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Fact-Checking Big Pharma's Most Common Justifications For Hiking Drug Prices

Pharmaceutical companies love to talk about their R&D efforts.

[Photo: Flickr user e-Magine Art]

Martin Shkreli is a walking nightmare for the pharmaceutical industry.

The so-called "Pharma Bro" entrepreneur who gained infamy last year for hiking the price of a life-saving drug from $13.50 to $750 has almost single-handedly made the issue of rising drug prices an urgent concern for federal regulators and the American public, especially when compared to other countries where pricing is regulated. Shkreli even helped make drug pricing an issue for the leading presidential contenders. And today, he made national news yet again when he smirked his way through a hearing of the House Committee on Oversight and Government Reform on the topic of astronomical drug price hikes.

But will pharma companies successfully extricate themselves from Shkreli? Fast Company asked health industry experts about the most common justifications that pharma companies use to justify price gouging, and whether there's anything more to it than maximizing profits.

Research And Development Costs

Pharma companies often argue that they must raise the price of their most successful drugs to recoup the costs for research and development. Developing a new drug isn't cheap: Some studies have estimated that it costs more than $2.6 billion. Pharma lobbyists will often say that the profits will help companies research additional uses for the product that can deliver more value to patients.

But critics say that these studies will often overstate costs, and are unfairly used to justify price hiking. Moreover, pharma companies will often point to R&D costs, but they rarely discuss how much of their profit is earmarked for marketing. As the Washington Postand the comedian Jamie Oliver—point out, most drugmakers spend far more on marketing their products to doctors than investing in innovation. For instance, Johnson & Johnson shelled out $17.5 billion on sales and marketing in 2013, compared with $8.2 billion for R&D. Moreover, pharmaceutical companies have some of the largest profit margins in the health care industry.

Offsetting Costs Of Chemicals And Other Raw Materials

Producers of generic drugs also justify rising costs by pointing to the rising costs of raw materials and ingredients. Moreover, drugs in the generic specialty market can require more specialized equipment and expertise to satisfy regulatory processes. There's some truth to this—the U.S. Food and Drug Administration has tightened the screws on quality control, and forced manufactures to spend more to meet their requirements.

Just Because We Can...

As smart commentators point out, Shkreli is a product of American capitalism. In the wake of media attacks, Shkreli pointed out that it's perfectly legal—if not expected—to race toward profitability. "Our shareholders expect us to make as much as money as possible," he said. It's a common strategy among drugmakers to buy up drugs that they perceive as undervalued, and hike up the price without making any meaningful changes to the product. In 2015 Valiant Pharmaceuticals did just that: The company bought the rights to a pair of life-saving heart drugs, and increased the list prices 525% and 212%.

In some cases, this is corporate greed pure and simple. But drugmakers will occasionally justify their actions by pointing out that if they're ahead of the pack with a new drug, they need to leverage a monopoly they have today to be in a strong position when competitors come in at lower prices.

That's The Real Value Of The Drug

Some drugs bring a great deal of value to patients. For instance, Gilead Pharmaceuticals developed a cure for Hepatitis C, called Solvaldi, but charged more than $90,000 for a cost of treatment. As some pharma advocates pointed out, the cost is justified in part because it helps patients avoid far more expensive treatments down the line, like dialysis or a kidney transplant. In 2014 alone, Sovaldi generated $10.3 billion in sales, making it one of the most lucrative drugs ever.

But many patients are finding that their health insurance companies will not cover the cost of the treatment, arguing that it is not "medically necessary." And state Medicaid programs are struggling to foot the bill. That leaves many patients in a position where they are desperately ill and in pain, but can't afford to pay for the treatment out of pocket.