Big pharma: the ultimate evil. Is this reality or a false narrative? Maybe this description is a bit extreme, but is it true that the pharmaceutical industry at large offers a net-negative to society? John LaMattina, author of Pharma and Profits, argues against this. In the book, he expounds on the myriad good that the pharmaceutical industry has provided to the world and explains why he believes the image of pharma has been tainted. After reading LaMattina’s writings, I have come to the conclusion that the pharmaceutical industry faces two primary problems, which I will expand on in this short piece.

Problem One: Identity. Society views the medical industry, including the manufacturing of new pharmaceuticals, closer to a vocation like the priesthood as opposed to an occupation like investment banking. However, the industry is not funded like the priesthood, in part because its funding would need to be significantly more expensive and in other part because people, at least Americans, do not want to fund medicine (with taxes, for example) unless they are in need of medicine. Therefore, the pharmaceutical industry has to find a way to fund itself, and thus it must create, as LaMattina explains, prices to enable enough profits to justify the risk that goes into R&D for a new medicine.

Problem Two: Funding in Conjunction with Identity. The second problem facing the pharmaceutical industry ties in with the first. Pharmaceutical companies, in order to fund the development of new medicines, must manually set pricing for their products because they are not funded by donation or charity. However, because of the patent lockup period, which is meant to help pharmaceutical companies recoup R&D investment and make some profit before generics are live, there is no market pricing dynamic for new drugs until 10-20 years after the drug’s release depending on if it is a generic or a biosimilar (generics for pills, biosimilar for biologicals). This lack of traditional market pricing (Dutch auction, etc) causes manufacturers to have to justify the prices they set on new medicines with a variety of factors that are not standardized. Some manufacturers price their drug at $X because of R&D costs or manufacturing costs. Others price their drug at $Y because a life, according to the UK health system scoring, is worth $50,000 per year, so if a drug can extend life Z years, it should be priced at least Z*$50k. The point is clear that these numbers will always be up for debate because there is no clear market pricing due to patent lockups. Because of this, and due to the fact that competition can be so low for smaller drugs like Martin Shkreli’s infamous Deraphrim, we see incredibly (almost ridiculously) high list prices on pharmaceuticals. In reality, these list prices are almost never paid as the insurance industry (known as the payers) has massive pricing power and can negotiate much lower rates with these pharmaceutical companies. But the issue stands that market pricing is non-existent, so prices continue to be set by arbitrary, non-standard methods that lead to questioning of profit motives for pharma companies.

What might be the solution to this two-part problem? Could it be to turn the entire pharmaceutical industry into a non-profit industry, just shift it closer to a vocation, and then allow funding through charities, tax deductions, etc? Could the real issue be the insurance industry that controls which drugs it will allow its customers to have based in large part on the pricing that the pharmaceutical companies provide? Or could it be an issue on the side of patent lockups causing a lack of market pricing and potentially stifling innovation and competition? Just questions that I continue to ponder.

-Charlie, April 2024