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Are Drug Prices Unethically High?

It makes sense for the maker of a best-selling drug to lower the price gradually over the life of its patent.

Q. Drugs under patent protection strike me as out­rageously overpriced, including old drugs that have been sold for years, new drugs just hitting the market, drugs for common illnesses, drugs for rare diseases—whatever. Do you think drug pricing today is ethical?

A. I understand your frustration, but I urge you to distinguish among the several situations you’re describing. Focus your moral indignation on drug companies run by tough financiers, not idealistic medical researchers—ones that buy the patent rights to old, popular drugs and immediately jack up the prices simply because they can. They give the whole industry a black eye and invite government scrutiny for monopolistic practices.

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To me, it makes sense, ethically and financially, for the maker of a best-selling drug to lower the price gradually over the life of its patent. The company will have already achieved a solid return, and the drug must eventually compete with lower-priced generics anyway.

Genuine pharmaceutical innovators have a legal and ethical right to recover the cost of creating and bringing a new drug to market and to earn a good profit. It’s reasonable that they price the drug to accomplish this over, say, five to 10 years.

Competition matters. If the new drug works only slightly better than existing drugs, it can’t be priced a lot higher than its competitors or it won’t sell well. The size of the market affects pricing, too. If a lot of people will potentially benefit from the new drug, its price will be moderated by the breadth of demand. The maker can earn less profit per unit but make it up on high volume.

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But if a company spends millions developing an effective new therapy for a rare disease that afflicts very few people, it’s fair for the company to price it very high. The development cost will be borne by insurers, Medicare, Medicaid or patients themselves, sometimes assisted by hardship discounts that many companies offer.

Have a money-and-ethics question you’d like answered in this column? Write to editor in chief Knight Kiplinger at ethics@kiplinger.com.

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