Written by: Daniel Murphy
Introduction
Each election cycle, politicians in America rail against “Big Pharma,” blaming a short list of large pharmaceutical companies for high drug prices and an unhealthy populace. According to a 2019 poll conducted by Gallup, 58% of Americans viewed the pharmaceutical industry negatively, placing it at the bottom of a list of over twenty industries which included the legal profession and federal government (McCarthy, 2019). Widespread criticism of its role in the Opioid Epidemic and extensive political lobbying have meant a steady decline in popularity since Gallup began polling in 2001. At the same time, American’s reliance on pharmaceutical drugs has grown enormously. In 2024, medicare beneficiary use of medicines reached an all time high and the market grew 11.4%, or $50B, to a record total $487B (IQVIA, 2025). The majority of the increased spending was driven by just a handful of drugs.
Americans are justifiably upset to pay exorbitant prices for everyday medication. Why, if it costs so little to produce a pill, should Americans have to pay upwards of hundreds and even thousands of dollars for a prescription? This discrepancy touches on the economic dilemma underlying pharmaceutical pricing: How to reconcile very high fixed costs with very low variable costs.
The Costs of Development
The fixed/sunk costs of pharmaceutical drug research and development are massive. According to a study published in the National Library of Medicine, the mean cost of drug development from 2000 to 2018 was over $170 million in 2024 dollars (Sertkaya et al., 2024). With the cost of failures included, that number jumped to $515 million. In 2014, the pharmaceutical industry funded Tufts Center for the Study of Drug Development estimated an average R&D cost as high as $2.6 billion for the most expensive drugs produced (Carroll, 2014).
R&D begins with a lengthy nonclinical stage, and before 2022 required the conduct of animal studies before beginning human trials (Hernandez, 2023). The proportion of costs expended on the nonclinical stage rests around an estimated 7% of total costs, rising to almost 30% when failures are accounted for (Sertkaya et al., 2024).
The majority of spending occurs in the clinical trial phase, during which the drugs are administered to a group of volunteers in placebo-controlled studies. Three phases, each with a greater number of participants, test safety and effectiveness (Clinical Trials, n.d.). Some 68% of total spending on R&D goes toward the clinical trial phase, which necessitates a large research staff, the recruitment and screening of volunteers, and compliance with stringent FDA regulations (Sertkaya et al., 2024).
The Costs of Manufacture
The variable costs of drug manufacturing are surprisingly low. Even those outraged over the high cost of medicine may be surprised to learn that the cost of a single pill ranges from just pennies to a dollar.
A 2018 study conducted by BMJ health estimated the costs of production for 148 drugs listed on the WHO Essential Medicines List (Hill et al., 2018). The list, which includes over the counter medicines like acetaminophen, also includes expensive prescription drugs for neurological disorders and cancer. Despite the inclusion of very expensive medications, the average production cost of the drugs ranged from just $0.01 to $1.45.
A Potential Solution: Generic Production
Reconciling the high costs of R&D with the low costs of manufacturing is no easy task. In the past, high drug prices have been rationalized as the only way for drug producers to recoup their upfront investment. To demand lower prices would be to remove the incentive for innovation, thereafter reducing the potential for new breakthroughs in treatment. This is the reason we have patents. Is the pharmaceutical pricing dilemma simply unsolvable, then? Recent history suggests otherwise.
Two global health crises of the past fifty years, the HIV/AIDs epidemic and the Covid-19 pandemic, may point to a solution. During both crises, drug manufacturers with outstanding patents entered licensing agreements with generic producers, enabling a dramatic increase in the market supply and a dramatic lowering of the drug price.
Voluntary Licensing: HIV
In 2011, Gilead Sciences entered several voluntary licensing agreements to increase HIV treatment availability in low and middle income countries. At the time, they held a patent which was due to expire in 2017.
First, they signed an agreement licensing the Medicines Patent Pool (MPP), an international medical nonprofit, to provide generic manufacturers with the intellectual property necessary to produce tenofovir, emtrictabine, cobicistat, and elvitegravir (UNAIDS, 2011). Essentially, MPP acted as a middle man between Gilead and generic producers, enabling the generic producers to pay reduced royalties or nothing at all in order to produce lifesaving treatments. That same year, Gilead engaged directly with four generic producers from India: Hetero Drugs, Matrix Laboratories, Ranbaxy Laboratories, and Strides Arcolab (Gilead, 2011). The agreements were royalty-free, and included access to the same information, including a combination of the four drugs called “The Quad.” (Gilead, 2011).
As a result of Gilead opening up production before patent expiration, the lowest available market cost for daily treatment dropped to just 21 cents, and more than 1.1 million patients in the developing world were treated for HIV (Gilead, 2011).
Compulsory Licensing: Covid-19
Shortly after the Covid-19 pandemic emerged in late 2019, governments around the world issued compulsory licenses for treatments. The long list includes Israel, Hungary, Russia and Indonesia (Doctors Without Borders, 2021). Germany and Australia amended their patent laws to expedite the practice during extraneous circumstances, and Canada simplified the process of license issuance (Doctors Without Borders, 2021).
