical Innovations

Despite Fleming’s claims, he does not mention how highly profitable innovations are already in the pipeline. 

According to a study conducted by Bain, “Blockbuster drugs and new technologies such as cell therapy will increase pharma revenues and expand the sector’s profit pool by 35% to $170 billion by 2024. With an overall 26% operating margin, pharma continues to be one of the most profitable healthcare sectors.” 

Note: These figures address only the U.S. market. 

Also, new opportunities with technology as well as for personalized medicine abound. Pharma titan Novartis, for example, has adopted a tech-centric approach to R&D, resulting in 80+ major drug submissions planned for 2020-2022. Again, we should remember how many of these new drugs in the pipeline will not (1) get FDA-approved and (2) sell well. The increased revenues and 26% operating margin, though, suggest that the pharmaceutical industry does not need to put such a high price tag on even their blockbuster drugs. 

New, and sometimes unique, illnesses manifest in seniors, requiring ‘precision’ drugs designed specifically for an individual or particular demographics. Proventa International editor Joshua Neil writes, “Precision drugs could reduce blockbuster R&D costs, with less need for vast trial populations, a reduced manufacturing capacity, and a more focused scope. More drugs could in theory also be generated, providing a larger capacity of money-making products.” Precision drugs, rather than blockbuster drugs, maybe the future of the pharmaceutical industry, as many believe that the low-hanging fruits have already been picked. 

Pharmaceutical R&D

Investopedia estimates the pharmaceutical companies spend, on average, 17% of revenues on R&D. Big pharma spends close to 20%. Small pharmaceutical companies, due to limited revenue, will spend around 50%. 

Just as a comparison, all other industries engaged in developing new products spend an average of around 1.3% on R&D. The only business that ‘outperforms’ pharmaceuticals in R&D spending is the semiconductor industry (25-28%, on average).

According to FierceBiotech’s list of the top 10 R&D budgets, Roche comes out on top at $12.06 billion (19% of revenue).  Every company invests at least 13% of their revenue in R&D. It is widely accepted, however, that most big pharma companies outsource discovery or buyout companies with promising early-stage drugs and focus on late-stage trials (sometimes not even that), scaling manufacturing, and marketing. 

In truth, the small pharmaceutical companies and startups do not have the infrastructure nor the capital to shepherd a drug from discovery to its appearance on drugstore shelves.      

Outsourcing & partnerships

Big pharma outsources around 40-45% of its work. That number is trending towards 60%.

Pharmaceutical companies outsource their clinical trials, their research needs, and even manufacturing to Contract Research Organizations (CROs). This is to cut costs significantly because it eliminates overhead (fewer permanent hires, no office space required, shorter development times due to less bureaucracy, cheaper labor offshore, and so on). 

The CRO industry has burgeoned in its short lifespan and seeing how much cost savings it brings, it will likely continue to grow rapidly.   

Big pharma-academia partnerships have also grown to become common in the pharmaceutical industry. AstraZeneca’s collaboration with the University of Cambridge is just one example of this developing trend. Outsourcing the discovery process to some of the best researchers in the world appears to have boosted innovation, especially in biologics and cell therapy (projected money maker). The research process and supply chain for cell therapy, in particular, better suits a university hospital, as the treatment requires the use of the patient’s cultures.

Investments & acquisitions

Pharmaceutical companies have also invested in startups and small biotech companies to head the discovery stage of drug development. Johnson & Johnson, apart from the $10+ billion they spend on their own R&D, uses ~$300 million for seed investments. They have their own incubator ‘JLabs.’ From 2013-2018, 63% of FDA-approved drugs originated from startups/small biotech companies (defined as businesses with less than $100M in revenue). 

Richard Murphey, from, did a bit of digging into this figure, as well as Deloitte’s study on pharma’s decreasing R&D ROI. As he admits himself, his post is a ‘back-of-the-envelope’ analysis; however, he discusses the challenges involved in accurately calculating R&D productivity. Murphey wanted to reach a figure for startups specifically. He defines them as a company that has received venture capital funding in the past fifteen years (drug development takes time). 19 drugs (32%) is the number he produced vs 13 drugs for big pharma.

Read more about pharma R&D here

As it stands, the U.S. government cannot negotiate drug prices for Medicare Part D due to a non-interference clause. If the government were allowed to negotiate, would that reduce drug prices? Join the debate on the Zero Theft voting platform…

Pharmaceutical Marketing

The amount pharmaceutical companies were spending on sales and marketing vs. R&D became a hot topic of discussion in the mid-2010s. A BBC report cited a 2015 GlobalData study that claimed: “9 of 10 top drugmakers spend more on marketing than research.” The following are the results from the aforementioned study:

world's largest pharmaceutical firms

From BBC via GlobalData

According to a JAMA study “Medical Marketing in the United States, 1997-2016,” ~$30 billion was spent on medical marketing in 2016. Nearly 70% of that went to Pharmaceutical Rep Marketing (PRM), a practice where a pharma rep convinces physicians on a drug’s efficacy. This goes against the common misconception that the money goes to Direct-to-consumer marketing.    

Obviously, the $30 billion does not add up with GlobalData’s numbers. The JAMA study took into account only the figures within the U.S. Big Pharma operates on a global scale, so it’s expected that the total market spend does not match with U.S. spend.

Furthermore, the agenda seems to greatly influence R&D vs. marketing calculations. Top pharmaceutical firms produced a somewhat different picture of their 2018 spending.

2018 marketing and sales

From the Regulatory Affairs Professional Society

What you consider ‘marketing’ drastically changes how you calculate the end result. Pharma reps have claimed that some estimations have included administrative and other non-marketing costs. John Lamattita, former president of Pfizer’s global R&D, claimed critics included free drug samples as a marketing cost. 

