Non-transparent research and development costs

Constantly rising prices mean that over two billion people lack access to drugs and the cost of healthcare in countries with public social security systems is constantly increasing. This jeopardizes the right to health care and risks creating a two-tiered system, even in wealthy countries like Switzerland. Pharmaceutical companies are able to set such high prices due to patent-based and regulatory monopolies and the ensuing pricing power they enjoy. They argue that these high prices are needed to cover against the high risks associated with the research and development (R&D) process for new drugs, but refuse to be transparent about the investments actually made. Estimating these investments is a challenge for scientists and NGO professional organizations, with both the data sets and method used being hotly debated. For the industry and its lobbyists, the very legitimacy of their business model is at stake.

Research and Development costs – a black box

A standard argument made by pharmaceutical companies and their lobby associations is that it’s impossible to determine precise R&D costs. In actual fact, however, clinical trials, which represent the bulk of R&D expenses, can be allocated very precisely to specific drugs. To do this, Public Eye searched in international databases for all the clinical trials in which the pharmaceutical company was the main sponsor for all approved indications of each drug.

Many drugs are first approved by pharmaceutical companies for one indication (for example, a certain type of lung cancer), but then tested for other indications. For example, authorization for other forms of lung cancer or other types of cancer that can be tackled using the same mechanism of action of the relevant drug is then applied for in subsequent years.

Public Eye has multiplied the number of trials with information from existing publications on average costs per clinical trial and phase. Since clinical trials account for the largest share, but not the total cost of R&D, the figure was increased by an estimated 30% in the literature. These additional costs are incurred in the discovery phase, for preclinical studies and marketing authorization fees. The costs estimated in this way are therefore the investments made by the industry. The pharmaceutical industry is trying to artificially double these estimates and justify the high margins on individual products with two arguments.

1. The first factor is what is known as “opportunity costs”. This refers to compensation for lost income from the return that could have been generated on the stock market if the capital allocated to the R&D project had been invested there instead. Using opportunity or capital costs for R&D estimates is extremely controversial. From a corporate perspective, it makes sense to evaluate the opportunity costs of a new project. However, the argument that these costs for investments on the stock market, which are by no means risk-free, must be borne by the public is absurd. This is especially true since not only do enormous public subsidies flow into drug R&D, but pharmaceutical companies can also offset their own investments against their taxes.

2. The second factor, which is repeatedly mentioned by the industry, is that their high margins on individual products have to compensate for the risk entailed in the development of treatments. This refers to all those products whose development is invested in, but which fail to make it to market authorization and, therefore, do not generate any sales. This factor is also highly controversial. Many active ingredients do not go through the complex and expensive clinical trials, but are filtered out in high-speed screening procedures. Only a small percentage is developed and tested further. In addition, many active ingredients that are declared as “failures” can be described instead as “withdrawn”. Treatments are not developed further for commercial reasons, while other active ingredients continue to be tested and authorized despite great risks. Ultimately, large pharmaceutical companies can spread the risk of failure across different projects. 

Despite these reservations, Public Eye has decided to make an estimate with probabilities of success in order to include systemic risk in the pharmaceutical sector and to show that even with this attempt to justify their behaviour in mind, huge profit margins are still being achieved.

Profit margins from 40 to 90%

In order to move from calculating the estimated costs of R&D to calculating profit margins in Switzerland, the cost of R&D was broken down for Switzerland according to the share of sales in Switzerland (costs for health insurance from Helsana’s projections for the whole of Switzerland) as part of the global turnover for a drug (the groups’ public annual reports). This method was already used in 2019 in a data journalist investigation carried out by the French-speaking Swiss television RTS for the programme “Mise au point”. These costs, together with the distribution costs and the estimated production costs, were deducted from the sales price of the treatment in Switzerland. Marketing costs were not taken into account because the selected cancer treatments are life-saving drugs that do not allow a large selection between different products and are therefore not subject to advertising-driven market logic.

So, if you subtract the estimated R&D costs for all authorized indications, as well as the distribution and production costs, from the sales price, you get the profit margin figure: in 2022, it was 40 to 90% per drug sold in Switzerland. This is showing an upward trend, especially for those treatments that haven’t been on the market for long and are currently at the lower end of the profit scale, but will continue to benefit from a monopoly position for many years to come and provide a return on the costs invested. The estimate for R&D costs for the industry is generous. It has been increased by the cost of failures and additional costs and, taking into account public subsidies and numerous tax breaks, the actual profits are likely to be even higher.

Another key finding to emerge from Public Eye’s investigation is the enormous resources that have to be invested due to the lack of transparency regulations from governments and unverifiable information from the industry itself. Not only is there a highly competitive field between pharmaceutical-related institutes and independent scientists, but the efforts that academics and professional organizations have to make in order to make sound, comprehensible estimates are also visible. Many of these efforts made at universities and non-profit organizations are funded by public money and voluntary donations.

Questions raised about current system

The size of these margins is raising questions about the current system. This was how monopoly and pricing power was intended to cover the risky R&D for medicines. However, the profit margins from cancer treatments, where high-risk R&D has already been factored in, show that pharmaceutical companies are not safeguarding their R&D with high prices, but are skimming off excess profits. The industry and its lobbyists are using scaremongering tactics by arguing that supply gaps are imminent and that such high profits are necessary because, for example, the development of antibiotics is far less profitable than treatments for cancer. However, pharmaceutical companies are actually withdrawing from these less profitable areas, which means that there is no cross-subsidy.

Nevertheless, the profits generated by pharmaceutical companies, which are almost twice as high as those of other sectors, in excess of 20% and the lack of investment in areas such as antibiotics, show that, despite available resources, the industry’s priority is not the patients, but its shareholders. The basic problem with this model is that it puts people’s lives and their fundamental right to health at stake. In Switzerland, the high prices of cancer drugs are a major contributor to the explosion in healthcare costs. This raises the question about how profit-oriented corporations set their prices. There is ample evidence that companies simply ignore their actual R&D expenditure when it comes to pricing, but use it as an unverifiable excuse for submitting inflated price demands to authorities and the public when necessary. Pharmaceutical companies demand what they can skim off from the market.

To enable the Swiss Government and the Federal Office of Public Health (FOPH) to fulfil their task of protecting and guaranteeing the right to health for all and to fulfil their accountability for expenditure on healthcare costs, pricing transparency is needed, which includes transparency on R&D costs.