Foreign free riders and the high price of US medicinesBMJ 2005; 331 doi: https://doi.org/10.1136/bmj.331.7522.958 (Published 20 October 2005) Cite this as: BMJ 2005;331:958
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We welcome the opportunity to respond to the letters from David
Reilly and Richard Smith. Mr. Veazey maintains that if drug companies are
profitable enough, they will not invest in finding new drugs for neglected
diseases. But they have not done so during the past two decades of high
profitability. They have shown little interest in using billions in
surplus cash to address the diseases that ravage two-thirds of the world’s
The Drugs for Neglected Diseases Working Group and the Harvard School
Public health surveyed the world’s top 20 pharmaceutical companies to
assess their level of R&D activity in five prevalent diseases of the
poor. Only 11 completed the questionnaire. Eight reported they spent
on R&D for sleeping sickness, leishmaniasis and Chagas disease. Only 2
anything on malaria research, and 7 spent less than 1% of their R&D budget
on any of the five diseases.1
We are surprised that Reilly and Smith claimed no conflict of
while they are employees of PhRMA and are defending the interests of the
multinational pharmaceutical industry. They cite the industry-sponsored
unrefereed Bain report whose underlying premise is that the use of newer
drugs makes people healthier. By that measure Europeans should be
compared to Americans but in fact by all measures Europeans are far
healthier than citizens of the U.S. Moreover, given the limited knowledge
about the safety profile of new drugs early, widespread use of these
could have serious negative health consequences.
Reilly and Smith do not challenge our central claim which is that
drug prices in industrialized countries outside the U.S. pharmaceutical
companies are able to recover all their annual R&D costs while continuing
be highly profitable.
Nor do they challenge the obvious inference that Americans do not pay
higher prices because other countries are “free-riders”, but because drug
companies use “corporate price controls” to charge Americans much more
and reap much higher profits. Instead, Reilly and Smith focus on secondary
parts of our article, such as our claim that only 10-15 percent of NDAs
drug approvals) provide important new benefits over existing medications.
They dismiss this argument because we based it on a report sponsored by
insurance industry. But aside from that report, the same conclusion has
separately confirmed by the Canadian Patented Medicine Prices Review Board
2 and the independent French drug bulletin La revue Prescrire.3
In support of their position, they cite a recent study from the U.S.
of Commerce. But there are factual errors in this report, for instance in
percent of revenue that comes from the sale of patented medicines in the
Reilly and Smith accuse us of denigrating the work that is involved
basic research to the stage where a drug is ready to be administered to
humans. We did no such thing and in fact in our article we acknowledged
value of all three types of research (basic, applied and other). Their
discussion of the failure rate in trials is also beside the point and
some of the “failures” are drugs withdrawn because a company thinks it
cannot make enough money from it.4 Companies do not hesitate to terminate
ongoing clinical trials if their commercial priorities change, even though
eliminates the chance for meaningful results from a trial.5
It is the drug companies that make people think that their huge R&D
are devoted to “innovation,” when most of it goes to developing or testing
new molecules discovered by others. An example of such claims is found on
the PhRMA website: “America's research-based biopharmaceutical companies
are committed to continuing and expanding innovative research and
developing new and better medicines and treatments.” Such statements
create quite a different and misleading impression than can be supported
the facts we cite including our analysis which shows that the
industry devotes a net of about 1.3 cents per dollar of sales to basic
NIH basic research contributes much more to discovering valuable new
than Reilly and Smith indicate, because that research identifies the most
promising biological targets. Without them, drug companies are like
in the dark with a large ring of keys (the millions of molecules in their
banks) but unable to find the keyhole.6
Joel Lexchin MD, Associate Professor, School of Health Policy and
Management, York University, Toronto, Ontario, e mail: firstname.lastname@example.org
Donald W. Light, Professor, University of Medicine & Dentistry of New
Stratford, New Jersey
1. Fatal imbalance: the crisis in research and development for drugs
neglected diseases. MSF, 2001. (Accessed 2005, April 19, at http://
2. Patented Medicine Prices Review Board. Annual report for 2004.
3. A review of new drugs in 2004: floundering innovation and
taking. Prescrire International 2005;14:68-73.
4. DiMasi J. Success rates for new drugs entering clinical testing in
States. Clinical Pharmacology and Therapeutics 1995;58:1-14.
5. Psaty B, D R. Stopping medical research to save money: a broken
researchers and patients. Journal of American Medical Association
6. Angell M. The Truth About the Drug Companies: how they deceive us
what to do about it. New York: Random House, 2004.
Competing interests: No competing interests
Very little can be said about the actual costs involved in
researching and developing costs for a particular drug. As the article
admits, pharmaceutical companies are not willing to open their books to
show these costs as this is proprietary information. I do not think that
the question posed by the article can be answered without this
However, I agree that in a patent monopoly situation, there should be
some form of regulatory oversight to ensure that the public benefits from
this non-market intervention.
