Demythologizing the High Costs of Developing New Drugs

February 21, 2011
By

Press Release: Pharmaceutical companies continue to claim that high research and development (R&D) costs make it necessary for them to charge high prices and retain long ownership of patents to recoup costs. But a new study (subscription required) co-authored by health economists Rebecca Warburton and Donald W. Light demonstrates that high R&D estimates have been constructed by industry-supported economists to support the companies’ claims.

The widely accepted figure promoted by industry-supported economists is $1.3 billion to discover and develop a new drug.  This estimate, however, was done on a costly subsample and then generalized to all drugs, inflating the estimate for the average new drug by about 7 fold.

TAXPAYERS CONTRIBUTIONS

The $1.3 billion estimate also does not include the substantial contributions by taxpayers through R&D-related tax write-offs. Taxpayers indirectly pay for about 39 percent of company R&D, a substantial reductions in a company’s net costs.

The industry-based figure also includes a large sum inserted for the cost of discovery, even though no one has solid figures on what those costs are. The cost of discovery can range from serendipity to 30 years of frustrating research to find a key compound. Light and Warburton conclude that cost estimates can only be done for development and not basic research.

Light and Warburton also found that independent evidence showed the $1.3 billion estimate was based on trials much larger than reported by the Food and Drug Administration and the National Institutes of Health. The estimate was also based on trials lasting longer than the lengths that companies reported under audit. Finally, the percent of trials that failed was higher than independent sources showed, which multiplies the costs of trials that succeed.

FOREGONE PROFITS AS “COSTS”

Half the $1.3 billion estimate is not real costs but a high estimate of profits that companies would have made if they had not developed drugs but just put their money in bonds or equities. Industry-supported economists used an estimate of those profits more than twice the return on capital conventionally used and counted this high estimate as a “cost of R&D.” “Estimated profits get converted to ‘costs’, and then companies press to get that money back as well as a good return on it,” explained Light. “This amounts to charging high prices to get profits on profits.”

Light and Warburton used the median cost because a few very expensive drugs skew the average and result in a misleading figure. They corrected for inflated numbers and multipliers. The median net corporate R&D cost per new drug was only $59.4 million, plus the unknown cost of discovery, which varies 30 fold.  This estimate is in line with audited figures submitted by companies. “We found that the net median corporate costs varied greatly, from $13 million to $204 million, depending on the kind of drug,” Light said.

GOVERNMENT PROTECTED PRICES NOT WARRANTED

“The European Parliament is increasing market protections that will delay generic competition and extend monopoly prices,” Warburton said. “Lobbyists have persuaded European leaders that companies need more time to recover billions in research costs, when R&D costs are really a fraction of the $1.3 billion average claimed.”

PRACTICAL IMPLICATIONS

This study strengthens the view that drugs companies do not need prices as high as they are to recover R&D costs, and their corporate risks are much lower than claimed. Most of their R&D products are scores of drugs with few proven advantages over existing drugs that can command higher, government-protected prices. Gross profits are spent more for marketing than research in order to maximize the number of patients taking these drugs. A large number of clinical trials are conducted for marketing and signing up lead clinicians. These form elements of The Risk Proliferation Syndrome described in a new book, The Risks of Prescription Drugs.  The result is millions of patients exposed to adverse side effects with few offsetting benefits.  Prescription drugs are now the 4th leading cause of death and result in about 2 million hospitalizations a year. They have also become a major cause of auto and trucking accidents.

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5 Responses to Demythologizing the High Costs of Developing New Drugs

  1. Byard Pidgeon on February 22, 2011 at 10:58 am

    Pharmaceutical companies are using accounting gimmicks? Shocking! Next, we’ll learn that corporations in general use accounting gimmicks to avoid taxes…or that our IRS Tax Code is heavily influenced by corporate lobbying of the Congress and White House…or that there were no WMD in Iraq. Shocking!!!

  2. Richard Meyer on February 23, 2011 at 9:17 am

    For drugs entering human clinical trials for the first time between 1989 and 2002, a paper for health economics estimated the cost per new drug to be $868 million. However, their estimates vary from around $500 million to more than $2,000 million, depending on the therapy or the developing firm. In addition THE EXPECTED COST of developing an average drug was recently estimated by Joseph DiMasi and colleagues at $802 million per new molecular entity (in 2000 dollars). The estimated expected cost of developing an HIV/AIDS drug is $479 million, while the expected cost of developing a rheumatoid arthritis drug is $936 million.

    The pharma industry is NOT using accounting “gimmicks” like some suggest. It is standard accounting practice for public companies that are supposed to be earning a return for their investors. It is true that some drugs cost less to develop than others but we also have to remember that a lot of big name blockbusters are soon to come off patent and the old model of new and improved does not work anymore as insurers prefer to recommend generics to HCP’s and patients to save money. The drug industry is now faced with a proposal from the President to cut the time new drugs have exclusivity which would further increase costs and ensure that less money is allocated to R&D.

  3. RA Patient on February 23, 2011 at 1:57 pm

    The most widely prescribed biologic to treat rheumatoid arthritis (RA) — a severe, systemic, autoimmune disease – is enbrel. Drug companies say the R&D costs are the reason for enbrel’s high price — over $1,600 a month. They fail to mention that the initial research that lead to enbrel, was done in the early 1990s by an academic researcher, Bruce Beutler, with the University of Texas Southwestern Medical Center – funded by taxpayers.

    Enbrel was approved by the FDA 12 years ago in 1998. In 2009, according to the IMS, it was 6th in global prescription drug sales at $5.8 billion. If the cost to bring a drug to market is estimated to be $1.3 billion – haven’t they recouped that cost and more yet? How long before consumers/insurers ever see a decrease in price?

    Biologic drug companies lobbied for and got 12 years of exclusivity in the health care law. It may take years before the FDA establishes a regulatory process for approval of generic versions – biosimilars. Despite enbrel going off patent in a few years, enbrel patients aren’t likely to see a drop in price, in fact, the price of enbrel was increased by 5% in 2010.

    So where is that money going? To R&D for new products? Doesn’t look like it – Pfizer (the marketer of enbrel) is cutting research spending by $1.5 billion. Marketing? Every night during evening news programs I see tv ads for enbrel. Do we really need those? It takes a doc to prescribe these drugs with black box warnings — these aren’t OTC drugs.

    Patients with severe RA — a chronic, debilitating disease, that affects the heart, lungs, eyes, as well as joints — have few options but to take biologics to manage this disease, but if the price of biologics that go off patent increases, instead of decreasing, and funding for the NIH and the CDC may be cut, reducing research for better treatments or a cure for RA – what is the future or hope for those of us with RA?

  4. RL on March 7, 2011 at 8:46 am

    @RM – excuse me but what is valueing the opportunity cost of capital at 11%pa if it’s not an accounting gimmick? Where can you get a guaranteed 11% ROI?

  5. Dr. Dan PIlgreen on April 27, 2011 at 10:12 am

    I always though I smelled a rat as I have advised my patients to always try older off patent drug as many have better track records and are much safer than the newer medications.

    This phooey price structure prohibits any natural remedies from being studied because of the high cost and the payoffs needed from lobbyists to government officials.

    This is a classic example of profiteering using smoke and mirrors.

    I agree with the reply the stated “where can you get 11% on your money” I sure would like to know.

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