> the whole point of free market capitalism is to ensure the price of a product is as close to its "free market value" as possible
You forgot competition. In a healthy market, a big difference between manufacturing cost and final price is a strong incentive for competitors to enter the market and undercut prices. You can see this in practise in unregulated markets like electronics, leading to a flood of really cheap devices, for example you can get a Galaxy S4 clone on Alibaba for about $200, whereas an original S4 goes for $400 right now.
You can bet the Chinese would also do cheap generics, if the FDA would let them.
Right; but the pharmaceutical industry goes out of its way to avoid competition. They won't develop drugs if there is too much competition.
I understand that someone needs to pay for R&D. Unfortunately, the US government already pays for most drug R&D, but the patents get assigned to the company doing the development in all but a few rare cases.
The US gov't does not pay for most drug R&D. It pays for most of the basic science, that often leads to drug candidates, but the industry shoulder nearly 100% of the cost of getting a drug to market.
The combined, private R&D budget for biotech is ~$70B (not including VC funding). Total NIH funding (much of which is not drug focused) is ~$30B.
They go out of their way by lobbying, which is to say they go out of the free market scope in order to avoid competition. So you are wrong in blaming the free market for this.
And when you say 'They won't develop drugs if there is too much competition' that only means that those existing companies won't do it - and as soon as they leave the market because they don't want to compete, several entrepreneurs will step in and fill the void because they're not afraid of competing.
You forgot competition. In a healthy market, a big difference between manufacturing cost and final price is a strong incentive for competitors to enter the market and undercut prices. You can see this in practise in unregulated markets like electronics, leading to a flood of really cheap devices, for example you can get a Galaxy S4 clone on Alibaba for about $200, whereas an original S4 goes for $400 right now.
You can bet the Chinese would also do cheap generics, if the FDA would let them.