A prescription drug's sunk R&D costs do not influence the drug's price, the Congressional Budget Office found.

CBO Report: R&D Costs Do Not Influence Pharma Pricing

The pharmaceutical industry’s spending on research and development as a proportion of its revenue dwarfs virtually all other manufacturing sectors, but those costs do not really impact pricing, according to a new analysis by the Congressional Budget Office.

Drugmakers spend up to 25% of its net revenue (sales less expenses and rebates) on R&D, totaling $83 billion in 2019, up from $38 billion in 2000. That ratio compares to about 2% to 3% of net revenue allocated to R&D for all other industries. Even the R&D-intensive software and semiconductor sectors spend significantly less than 20% on finding and creating new products.

The CBO report concluded that the cost of developing a new drug ranged from $800 million to $2.3 billion. Smaller firms tended to focus on developing new products, which are often sold to larger firms. Larger drug manufacturers tended to focus their R&D efforts on “conducting clinical trials, developing incremental ‘line extension’ improvements (such as new dosages or delivery systems, or new combinations of two or more existing drugs), and conducting post-approval testing for safety monitoring or marketing purposes,” CBO said.

Perhaps the most troubling finding of the CBO report is that R&D costs really are not a factor in how drug manufacturers set prices—a claim the industry regularly makes to justify high prices.

“The prices and sales volumes of existing drugs provide information about consumers’ and insurance plans’ willingness to pay for drug treatments,” the report noted. “Importantly, when drug companies set the prices of a new drug, they do so to maximize futurerevenues net of manufacturing and distribution costs. A drug’s sunk R&D costs…do not influence its price.”

The CBO’s conclusion led to a rebuke of the pharmaceutical sector by the Campaign for Sustainable Rx Pricing, which supports the 340B program.

“CBO’s findings further undermine big pharma’s bogus rhetoric that solutions to lower drug prices and hold the industry accountable will negatively impact innovation into new cures,” said CSRxP Executive Director Lauren Aronson in a statement. “The evidence is clear that research and development investments have no relationship to prices set by brand name drug companies on their products and now is the time to advance bipartisan, market-based solutions to hold big pharma accountable and lower prescription drug prices for struggling Americans.”

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