Demythologizing the High Cost of Developing New Drugs

Posted by

Merrill Goozner

First published 2/21/11 on Gooz News

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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