Active Ingredients: Exploring the Key Factors Affecting the Rising Cost of Developing New Drugs*
Sarah J. Fossett, Phanindra V. Wunnava

What makes prescription drugs cost so much? The media and Congress say it is corporate greed, while pharmaceutical firms blame federal regulations and an expensive drug development process. This study focuses on Research and Development (R&D) expenditures at global pharmaceutical firms and explores the driving factors behind what makes R&D for prescription drugs so costly. Methods: By combining variables that represent the news media‟s claims (i.e. CEO compensation) and the pharmaceutical firms‟ rebuttals (i.e. late-stage drug development), this study attempts to add empirical evidence to the growing debate surrounding the high and rising cost of prescription drugs. Results: The results suggest that both CEO compensation and phase II development are positively correlated with R&D expenditures. However, we have reason to believe that CEO compensation is more of an indicator of business strategy than greed. Conclusion: There is no straightforward approach to legislating R&D activity in order to curb high and rising prescription drug prices. It is well known that the major argument against enacting drug price ceilings is that it would lower a given firm's incentive to innovate. This study also proposes possible extensions for future research.

Full Text: PDF     DOI: 10.15640/ijhs.v7n3a1