The research they are doing is generally not in the final phase of actual development of the drug which is where it gets incredibly expensive.
The interesting thing is that, from: http://www.techdirt.com/articles/20070927/012604.shtml
>A recent GAO study found this to be a worrisome trend, noting that fewer new innovative drugs are being created -- with pharma firms instead focusing on ways to extend the patent protection on existing products by pulling a few tricks (such as "reinventing" Claritan as Clarinex just to get more patent coverage).
In other words, government funded or not, patents are stifling medical innovation.