Since 2014, drug pricing has grown in importance in health care policy conversations. From Gilead Sciences’s Hepatitis C treatment costing $84,000 per course of treatment to Turing Pharmaceutical’s 5,000 percent price hike of Daraprim, lawmakers, consumers, and insurance companies alike are raising concerns about the cost of pharmaceuticals. President Obama, as well as presidential candidates Hillary Clinton, Senator Bernie Sanders, and Donald Trump have all called for government intervention. One clear challenge to understanding drug pricing is the difficulty in ascertaining how the prices are developed. As complaints grow about exorbitant pharmaceutical prices, manufacturers are coming under pressure to increase transparency by disclosing research and development (R&D) costs and profits of medicines in order to justify the current prices.

Pricing Before The Drug Leaves The Manufacturer -

Innovator Drugs -

The costs involved in creating a drug are complex. As is the case with all goods, the price must reflect the cost of production. Obviously, there is the cost of R&D for the drug itself. Less well known but equally important is the cost of failed R&D on other drugs and R&D for future drug development. Once the pharmaceutical product has completed the approval process, it goes on to production and will have marketing costs associated with its entry into the market. Finally, as is the case with all for-profit entities, there will be a return on investment for the investors. Arguably, the costs that go into determining the price of a drug can be reduced to those specific factors: actual production costs, current R&D, failed R&D, future R&D, marketing, and return on investment. While this may seem like a logical approach to drug pricing, recent investigations have found even more complex factors influencing pricing. According to documents provided by Gilead to the Senate Committee on Finance, the pricing process can be based on clinical attributes, value determination, market research with payers, and the cost of current product regimens.