It costs, on average, $1.3-billion (U.S.) in
research and development to bring a new drug to market. That level of
investment in R&D by Big Pharma justifies the high cost of prescription drugs.
Those statements are repeated so often that they have come to be accepted as
fact.
But are they fact or fiction?
An article in the current edition of the journal BioSocieties, a publication of
the London School of Economics, argues that the
real cost of R&D is, in fact, a fraction of the commonly cited estimate and
we are having the wool pulled over our eyes.
The authors - Donald Light, professor of comparative
health care at the University of Medicine and
Dentistry of New Jersey in Newark, N.J., and Rebecca Warburton, a health
economist at the University of Victoria - have
returned to the source of the original estimate and deconstructed it.
Here is the Coles Notes version of their detailed analysis.
In 2003, Joseph DiMasi and a team of researchers from the Center for the Study
of Drug Development at Tufts
University in Boston published an article in the journal Health Economics titled The Price of Innovation: New
Estimates of Drug Development Costs.
It concluded that the mean R&D cost for a new drug was $802-million in the
year 2000. (The Pharmaceutical Research and
Manufacturers of America, or PhRMA, later "updated" this
figure to $1.32-billion in 2006 dollars.) Let`s look at how they arrived at the
final figure.
The researchers asked 24 large drug companies to submit R&D costs for
"self-originated new chemical entities" - essentially new drugs
developed in-house. Ten companies did so but on the condition that the data be
kept confidential, meaning we don`t know what companies or what drugs were
included, or what exactly is included in R&D.
The researchers estimated that the "cost of discovery" - the time
from the synthesis of a drug to animal testing -
at $120.9-million. The larger cost was clinical trials,
testing the safety and effectiveness of a new drug in humans, at
$281.9-million. Add the two and you get the total "average out-of-pocket
per new drug": $402.8-million.
Then Dr. DiMasi and his team calculated the "cost
of capital" - essentially what this money would have earned if it
had been invested in the stock market instead of in R&D. They used an
annual return on investment of 11 per cent.
Applied over the time it takes for clinical trials and regulatory review - 72
months and 18 months respectively - that cost of capital brought the total
R&D cost to $802-million.
The original paper said that it took an average 11.8 years to get a drug to
market, including 52 months of preclinical research and the aforementioned 90
months for trials and regulatory approval.
Now, let`s look at the critique, or what Dr. Light and Dr. Warburton dub
"demythologizing the high cost of pharmaceutical research."
First, they note that drug companies have "tightly controlled access to
verifiable facts" so there is no way of independently confirming their
numbers. So let`s assume they are essentially correct but analyze them through
a prism of publicly available data.
First, there are not many novel drugs developed. Between 1990 and 2000 only 35
per cent of "new drugs" were actually new chemical entities (NCEs),
according to the U.S. Office of Technology Assessment. Most new products are
reformulations or recombinations of existing drugs - "me too" drugs
in common parlance.
Only 22 per cent of drugs developed in-house by pharmaceutical companies are
NCEs.
That means the $802-million is, at best, an estimate of the R&D cost of the
costliest one-fifth of drugs, not all drugs. The cost of "me too"
drugs is necessarily a lot less.
The eyebrow-raising aspect of the original cost calculation is the whopping
"cost of capital." While "costs forgone" is a legitimate
calculation for accountants, the accepted standard is to assume an annual
return on investment of 3 per cent in the United States and 5 per cent in
Canada - not the 11 per cent used in the original cost calculation.
The "cost of capital" is massive because of the length of time it
takes to get a drug to market. But the new paper suggests those estimates are
off too.
According to the U.S. Food and Drug Administration
Register, drug trials last, on average, 36 months, not 72 months, while
regulatory review takes less than 12 months on average, not 18 months.
(The original study also said clinical trials involved 5,303 patients on
average at a cost of $23,572. According to the U.S.
National Institutes of Health, the average trial involves half that
number at an average cost of $3,861.) Another controversial figure is the 52
months allocated for preclinical research; that number is virtually impossible
to calculate - not to mention that basic research is often done in universities
and government-sponsored labs. Yet it accounts for fully one-third of the
$802-million estimate.
Finally, the new analysis notes that there are generous tax breaks for R&D
and those were left out of the cost calculation. "A reasonable guess is
that half of corporate R&D expenses are paid for by taxpayers over the long
term," the authors write.
So, what do you get when you crunch all those numbers?
According to Dr. Light and Dr. Warburton, the net median R&D cost of
developing a prescription drugs varies from $13-million to $204-million,
depending on the kind of drug.
Over all, they estimate R&D costs $59.4-million for each new drug.
That is a far cry from $802-million or $1.3-billion.
Consumers who use prescription drugs, and the drug
plans that are the principal purchasers, need to start questioning the
"facts" and asking some tough questions.
If R&D costs are only a fraction of what is asserted, then what is the
justification for high prescription drug prices?
