Studies fuel criticism of high drug development costs

How much does it cost to develop a prescription drug? Opinion varies. The highest - and most publicised - estimate is $2.56bn, or $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 is a 145 per cent 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.

A lower but still striking estimate, by the Deloitte Centre for Health Solutions in the UK, puts the cost for 2014 at $1.4bn, up from $1.35bn the previous year.

Critics of the pharmaceutical industry attack such figures as a vehicle for corporate campaigns to achieve high prices for new drugs. For example, Rohit Malpani, policy director of the medical relief group Medecins Sans Frontieres, pounces on the Tufts $2.56bn estimate.

"We know from past studies and the experience of non-profit drug developers that a new drug can be developed for just a fraction of the cost the Tufts report suggests," he says.

Another critic, James Love, 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.

The most important cause of confusion is whether the estimates include just the direct R&D cost of individual drugs that reach the market or also cover the costs of the larger number that fail before gaining regulatory approval.

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.

The Tufts estimate is further inflated by its inclusion of "time costs", that is "expected returns that investors forgo while a drug is in development". This cost of capital adds a hefty $1.16bn to the "average out-of-pocket cost" - direct spending on R&D - of $1.4bn per approved drug.

The latter figure corresponds with Deloitte's $1.4bn estimate of the cost of bringing a drug to market in 2014, though the methodology and data sources used by the two studies are different. "Their number is remarkably close to ours," says Julian Remnant, Deloitte life sciences partner.

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.

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.

Even so, Joe DiMasi, director of economic analysis at the Tufts Center, warns against premature celebration. "I'm not ready to predict lower costs," he says. "The number of approvals does fluctuate from year to year. What's more, many of the R&D expenditures incurred in recent years will be associated with approvals in a number of years to come."

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Mr DiMasi has a list of measures the industry can undertake to improve productivity and reduce the cost of drug development. "There is a lot of interest in improving the efficiency of clinical trial operations and designs," he says.

"One of the main drivers of the increase in total cost that we found this time was a substantial increase in drug development risk. The clinical approval success rate - the likelihood that a drug that enters the clinical testing pipeline will eventually get approved for marketing - declined significantly."

Like Mr Remnant, Mr DiMasi urges the industry to improve to reduce the dropout rate, with better predictive models of success and failure.

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