The Truly Staggering Cost Of Inventing New Drugs

The drug industry has been tossing around the $1 billion number for years. It is based largely on a study (supported by drug companies) by Joseph DiMasi of Tufts University. It’s a nice number for the pharmaceutical industry, because it seems to justify the idea that medicines should be pricey (and increasingly, they can be very pricey, costing tens of thousands of dollars per patient per year) without making it seem that inventing new medicines is so expensive an endeavor as to be ultimately futile.

But as Bernard Munos of the InnoThink Center for Research In Biomedical Innovation has noted, just adjusting that estimate for current failure rates results in an estimate of $4 billion in research dollars spent for every drug that is approved. But Munos showed me another figure, where he divided each drug company’s R&D budget by the average number of drugs approved. This was far more dramatic.

Wanting to make this even more rigorous, Forbes (that would be Scott DeCarlo and me) took Munos’ count of drug approvals for the major pharmas and combined it with their research and development spending as reported in annual earnings filings going back fifteen years, pulled from a Thomson Reuters database using FactSet. We adjusted all the figures for inflation. Using both drug approvals and research budgets since 1997 keeps the estimates being skewed by short-term periods when R&D budgets or drug approvals changed dramatically.

The range of money spent is stunning. AstraZeneca has spent $12 billion in research money for every new drug approved, as much as the top-selling medicine ever generated in annual sales; Amgen spent just $3.7 billion. At $12 billion per drug, inventing medicines is a pretty unsustainable business. At $3.7 billion, you might just be able to make money (a new medicine can probably keep generating revenue for ten years; invent one a year at that rate and you’ll do well).

There are lots of expenses here. A single clinical trial can cost $100 million at the high end, and the combined cost of manufacturing and clinical testing for some drugs has added up to $1 billion. But the main expense is failure. AstraZeneca does badly by this measure because it has had so few new drugs hit the market. Eli Lilly spent roughly the same amount on R&D, but got twice as many new medicines approved over that 15 year period, and so spent just $4.5 billion per drug.

Why include failure in the cost? Right now, fewer than 1 in 10 medicines that start being tested in human clinical trials succeed. Some biotechnology companies do manage to make it to market without having to spend money on failed medicines – but only because other startups went bust trying to test other ideas.

Last year, an accounting in the journal BioSocieties claimed to take apart the earlier $1 billion figure and find that drug companies were really only spending $55 million on each new drugs. Picked up by Slate, this paper whittled down the number to $55 million. That’s about a third of what was recorded in R&D by about the cheapest drug I can find – Optimer’s new antibiotic Dificid for drug resistant clostriduim difficile bacteria. Total costs sunk? $175 million, for a product that delivered $24 million in sales during its first five months. If this is really just taxes and accounting games, I’d like it explained how it is that biotechnology companies so often manage to spend all of their cash.

The high cost of developing drugs shouldn’t be a badge of honor for drug firms; there’s no reason it has to be this expensive. And using the cost of research to justify the prices of prescription drugs was always a dumb move on the pharmaceutical industry’s part. Just because something was expensive doesn’t make it good. And another: many medicines are over-priced, but high-cost drugs are only a small part of our general health cost problem. Medicines are just among the easiest products to scapegoat because their prices are easier to track.

But if a drug company could promise to invent new medicines for $55 million a pop, its stock price would soar like Apple’s. It really does cost billions of dollars to invent new medicines for heart disease, cancer, or diabetes. The reality is that the pharmaceutical business is in the grip of rising failure rates and rising costs. We can all only hope that new technologies and a better understanding of biology will turn things around.

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