The party-line statement for the pharmaceutical industry regarding the high cost of prescription drugs is that a large amount of money is needed for research and development. From their own website:

  • Significant time and money is needed to research
    and develop new, safe and effective medicines.
    Economists estimate that it takes an average of 12 to
    15 years to discover and develop a new medicine
    and, on average, it costs $800 million (Figure 2).
  • On average, only five of every 10,000 compounds
    investigated are tested in clinical trials. Of those five,
    only one is ever approved for patient use. Revenues
    from one successful medicine must cover the costs of
    the vast number of ?dry holes.?

Graphically stated:

image

So if this is the case, please explain to me the following:

Generic/Brand Name Brand Drug Price* Generic Drug Price
Amlodipine/Norvasc, 10mg $73 $64
Sertraline/Zoloft, 100mg $88 $69
Budeprion/Wellburin XL, 300mg $162 $130
Ciprofloxacin/Cipro, 500mg $177 $122

*Prices from Drugstore.com

So these generic drugs cost between 69 and 80% of the full brand-drug price. Why? What is research cost? What is the marketing cost? There is none. So how does the generic drug manufacturer get away with charging this high of a percentage?

From Forbes:

During the first 180 days a generic drug is on the market, the generic company has a virtual market monopoly for its formulation. After that time span, other competitors can jump in, which tends to push down the prices of both the original formulation and generic copies.
Generic-drug companies usually have lower research and development costs (relative to sales) than the big pharmaceutical houses. Perhaps the biggest drawback to this business are the legal costs that generic companies often encounter when challenging well-entrenched branded drugs.
A case in point is Pomona, N.Y.-based Barr Laboratories (nyse: BRL - news - people ). The company emerged victorious in the prominent legal battle to disqualify Eli Lilly's (nyse: LLY - news - people ) patent on Prozac, which was set to expire in 2003. Barr gained a 180-day exclusivity, starting last August, to market a 20-milligram capsule generic version of the antidepressant.
Barr's Prozac clone worked wonders; the company recently announced that it expects per-share earnings for the quarter ending in December to increase to $1.40 to $1.50, compared to 39 cents per share for the same period last year.

This bore out when I checked the generics for some older drugs, such as Zocor and Prozac, which are much lower (although Cipro has been generic for more than 180 days, so I still don't understand that number). The bottom-line is that these companies are give a 180-day license to practice non-free trade. They have 6 months to gouge before competition is allowed.

Shameless.

Another issue that is widely documented is the wide disparity of generic drug costs. For instance:

Drug Name CVS Price/pill* Costco Price/pill
Sertraline, 100mg $2.13 $0.15
Enalapril 10mg $0.61 $0.10
Fluoxetine 10mg $0.66 $0.10

*Comparisons are from Pharmacychecker.com. These are the first three drugs with prices for both companies. This is very consistent with other disparities documented.

So who is the villain here? There are many. Who is the victim? All of us. There are many fingers in the deep pot of healthcare, all hoping to squeeze some money out of the huge cash-cow.

How can healthcare be saved? The answer is very complex.