This is a good moment to share a few other common questions we hear from our learners related to misconceptions about pharma, and our responses.
Q: Don’t the NIH and universities do most of the research for new medicines — and then pharma swoops in to take it and sell it back at high prices? (“We funded that research with our tax dollars and drug companies just make us pay for what we should already own!”)
A: No. Private investors fund the vast majority of R&D for new medicines. But the NIH and academic researchers are essential partners. ([OPTIONAL]: Check out this animation to learn how. For more depth, there’s this slide deck. And for some more examples, see this interview with a former head of R&D at a large pharmaceutical company.)
Q. People in Canada and in Europe pay less for drugs, so we should too. Innovation won’t be harmed.
A: The short answer here is that other countries get a discounted pass because the US is willing to pay for innovation. The US is the important market. Other governments are willing to just say “no,” and so drug companies find a price where they can make some money rather than no money to pad the core US profit stream that was always the main incentive. We’ll share more on this in Chapter 6.
Q: Don’t drug companies’ executive salaries drive drug prices higher?
A: Most executive compensation is a function of their share of future profits. Their salary, bonus, and equity share is set by the market (if companies could hire a competent person for less, shareholders are incentivized to do so) and in any case, it’s not a significant component of drug costs. We estimate that cutting executive salaries or equity compensation entirely wouldn’t budge net drug prices by more than 1%.
Q: What about the obscene amount of money pharma spends on lobbying?
A: The purpose of lobbying is educating policymakers. Whether lobbying is good or bad is a function of whether the information being conveyed to policymakers is accurate. If you see that policymakers are making a mistake and you know some truth that they don’t know, but you just hope that the truth will emerge on its own, then you may find that bad policy persists. It’s like a court of law — you need lawyers on both sides and they need to be paid. When Big Tobacco lobbies congress, anti-smoking advocates lobby right back.
As for the amount pharma spends on lobbying, it is again insignificant compared to spending on R&D and M&A, so banning pharma lobbying would have little if any effect on drug prices.