Campaign Donations & Lobbying

While the pharmaceutical industry consistently spends the most in campaign donations and lobbying, you will likely be surprised by how low their expenditures are (relative to revenue).

Campaign donations: $1.3 billion from 1999 to 2018

Lobbying (pharma + health): $4.45 billion from 1998 to 2020

Referring back to Wouter’s study (1999-2018) on lobbying and campaign expenditures:

“Excluding contributions to outside spending groups, the industry donated $367 million to party candidates and committees ($216 million [58.9%] to Republicans; $151 million [41.1%] to Democrats), with more money going to Republicans than to Democrats in all but 2 election cycles (2008 and 2010).”

1,227 (62.9%) pharmaceutical/health product lobbyists in the U.S. and the percentage that are former government employees as of March 2020. A thorough examination into these lobbyists’ time in the government, as well as current representatives is a major yet necessary task that should be undertaken. Especially considering the status of H.R. 3.   

Beyond the H.R. 3

Herein we are approaching a fundamental conflict: pharma is for-profit. Maybe ethically speaking, pharmaceutical companies should reduce their prices and invest more in R&D.  The numbers, while murky, seem to suggest they definitely could. Maybe they should reinvest money instead of marketing directly to consumers, especially for anything not offered over-the-counter like anti-depressants. These marketing efforts could lead to citizens ‘doctor shopping,’ finding a physician who will prescribe the drug even if they have no need for it.

After all, we’re not talking about the fashion or cosmetic industries (which admittedly have their own human and animal rights issues); we’re talking about a matter of life and death for humans. People have died because they couldn’t pay for their prescriptions. 

But the fact of the matter is, pharmaceuticals and health care will remain a business for the foreseeable future. Derek Lowe of the American Association for the Advancement of Science (AAAS) points out:

“No matter what is the amount spent on marketing, it’s supposed to bring in more money than is spent. That’s the whole point of marketing. Even if the marketing budget was the same as the R&D, even if it were more, it still wouldn’t get rid of that point: the money that’s being spent in the labs is money that came in because of marketing.”

With the total lack of transparency across the supply chain (more on this later), the way forward seems unclear. H.R. 3 would not have been suggested, though, if everyone could get access to the drugs they need. Perhaps the Pelosi bill is too draconian and would damage the innovation-revenue cycle. If that is the case, then we need to find alternative ways to ultimately get the citizenry paying much less for the drugs they require. 

This is not to free Big Pharma and other players in the supply chain who all have definitely rigged the ‘free’ market in other ways.    

Pay-for-delay deals

In order to maximize revenues even after a patent expires, branded drug manufacturers compensate (not only just monetarily) competitors to delay the releases of their generic versions. That means the pharmaceutical industry rakes in money because citizens have no option but to buy the high price, single-source prescription drugs they need.  

The Federal Trade Commission (FTC), since 2013, has been working to end these anticompetitive deals. According to the FTC’s own estimation, Americans are paying $3.5 billion in higher drug costs every year.   

 Senators Klobuchar (D-Minnesota) and Grassley (R-Iowa) have co-sponsored a bipartisan bill to prevent these pay-for-delay deals. However, while many believe the bill will pass, there’s skepticism in regards to whether the FTC can catch drug manufacturers. Compensation does not have to involve money changing hands, of course.    

In the U.S., drug prices, on average, are 2.56 times higher than those in 32 developed nations. Americans spend about $1,200 on prescription medication annually. Is the American public spending much more than they would in a free market?


A more recent issue has come in the form of biologic drugs (large molecules). In the past, most FDA-approved drugs were what’s known as small molecules—medicines with relatively simple chemical compositions. In short, biologics are chemically complex and involve a costly step of being manufactured in living cells.

Avik Roy, in a Forbes article, outlines how pharmaceutical companies secure the growing biologics market with a great amount of spending.

USA net drug spending

Beyond the high development costs, Big Pharma can assert a much broader patent estate because of the chemical complexity of biologics. Industry giants further spend to ensure the success of their costly biologics by pumping cash into their massive sales force. 

This, along with the R&D spend and the time-consuming process of producing large molecules, dissuades biosimilar manufacturers from competing. If a Big Pharma wins just one of their many patent litigations, the biosimilar manufacturer in question would go out of business.  

Finally, Big Pharma uses ‘rebate walls.’ These are financial incentives for pharmacy benefit managers, another potential culprit in the exorbitant drug pricing. Rebate walls come in bundling deals wherein a new biologic will be released with a high price tag in exchange for discounts on the rest of the drug manufacturer’s medicine. This measure prevents better alternatives to be offered on plans.  

You can read more on cases involving Pfizer and Shire here.    

Inefficient supply chain 

According to a USC study, over 40% of retail sales goes to intermediaries (PBMs, insurers, and pharmacies). Again, much of this money should be going to provide better plans or lower drug pricing for Medicare Part D enrollees. Examining how these intermediaries’ profit would reveal likely corruption that is leading to price gouging.

There are also innovations happening to disrupt the pharmaceutical supply chain. You can read up about them here.   

Eliminate Price Gouging Across Industries

Rigged drug pricing negatively affects each and every one of us. Some more than others, but most, if not all, of us, will need medicine at least once in our lives. We aren’t talking about luxury goods here; medications are essential goods, requirements for you, your loved one, a friend of a friend to live. Being able to afford prescriptions can actually be a matter of life and death. We cannot let corporations unethically boost profits by exploiting our vulnerabilities and frailties. 

View how much is being STOLEN

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