The real reason U.S. drug prices are so high
Turing Pharmaceuticals CEO Martin Shkreli became the latest poster boy for Wall Street greed when he jacked up the price of an HIV drug more than 4,000 percent to $750 a pill.
But the former hedge fund manager's behavior is far from unique. Dramatic price hikes on existing drugs, or astoundingly high rates for new ones, are common practice in the United States.
The pharmaceutical industry defends the price spikes as a means of funding research to develop new drugs. But a close look at the finances of more than a dozen public drug companies illustrates research and development expenses are routinely smaller than company overheads, including marketing costs. And often after-tax profits still greatly exceed those R&D expenses that the companies say are so high.
A Wall Street Journal report showed drug price increases typically outpace inflation and that they happen even when demand for the product falls.
CBS MoneyWatch took the list of companies behind a Journal analysis of growth trends for 30 top-selling drugs, and looked at 2014 financial data for the 16 publicly held.
Here is a list of companies with annual revenue (in billions), R&D (research and development) and SG&A (sales, general, and administrative, a category that includes marketing) and net income (profit after taxes):
Annual revenues for the companies ran from $6.03 billion (Shire) to $74.33 billion (Johnson & Johnson, which includes non-drug product revenues).
Table listing R&D and overhead as profit as percentages of annual revenue:
In all cases but one, corporate overhead was higher than R&D, and often significantly so. In half, after-tax profits were higher than the research-and-development expenses the industry typically points to as the major reason for high costs.
According to a May 2015 Credit Suisse report, drug price increases here were a "key driver" of profit growth last year for many multi-national pharmaceutical companies. In addition, while traditional SG&A expenses grew 4 percent year-over-year in 2014, "overall promotional costs rose 17 percent, well ahead of reported sales growth," Credit Suisse found.
One way of looking at this is U.S. consumers pay more to subsidize marketing activities and profits than to fiance new-drug research.