The industry's principal claims, as well as being contradicted, are based on false premises. Firstly, counting which country discovers the most new molecular entities is irrelevant in a global market. Companies know that where a good drug is discovered does not matter, and often a discovery comes from research in several countries. Whether domestic revenues recover a given country's research and development costs is also irrelevant. If this were not the case the industry would have shut down operations in Switzerland long ago because of its small market size.
If revenues are inadequate, it would make more sense to conclude they do not cover all marketing costs rather than research costs. Research is central to the industry, and costs associated with it should be deducted first. Pharmaceutical companies report that they invest around three times more in the combination of marketing, advertising, and administration than in research, leaving ample room to cut costs.20
Secondly, every student in introductory economics learns that fixed costs like research do not determine prices.21
The market sets prices, implying they are open to free trading like stock prices. Patents, and especially patent clusters, turn the market into a monopoly, and only a monopoly can claim that fixed costs determine prices because it can make that a self fulfilling prophecy. The claim by companies that they have to set prices at 50-100 times production costs to recover research and development costs has never been substantiated, because they have never opened their books to independent public inspection to prove it. What we do know is that all research and development costs are fully recovered each year from domestic sales in the UK and Canada at prices that are far lower than those in the US.
Thirdly, free rider is both a vivid public image of someone jumping on for a free ride and a highly misleading economic term. Technically it refers to a method for allocating fixed costs in proportion to the prices that different groups pay. For example, if Group A (call it Europe) pays $1 per pill and Group B (call it the US) pays $2 a pill and each buys a million pills, then this accounting method would assign half as much of the fixed cost to Group A as to Group B. If, however, the fixed costs are only $300 000 (a tenth of the total revenue) for the two million pills, the fixed costs could be allocated by volume rather than by price ($150 000 for each group) and conclude that Group A more than pays the fixed costs and Group B pays much more than it has to. In short, the free riding argument economically is the artefact of an accounting convention and can be eliminated by Group B cutting its prices in half, rather than forcing Group A to double its prices.
Prices of patented drugs are substantially higher in the US than in other affluent countries
Published reports indicate that pharmaceutical companies in affluent countries recover research and development costs from domestic sales with substantial profits
Discovery of innovative new drugs in Europe is proportionately equal to that in the US
US pharmaceutical companies invest just 1.3% of net sales in basic research
The idea that the US is subsidising other rich countries contradicts basic economics and the global nature of pharmaceutical markets