I don't know why we go through this kabuki process of pretending there is a functioning market in places where the government is such a dominant player (see also defense contractors). Why not just cut out the middleman?
At this point I risk conflating not just two but three arms of the government: the NIH (funding), FDA (approval), and Medicare (payment).
> Why not just cut out the middleman?
Medicare has hinted at doing this, using its purchasing power to drive down the cost of drugs and refusing to pay for treatments approved to work but who have a low cost-to-efficacy ratio. A recent example is the fight over Hepatitis C medication[0]
[0] http://www.npr.org/blogs/health/2014/05/12/307747798/boomers...
Is Walmart paying for the QA testing?
The government pays for the early research, sets all the ground rules for the drug trials, and -- as the drug companies' biggest customer -- ends up ultimately shouldering much of the cost of those trials whether successful or not. The government certainly has the financial wherewithal to fund stage 3 trials, $100M a pop is a rounding error on federal spending or even on just federal medical spending. So why not just go ahead and do so? Why the farce with pretending there's a healthy drug market when the government is driving so much of the process? Let's just admit this is a market failure of the public good variety, like firefighting and roads, and have the government provision it.
If public funds and private donations could actually cover the research costs getting all the way to FDA approval, I would think you would see more doctors and researchers creating nonprofit partnerships to attract the funds and do the research. Sounds like it would be a dream come true to be funded to do research you cared about and better the lives of millions without the corporate suits getting in your way. But I think the reality is the facilities alone cost hundreds of millions if not billions, so just for Mayo to give you the lab space to work for a couple years is a major investment.