Only problem is, with the new international trade laws going in that let companies sue governments for "unfair competition", any government that goes cost-plus will get sued to the point where it's not worth pursuing anymore -- because there's no way the patent system can compete with low-cost drugs and open access methods. But I agree: that's what should have been happening for the past decade. It really calls into question why it hasn't, and why governments are instead pushing the current trade laws.
Don't disagree, though really with the low success rate of new drugs these days, you'd think that pharma companies would look at this as an opportunity to diversify. Right now they employ hordes of scientists and since invention is serendipitous they often end up spending money developing less-promising drugs just to keep half of their scientists busy. They can't just fire everybody when they only have one or two candidates and then scale back up when they have more - it is hard to change scale and there are economies of scale from staying big.
With a model that allows public competition under a cost-plus model a pharma company could still do end-to-end drug development that yields products that are very lucrative, but with a high risk. Then if it has spare capacity it could bid on government cost-plus contracts to develop public candidates. That would allow them to maintain their scale and make a modest profit with very little risk. The situation is really not all that different in terms of what kinds of drugs they target privately - they aim for areas with no competition so that they can make monopoly profits. The public benefits since it gives them more options - the areas the private companies are targeting are areas that the government is missing anyway for whatever reason. Also, some drugs might be needed but be politically undesirable, but private companies will go where the money is so people who suffer from conditions that have some kind of stigma associated will at least get something to help them.