What lower prices would mean for drug companies

Drug pricing regulations would not decimate the pharmaceutical industry, according to an analysis from health policy researchers at West Health and Johns Hopkins.

Why it matters: This throws some cold water on Big Pharma's claims that new drug research and investments would evaporate if the federal government limits what they can charge for medications — the proposal du jour in Congress and the White House.

Details: The report from West Health, a policy group only funded by telecom moguls Mary and Gary West, found that drug companies have the highest profits of any industry when calculated as a "return on invested capital." And those profits would still be among the top if drug sales were reduced through federal negotiations or price caps.

• "Pharma will still have this high rate of profitability, but it's also less volatile than other industries," said Sean Dickson, a health policy director at West Health and co-author of the report. "The demand for drugs is inelastic — people need to take them to stay alive."

Yes, but: Some economists and analysts criticized the report's methods — for example, focusing on publicly traded drug companies while leaving out smaller, failed drug firms could skew profitability. And while pension funds and institutional investors would not abandon pharma, the industry likely would change how and where to spend research dollars.

• The Congressional Budget Office estimated Rep. Nancy Pelosi's bill would prevent eight to 15 new drugs from coming to market in the next decade.
• However, CBO didn't say whether that reduction involved important drugs, or less valuable drugs (like "me-too" medications).

PhRMA, the industry's primary lobbying group, said the authors are "naive" to claim drug pricing regulations "would not have a devastating impact on research and development," and that "excluding smaller biotech companies from the analysis demonstrates a rudimentary understanding of the drug development process."

• "Pharmaceutical companies will still need to invest in new drugs in order to earn revenue — it's their entire business model," Dickson said in response. "They could maintain their current research investments and still be enormously profitable."

The bottom line: Our reporting similarly shows that pharmaceutical companies easily hold the highest profits and margins in health care alone. It makes sense, considering these companies are granted patent monopolies for their products.

• Changing the way drug prices are set does not mean profits, or research, would cease to exist. The debate is over the magnitude of pharmaceutical profits, and what would happen if those levels are reduced.