What is the real cost of developing new drugs?

nbt0511-381a-I1POST SUMMARY: Pharma has used the high cost of drug development as justification for high drug prices but are these costs realistic?

According to the Financial Times…The  estimate to bring a new drug to market varies from $2.56bn to $2.87bn if you count post-marketing research and development, according to a study released in November by the Tufts Center for the Study of Drug Development in Boston.  That’s 145% increase in real terms on the estimate of $800m ($1bn adjusted for inflation) the team at Tufts University published in 2003.


The factors responsible for driving up costs include larger and more complex clinical trials, a greater focus on chronic and degenerative diseases, and including more “comparator drugs” (used to test a drug’s effectiveness) in clinical testing.

Critics of the pharmaceutical industry attack such figures as a vehicle for corporate campaigns to achieve high prices for new drugs.  James Love, a critic of these costs and director of Knowledge Ecology International, the advocacy group, points out that annual claims in 2010 under the US orphan drug tax credit, which covers half the cost of clinical testing of qualifying drugs, totalled only $650m for a large number of products. “Hard to get from $650m to $2.6bn for one approval,” he says.

In a phrase much quoted by pharma critics, Sir Andrew Witty, chief executive of GlaxoSmithKline, called the $1bn price tag “one of the great myths of the industry” at a conference in 2013. But he was referring to the direct cost of developing an individual drug, which is usually much less than $1bn, and was not challenging the higher estimates from Tufts, Deloitte and others that attribute all R&D costs to successful products.


There are, however, signs that the long rise in the cost of bringing a drug to market may be reaching a peak, or at least a plateau. The pharmaceutical industry’s total R&D expenditure has remained steady in real terms (at about $55bn a year) since 2007, while the number of new drugs approved has been increasing over the same period, after falling alarmingly during the previous decade.

[bctt tweet=”The US Food and Drug Administration approved 41 new products in 2014, up from 27 the previous year and 39 in 2012.”] The total is the second highest on record, beaten only by 53 drugs approved in 1996 at the peak of a golden period for product launches.

Ed Siverman says “As the rising cost of prescription medicines becomes more widely debated, more attention is being focused on what the pharmaceutical industry likes to call the value proposition. Simply put, this refers to the long-run economic benefit that can be gotten from using a particular drug when compared with alternatives. In other words, a high price tag for a drug may not translate into the costliest treatment.

A study in Health affairs showed “Despite High Costs, Specialty Drugs May Offer Value For Money Comparable To That Of Traditional Drugs”.

HBR says “focusing only on the cost of a medicine — without considering its health-improving or life-saving benefits, or consequent reductions in other health care expenses — ignores its real value. While the cost is immediate, the benefits often don’t accrue for years. I co-led a team that brought alendronate from the laboratory to worldwide use. The incidence of osteoporosis-related hip fractures in women declined by 40% since the mid-1990s, when alendronate and (subsequently) similar drugs were introduced in the United States. Preventing such fractures avoids suffering for individuals and saves thousands of lives. It also lowers the costs of caring for people who would otherwise have endured a fracture.”


Improving patients’ adherence to their medication regimens does increase spending on drugs, but the long-term savings can be so compelling that, for example, some insurers now offer all diabetes medicines to their members with no copay. The nonpartisan Congressional Budget Office acknowledges that use of prescription drugs can reduce health care spending.

[bctt tweet=”The biggest challenge that has faced the pharmaceutical industry in recent years has been the role of payers”]. They have effectively become gatekeepers in terms of the availability of new medicines. If a payer believes that a new drug doesn’t provide any advantages over existing, cheaper medications, the payer will refuse to reimburse the patient for it. As a patient is unlikely to pay for an expensive new drug out of his or her pocket if a low cost alternative exists, the expensive drug will get little use.

The pharma industry MUST make a profit not just to survive, but to prosper. Anyone thinking that the pharmaceutical industry is making outrageous profits just has to look at the cost cutting going on at Merck and other pharmaceutical companies, as well as the consolidation that has happened in the industry over the last 15 years. Ironically, the cutting of R&D budgets and the closing of research labs are occurring at a time when the research opportunities are better than ever before, thanks to the unraveling of the human genome. A vibrant pharmaceutical industry is crucial if we are to capitalize on the new insights being made daily on the causes of disease. The return on investment through the pricing of valued medicines is key to that success.