The article, in accusing others of misusing economic theory, also
commits some economic fallacies. It is incorrect to assume that drug
prices should be determined in a free and open market, similar to stock
prices. Patent protection exists to correct an assumed market failure.
The assumption is that firms need an expectation of a certain level of
profit if they are to stay in business. Without patent protection, would
pharmaceutical companies invest in research, development, and getting a
new drug approved if there is no expectation of recovering those costs?
Without patent protection, you would have a different sort of free
rider problem. Other companies skilled at reverse engineering would
simply "free ride" on the expensive research, development, and costs
associated with getting regulatory approval of a new drug.
The article's attempt to show "free riding" as a flawed accounting
convention is an obfuscation. The concept of a "free ride" in economics
goes far beyond accounting conventions. If a pharmaceutical company needs
to raise prices in a less regulated country to remain a profitable
business, it is doing so at the expense of that country.
This is not to say that a company with patent protection can raise
its prices to infinity. The monopolistic company, in the absense of other
restrictions, will charge only as much as the market can bear.
But the question of what happens when you take the profits out of the
pharmaceutical business is a pertinent one today, considering the
financial difficulties now apparent in the industry. As profits become
scarcer, you will see more and more consolidation and an even higher focus
on profits to stay in business and avoid takeovers. This will be only at
the expense of research for "neglected" diseases and vaccines.
Competing interests: No competing interests
We are writing in response to the October 22, 2005, commentary by
Donald Light and Joel Lexchin, “Foreign free riders and the high price of
US medicines.” The authors’ claims are based on inaccurate and incomplete
The authors argue that only basic research is important to
discovering “breakthrough” drugs. This implies that drug development and
testing is unimportant to bringing new medicines to patients. The
importance of drug development is evident from the fact that most
medicines that enter clinical trials fail; even among medicines entering
Phase III trials after many years of development, about half fail. If
drug development were easy rather than extraordinarily difficult and all
important scientific and clinical knowledge about a compound were
established during basic research this would not be the case.
The authors also ignore a wealth of independent data contradicting
their claims about the contribution of biopharmaceutical companies to the
development of new medicines. Research sponsored by the National
Institutes of Health (NIH), most of which is basic research, clearly is
important to achieving medical progress. Yet in a 2001 report the NIH
itself found that the direct contributions of NIH-funded research to final
therapeutic products are “limited and difficult to determine.”
The authors claim that only 10-15% of newly approved drugs provide
important benefit over existing medicines. However, the source for their
claim is a deeply flawed, non-peer reviewed study conducted by an
association of insurers. Among its errors, the study arbitrarily excluded
all vaccines and biotech drugs from its analysis. Therefore, drugs such
as Herceptin®, a remarkable breakthrough for breast cancer, are ignored.
Additionally, the report classifies drugs as “innovative” only if they
were assigned “priority” review by the FDA. Yet the FDA’s Manual of
Policies and Procedures states that priority determination “…is not
intended to predict a drug’s ultimate value or its eventual place in the
market.” This caution has been borne out by experience; for example,
Prozac®, the first SSRI, a class that proved to be exceptionally important
to the treatment of mental illness, did not receive priority review.
The authors’ effort to claim that foreign price controls do not
adversely affect drug development rests on a similarly weak foundation.
For instance, they state that there is no evidence that lower prices
abroad lead to less research. This ignores the U.S. Department of
Commerce’s 2004 study finding that foreign price controls limit the number
of new medicines launched in U.S. markets and that eliminating such
controls could increase R&D spending.
Likewise, in making the claim that “Europe is no less innovative than
the US,” the authors ignore the fact that between 1960 and 1965, European
companies invented 65% of new chemical entities (NCEs) placed on the world
market, but by the end of the 1990’s, this share had fallen to about 35%.
The latest data available covering 1999 to 2003 show the predominance of
the United States in inventing new molecules. According to a 2004 report
by Bain & Company, because of “onerous regulations on drugmakers that
keep prices and utilization artificially low,” the pharmaceutical industry
is “reallocating R&D investment from Europe to the US.” 
The last decade has been marked by important advances in treating a
broad range of conditions. It is vital that these advances continue,
particularly as the demographics of our societies change. The author’s
effort to obscure the roles of biopharmaceutical companies and economic
investment in achieving medical progress is not a sound basis for
continuing or accelerating that progress.
Richard I. Smith,
Senior Vice President,
Policy, Research and Strategic Planning,
Policy and Research,
1 Gilbert J. and Rosenberg P., “Addressing the Innovation Divide, Imbalanced Innovation,” Bain & Company, 22 January 2004, Presented at the Governors of the World Economic Forum for Healthcare Annual Meeting, Davos, 2004.
Competing interests: No competing interests