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The Costs of Drug Research: Beginning a Rebuttal

Note: a follow-up post to this one can be found here.
I’ve had a deluge of emails asking me about this article from Slate on the costs of drug research. It’s based on this recent publication from Donald Light and Rebecca Warburton in the London School of Economics journal Biosocieties, and it’s well worth discussing.
But let’s get a few things out of the way first. The paper is a case for the prosecution, not a dispassionate analysis. The authors have a great deal of contempt for the pharmaceutical industry, and are unwilling (or unable) to keep it from seeping into their prose. I’m tempted to reply in kind, but I’m supposed to be the scientist in this discussion. We’ll see how well I manage.
Another thing to mention immediately is that this paper is, in fact, not at all worthless. In between the editorializing, they make some serious points, and most of these are about the 2003 Tufts (diMasi) estimate of drug development costs. This is the widely-cited $802 million figure, and the fact that it’s widely cited is what seems to infuriate the authors of this paper the most.
Here are their problems with it: the Tufts study surveyed 24 large drug companies, of which 10 agreed to participate. (In other words, this is neither a random nor a comprehensive sample). The drugs used for the study numbers were supposed to be “self-originated”, but since we don’t know which drugs they were, it’s impossible to check this. And since the companies reported their own numbers, these would be difficult to check, even if they were made available drug-by-drug (which they aren’t). Nor can anyone be sure that variations in how companies assign costs to R&D haven’t skewed the data as well. We may well be looking at the most expensive drugs of the whole sample; it’s impossible to say.
All of these are legitimate objections – the Tufts numbers are just not transparent. Companies are not willing to completely spread their books out for outside observers, in any industry, so any of these estimates are going to be fuzzy. Light and Warburton go on to some accounting issues, specifically the cost-of-capital estimate that took their estimated cost for a new drug from 400 million to 800 million. That topic has been debated around this blog before, and it’s important to break that argument into two parts.
The first one is whether it’s appropriate to consider opportunity costs at all. I still say that it is, and I don’t have much patience for the “argument from unfamiliarity”. If you commit to some multi-year use of your money, you really are forgoing what you could have earned with it otherwise. You’re giving it up – it’s a cost, whether you’re used to thinking of it that way or not. But the second part of the argument is, just how much could you have earned? The problem here is that the Tufts study assumes 11% returns, which is just not anywhere near realistic. Mind you, it’s on the same order of fantasy as the returns that have been assumed in the past inside many pension plans, but we’re going to be dealing with that problem for years to come, too. No, the Tufts opportunity cost numbers are just too high.
Then there’s the tax situation. I am, I’m very happy to say, no expert on R&D tax accounting. But it’s enough to say that there’s arguing room about the effects of the various special tax provisions for expenditures in this area. And it’s complicated greatly by different treatment in different part of the US and the world. The Tufts study does not reduce the gross costs of R&D by tax savings, while Light and Warburton argue otherwise. Among other points, they argue that the industry is trying to have it both ways – that cost-of-capital arguments make R&D expenditures look like a long-term investment, while for tax purposes, many of these are deductible each year as more of an ordinary business expense.
Fine, then – I’m in agreement, on general principles, with Light and Warburton when they say that the Tufts study estimates are hard to check and likely too high. But here’s where we part company. Not content to make this point, the authors turn around and attempt to replace one shaky number with another. The latter part of their paper, to me, is one one attempt after another to push their own estimate of drug R&D costs into a world of fantasy. Their claim is that the median R&D cost for a new drug is about $43 million. This figure is wrong.
For example, they have total clinical trial and regulatory review time dropping (taken from this reference – note that Light and diMasi, lead author of the Tufts study, are already fighting it out in the letter section). But if that’s true why isn’t the total time from discovery to approval going down? I’ve been unable to find any evidence that it is, and my own experience certainly doesn’t make me think that the process is going any faster.
The authors also claim that corporate R&D risks are much lower than reported. Here they indulge in some rhetoric that makes me wonder if they understand the process at all:

Reports by industry routinely claim that companies must test 5000-10000 compounds to discover one drug that eventually comes to market. Marcia Angell (2004) points out that these figures are mythic: they could say 20,000 and it would not matter much, because the initial high-speed computer screenings consume a small per cent of R&D costs. . .

The truth is, even a screen of 20,000 compounds is tiny. And those are real, physical, compounds, not “computer screenings”. It’s true, though, that high-throughput screening is a small part of R&D costs. But the authors are mixing up screening and the synthesis of new compounds. We don’t find our drug candidates in the screening deck – at least, not in any project I’ve worked on since 1989. We find leads there, and then people like me make all kinds of new structures – in flasks, dang it, not on computers – and we test those. Here, read this.
The authors go on to say:
Many products that ‘fail’ would be more accurately described as ‘withdrawn’, usually because trial results are mixed; or because a company estimates that the drug will not meet their high sales threshold for sufficient profitability. The difference between ‘failure’ and ‘withdrawal’ is important, because many observers suspect that companies withdraw or abandon therapeutically important drugs for commercial reasons. . .

