Are Prescription Drug Prices Too High? Or Are They An Investment In Living Longer?

We seem to constantly see and hear headlines about high prescription drug prices.  And, of course, there is something to be said for getting the benefit of medical innovation at the lowest possible price. But we may justifiably ask: what drug prices would be fair? Just consider the value of the benefit of pharmaceuticals in terms of extending life expectancy.  Out of all the innovations of modern medicine (e.g. procedures, devices, diagnostics, sanitation), it is pharmaceuticals that seem to account for about half of the gains in life expectancy (1).  Considering that life expectancy was close to 30 at the beginning of the 20th century (2) and is almost 80 now (3), half of that nearly 50 year gain in life expectancy for every person can be attributed to pharmaceuticals.  And what does this cost? The world spends just over $1 trillion per year on pharmaceuticals, with a disproportionate amount of that spending concentrated in the United States (4).  One would have to set a pretty low value on human life to make the argument that the world is overpaying.  The math works out to just shy of $3,500 paid per year for each person worldwide.  I think we would all probably agree on a common choice between paying that much or dying 25 years earlier.

So does the ~$1 trillion annual cost reflect market prices? Yes and no.  Governments can grant pharmaceutical companies temporary monopolies via patent law to incentivize innovation.  Such a system can encourage companies to extend the patent lives of their products, sometimes by questionable means.  In the generic drug space, manufacturing regulations can result in short-term monopolies and unscrupulous price gouging.  Instances of scandalous and unethical practices tend to make their way into the headlines for good reason.  But the manufacturing costs of drugs (at least of the small molecule variety) are relatively low and once the monopoly power is removed, the price is much less than what one would likely be willing to pay for the additional years of life expectancy.  They are also pretty easy to copy, making the patent protection essential.  It is hard to imagine an unregulated market resulting in a sustainable cycle of drug discovery – the incentives to invest in this costly and lengthy process would likely disappear.  Patent protection is intended to elevate the market price of new pharmaceuticals for about a decade as a reward for investing in research and development.

We may eventually reach a point when human life expectancy stops rising with new discoveries and the whole system falls apart.  Thus far, however, the trend of life advancing medical innovation has skewed upwards, with the era of infectious disease suppression yielding to an epoch of cardiovascular improvement, which subsequently yielded to our current era wherein cancer mortality is declining (5) (6).  Life expectancy gains might reasonably be expected to accelerate if the potential of genomics, personalized medicine and genetic modification come to fruition.  Either way, I think we should be happy to keep investing in pharmaceutical products and businesses as long as the medical benefit persists, especially as current pricing is still arguably an incredible bargain for humankind overall.  As for the truly scandalous headlines publicizing corporate malfeasance, I believe regulators need to curtail such practices and prosecutors need to pursue the perpetrators but I say let's not dismantle a system that has given each of us so many more years of life to enjoy.

References

1. The Effect of Medical Technology Innovations on Patient Outcomes, 1990-2015: Results of a Physician Survey. Wamble, David. s.l. : Journal of Managed Care & Specialty Pharmacy, 2019, Vol. 25.

2. Does modern medicine increase life-expectancy: Quest for the Moon Rabbit? Mishra, Sundeep. 2016, Indian Heart Journal, pp. 19-27.

3. Global age-specific fertility, mortality, healthy life-expectancy (HALE), and population estimates in 204 countries and territories, 1950-2019: a comprehensive demographic analysis for the Global Burden of Disease Study 2019. GBD 2019 Demographics Collaborators. s.l. : The Lancet, 2020, Vol. 396.

4. IQVIA Institute for Human Data Science. Global Medicine Spending and Usage Trends. s.l. : IQVIA, 2020.

5. Changes in life expectancy 1950-2010: contributions from age- and disease-specific mortality in selected countries. Klenk, Jochen. s.l. : Population Health Metrics, 2016, Vol. 14.

6. Why have breast cancer mortality rates declined? Narod, Steven. s.l. : Journal of Cancer Policy, 2015, Vol. 5.

About The Author

Yan Zelener, a Portfolio Manager at Humankind Investments, brings over 15 years of experience in research-driven investment management to the Humankind team. He most recently served as Director of Research at CV Advisors, with previous research and portfolio management roles at Majestic Research, Teleos Management and Willowbridge Associates. He holds a PhD in History from Columbia University and a BS in Computer Science from MIT.