Americans spent over $335 billion on prescription drugs in 2018 compared to $30 billion in 1980, according to the Congressional Budget Office.

This compels us to ask why there has been a $305 billion increase in less than 40 years. The simple answer is that it is expensive to research and develop new pharmaceuticals, and drug manufacturers have little restriction placed upon them while setting prices.

Drug manufacturers are constantly developing dozens of new medications. Many in the general public developed a skewed view of this process during the COVID-19 pandemic when companies like Pfizer and Moderna were regularly releasing medications and vaccines to battle the novel coronavirus.

In reality, 95% of experimental medications never make it to market, usually because they are not proven safe, have too many side effects or do not work any better than what is already on the market.

The volume of failed medications in drug development consumes a lot of time, energy and money, all of which is offset by the price of successful products.

A 2001 study done at Tufts University found that the average new drug development cost was around $1 billion dollars. Yet, this figure is dated, and it did not factor in the cost of failed drug development.

In 2013, Forbes looked at the research and development budgets for 100 companies and compared it to the number of new drugs they developed in a 10-year time frame, revealing much higher development costs.

For example, Pfizer spent over $77 billion on research and development to produce 10 new medications during the 10-year period. Similarly, AstraZeneca spent over $38 billion and produced four, while Eli Lilly spent over $26.7 billion to also product four.

The research and development of a new drug typically takes a decade or more to bring to market when one accounts for preliminary research, clinical trials and the Food and Drug Administration’s approval process. Most new drugs never make it out of the discovery or proof of concept stages.

A researcher may get lucky enough to get a significant grant from either the National Institutes of Health or the Defense Advanced Research Projects Agency in order to begin the discovery phase of drug development. However, after discovery and initial development, many experimental drugs get stalled as researchers have to prove the drug’s usefulness and scope.

If a drug shows promise, then it is easier for researchers to get a manufacturer to fund clinical trials. Knowing that there is no guarantee that a new medication will successfully complete clinical trials and become approved, companies are reluctant to fund a medication with a limited scope or one that might not ever be profitable.

Typically, the government funds a higher percentage of the initial research and discovery, while the pharmaceutical industry funds more of the later stages. The National Institutes of Health spend around $38 billion a year on around 50,000 medical research grants.

Prior to 1980, and because of significant risk in drug development, many corporations did not invest significantly for fear of the inability turn a profit on investment. In order to encourage more private investment in pharmaceutical development, Congress passed the 1980 Bayh-Dole Act, also known as the Patent and Trademark Law Amendments Act.

Bayh-Dole allowed publicly funded research to be patented by private developers but also allowed the government to impose price caps in order to ensure that the public could still take advantage of the products they helped to fund.

This encouraged the private sector to invest heavily in new drugs, but it also allowed the government to have a significant role in setting new drug prices. One reason for the rapid rise in drug prices over the last two decades is that the U.S. government has not exercised its right to cap the prices of drugs it helped to develop.

All of this get complicated, but generally this is how it works. The government invests less money but takes higher risks by funding the initial discovery and investment in new drugs. The pharmaceutical companies invest more money, but they take less risk by doing so after they already have an idea that the drug has a chance to make it to market.

This partnership has historically been very beneficial for everyone, but recent decades have seen an exorbitant rise in drug costs for the general public due to the government not taking a more active role in capping prices.

We are now at a point where taxpayers need to see the benefit of government-funded drug development in terms of price reduction on prescription drugs.

This needs to be either government-mandated for all new public-private partnerships or the pharmaceutical industry needs to step up and do the right thing by making these drugs affordable.

Editor’s note: This is the second article in a two-part series. Part one is available here.