$2.6 Billion to Develop a Drug? New Estimate Makes Questionable Assumptions

The following originally appeared on The Upshot (copyright 2014, The New York Times Company).

The Tufts Center for the Study of Drug Development has just released its newest estimate for the cost to develop and bring a drug to market. At $2.6 billion, this figure is bound to get a lot of attention. We should take this announcement with a grain of salt, however. While it is no doubt expensive to create a drug, such announcements have come under attack before, often with good reason.

The Tufts Center is funded, to a large extent, by the pharmaceutical industry. It is in the pharmaceutical industry’s best interests to have the public believe that it is very expensive to develop a drug. This belief helps drug companies justify the high prices they often charge. As I’ve said beforehere at The Upshot, financial conflicts of interest can have a great deal of influence, and we would be remiss to ignore them in this case.

But let’s talk about the particulars of how the number $2.6 billion was calculated. The truth is, I can’t give you as nearly as much detail as I’d like. That’s because the study itself has not been published or peer reviewed. There are a news release, a set of slides and a backgrounder that describe the overview, but not as much detail as you’d see in a journal.

This is what happened in 2001, as well, when the Tufts Center released its finding that drugs took an average of $800 million to develop ($1 billion in 2013 dollars, the year used for the current study, the center said). The paper that summarized the methods by which they arrived at that number waspublished more than a year later, in 2003.

After those detailed methods were published, a number of people took exception to them. It might be helpful to review the concerns from last time in light of this latest announcement.

In both of these announcements, a significant amount of the costs to develop the drugs were opportunity, or time, costs. They are the returns that might be expected, but that investors went without, while a drug was in development. When a drug company invests in research and development, it is tying up money that could otherwise be invested elsewhere. In this announcement, the Tufts Center says that $1.2 billion of the $2.6 billion is time costs.

In other words, they estimate that drug companies could have made more money if they used their research investment for things other than drug development. While this is a perfectly sound economic argument, it often rings false to many. It’s true that a drug company might have been able to make more money by increasing spending in the short term on marketing, or by investing in land, but if at some point it doesn’t invest in research and development, it won’t be a drug company anymore.

Moving on, that leaves an out-of pocket-cost of $1.4 billion for drug development. That’s still a lot of money. But, assuming that the Tufts Center used methodology a similar to the one it used last time, it made some assumptions that are questionable.

The Food and Drug Administration considers some drugs to be new molecular entities, or N.M.E.s. These are drugs that contain active ingredients that have not been approved for individual use or as part of combination therapies in the past. It makes sense that the research and development for an N.M.E. would be higher than for other drugs. But N.M.E.s represent only a relatively small percentage of drugs approved each year by the F.D.A.; many more are “copycat drugs,” slightly different versions of drugs already on the market. These, it’s fair to assume, are much less expensive to develop.

Another issue concerns who paid for the research. A fairly large amount of research is funded by the public through the National Institutes of Health and other entities. Sometimes, this research later leads to drug development. For those drugs, and they have constituted a significant percentage of important drugs, the pharmaceutical industry did not bear all of the costs of research.

But in its last study, and, apparently, in this study, the Tufts Center considered only drugs that were new molecular entities and were developed entirely in-house by pharmaceutical companies. There’s no question that these would be the most expensive drugs developed by those companies. However, they represent a minority of drugs, and they’re certainly not “average.” Yet those were the only drugs used to calculate the “average” cost.

Moreover, it appears that all of the data for the drugs were provided by the pharmaceutical companies themselves. Those data are secret, and no one else gets to really see or verify them. This creates a large potential for conflict of interest. Although the Tufts study said that the drugs it considered were randomly selected from the companies’ portfolios, there’s no independent proof of that.

Finally, it’s worth mentioning that the research costs of drugs to pharmaceutical companies are tax deductible. That doesn’t mean those costs aren’t real, but it does mean that part of them are already being covered by taxpayers as a tax expenditure.

In an email late Wednesday, Joseph A. DiMasi, the lead author of the study, said that N.I.H. and other public research funding was “just part of the social cost of drug development” and irrelevant to what he was trying to measure, which was what private companies spend. He said the researchers did not exclude drugs from the study on the basis that they may have been developed using underlying knowledge funded by the N.I.H.

Mr. DiMasi said the other comments I’ve made on the study were similar to what he called the “wrong-headed methodological criticisms” raised at the time of the earlier work, which the researchers had responded to in a separate paper.

The bottom line is that the report contains a lot of assumptions that tend to favor the pharmaceutical industry. While the Tufts Center reports that $2.6 billion is the cost to develop “a new prescription medicine that gains marketing approval,” it might be more accurate to say that it’s the cost to develop certain new molecular entities for which pharmaceutical companies did all of the research. That’s very few drugs, in the scheme of things.

When the last study was published, a number of other organizations did their own analyses as well. One was by Public Citizen, the advocacy group founded by Ralph Nader, which basically took the amount that pharmaceutical companies reported in research and development over a period of time, and then divided it by the number of drugs that obtained F.D.A. approval. The group came up with $161 million.

In 2010, a systematic review of studies that looked at the cost of drug development was published in Health Policy. The review found 13 articles, with estimates ranging from $161 million to $1.8 billion (in 2009 dollars). Obviously, methodology matters.

The best thing might be for pharmaceutical companies to open their books and allow researchers to verify these findings independently. That’s unlikely to occur. As long as others control the data and the methods used to analyze them, we will continue to disagree as to how much it costs to develop new drugs.


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