Some of the antiviral drugs produced generically included lopinavir, remdesivir, and flavipiravir (Doctors Without Borders, 2021). As a result of government action, not only did citizens of these countries enjoy rapid treatment, but citizens across the world did also, as several patent holders decided to waive their patent rights worldwide for the duration of the pandemic (Doctors Without Borders, 2021).
Takeaways
Licensing appears to offer good prospects for lower drug prices. The case studies of HIV and Covid-19 make the benefits of generic production very clear: higher market supply, lower costs for consumers and increased treatment availability. Voluntary and compulsory licensing, however, are unlikely to be widely adopted.
Voluntary licensing, as seen in the case of Gilead Sciences, is often limited to the developing world. The economic reason for this is a discrepancy in the elasticity of demand between high and low income countries. In America, patent holders enjoy a low elasticity of demand, meaning that the domestic demand for drugs changes little in response to a price change. For this reason, “Big Pharma” can wield a patent to gain monopoly profits, recouping its R&D costs without concern that Americans will stop consuming the drug. In the developing world, however, drug companies have trouble selling expensive pharmaceuticals. The elasticity of demand in Africa and Southeast Asia is very low and consumers are sensitive to price changes. Because of this, there are a number of voluntary licensing agreements in which patent holding firms in America receive royalties from generic producers on other continents. These agreements allow pharmaceutical companies to profit from drug sales in poorer nations while recouping their R&D costs elsewhere. Voluntary licensing is unlikely to be widely adopted because it is always implemented in places that wouldn’t otherwise purchase pharmaceuticals.
Compulsory licensing is even rarer than voluntary licensing, and used by governments almost exclusively during health crises like Covid-19. Because compulsory licensing is widely seen as government overreach, and as damaging to the innovation incentive of the industry, it is also unlikely to solve America’s affordability crisis.
References
Carroll, Aaron. (2014, November 18). $2.6 Billion to Develop a Drug? New Estimate Makes Questionable Assumptions. The New York Times. https://www.nytimes.com/2014/11/19/upshot/calculating-the-real-costs-of-developing-a-new-drug.html.
Compulsory licenses, the TRIPS waiver, and access to COVID-19 medical technologies. (2021, May 26). Doctors Without Borders. https://msfaccess.org/compulsory-licenses-trips-waiver-and-access-covid-19-medical-technologies.
Clinical Trials Phases Defined. (n.d.) Cincinnati College of Medicine. https://med.uc.edu/depart/psychiatry/research/clinical-research/crm/trial-phases-1-2-3-defined.
Gilead Expands Access Program for Medications in Developing World. (2011, July 12). Gilead. https://www.gilead.com/news/news-details/2011/gilead-expands-access-program-for-medications-in-developing-world#:~:text=LONDON%20&%20HYDERABAD%2C%20India%2C%20Jul,patients%20in%20the%20developing%20world.
Hernandez, Joe. (2023, January 12). The FDA no longer requires all drugs to be tested on animals before human trials. NPR. https://www.npr.org/2023/01/12/1148529799/fda-animal-testing-pharmaceuticals-drug-development#:~:text=Music%20of%202025-,FDA%20no%20longer%20requires%20all%20drugs%20to%20be%20tested%20on,NPR.
Hill et al. (2018, January 29). Estimated costs of production and potential prices for the WHO Essential Medicines List. BMJ Global Health. https://gh.bmj.com/content/3/1/e000571.
McCarthy, Justin. (2019, September 3). Big Pharma Sinks to the Bottom of U.S. Industry Rankings. Gallup. https://news.gallup.com/poll/266060/big-pharma-sinks-bottom-industry-rankings.aspx.
Pills in blister pack. [Photograph]. (2016, October 10). Wikimedia Commons. https://commons.wikimedia.org/wiki/File:Pills_in_blister_pack.jpg.
Sertkaya et al. (2024, June 28). Costs of Drug Development and Research and Development Intensity in the US, 2000-2018. National Library of Medicine. https://pmc.ncbi.nlm.nih.gov/articles/PMC11214120/.
UNAIDS welcomes first voluntary license to the Medicines Patent Pool by a pharmaceutical company. (2011, July 12). UNAIDS. (https://www.unaids.org/en/resources/presscentre/pressreleaseandstatementarchive/2011/july/20110712pspatentpool#:~:text=Press%20Statement-,UNAIDS%20welcomes%20first%20voluntary%20license%20to%20the%20Medicines%20Patent%20Pool,products%20still%20in%20clinical%20development.
Understanding the Use of Medicines in the U.S. 2025. (2025, April 30). IQVIA. https://www.iqvia.com/insights/the-iqvia-institute/reports-and-publications/reports/understanding-the-use-of-medicines-in-the-us-2025.