Bring out some of those observers, then! And bring on the list of therapeutically important drugs that have been dropped out of the clinic just for commercial reasons. Please, give us some examples to work with here, and tell me how the disappointing data that the companies reported at the time (missed endpoints, tox problems) were fudged. Now, I have seen a compound fall out of actual production because of commercial reasons (Pfizer’s Exubera), but that was partly because it didn’t turn out to be as therapeutically important as the company convinced itself that it would be.
And here’s another part I especially like:

Company financial risk is not only much lower than usually conveyed by the ‘1 in 5000’ rhetoric, but companies spread their risks over a number of projects. The larger companies are, and the more they merge with or buy up other companies, the less risk they bear for any one R&D project. The corporate risk of R&D for companies like Pfizer or GlaxoSmithKinen are thus lower than for companies like Intel that have only a few innovations on which sales rely.

Well, then. That means that Pfizer, as the biggest and most-merged-up drug company in the world, must have minimized its risk more than anyone in the industry. Right? And they should be doing just fine by that? Not laying people off right and left? Not closing any huge research sites? Not wondering frantically how they’re going to replace the lost revenue from Lipitor? Not telling people that they’re actually ditching several therapeutic areas completely because they don’t think than can compete in them, given the risks? Not announcing a stock buyback program, because they apparently (and rather shamefully) think that’s a better use of their money than putting it back into more R&D? I mean, how can Intel be doing better than that? It’s almost like chip design is a different sort of R&D business entirely.
Well, this post is already too long, and there’s more to discuss in another one, at least. But I wanted to add one more argument from economic reality, an extension of those little questions about Pfizer. If the cost of R&D for a new drug really were $43 million, as Light and Warburton would have it, and the financial and tax advantages so great, why isn’t everyone pouring money into the drug industry? Why aren’t VC firms lining up to get in on this sweet deal? I mean, $43 million for a drug, you should be able to raise that pretty easily, even in this climate – and then you just stand back as the money gushes into the sky. Don’t you?
Why are drug approval rates so flat (or worse?) Why all the layoffs? Why all the doom and gloom? We’re apparently doing great, and we never even knew.

49 comments on “The Costs of Drug Research: Beginning a Rebuttal”

  1. Hap says:

    I assume they didn’t ask anyone what the costs of clinical trials are, or try to find out how much those services would cost from a contractor?
    $43 M will barely pay the CEO’s salary – even considering the number of drugs a company comes up with, his pay is probably 10-20% of the cost of the development of a drug by their numbers. That seems more than a little implausible.
    That part of science about checking your data against the world and that the world doesn’t care what you think does not appear to be a universal trait.

  2. MTK says:

    $43 million?
    That number is so laughably small it’s hard to believe anyone would write or publish that number in sincerity.
    Let’s assume that Pfizer’s $11B R&D budget really is inflated 20x ($800M/40M) and should be closer $500M, that still means they should have churned out 10-12 new drugs last year, not the 3 approvals that they got.
    And you’re spot on Derek. If that was truly the cost, then pharmaceuticals would be the greatest return on investment out there. I don’t really see the money flowing in.
    The analysis reminds me of those “analyses” which end up concluding that you are the only person in the country actually working.

  3. PharmaHeretic says:

    Maybe they did not add compensation to CEOs, lawyers, MBAs, bribes to congressmen, revolving door deals with government agencies, payments to consultants, mafia retainer fees, costs of botched outsourcing etc to their cost analysis.

  4. john says:

    I agree, I couldn’t read more than two sentences to know the bias that the authors of the studies were bringing to the table.
    I also agree that the tax numbers they used, and the capital costs were probably out of whack.
    However I believe that the numbers in the paper, 42 million, are way too low and the authors are really just waving their hands (looks a lot like paper chemistry to me).
    Anyways I have a question for people here. Right now most big pharma stocks are paying decent dividends. Most people who own stock are getting older (the majority of my generation doesn’t own stock or only holds mutual funds) and as a result are looking for their stock portfolios to produce income through dividends. Is this causing a change in how companies operate, instead of doing costly R and D, going the mergers route and partnering in order to maintain revenue, or at least dividends?

  5. chris says:

    I’ve read the article twice and for the life of me I can’t see how $43M is anything other than a hand waving exercise.
    Sadly though it is likely to be taken up as a stick to beat the Pharma industry. I’ve worked with a number of not for profit agencies who very diligent about keeping costs down and I’ve never seen anything to suggest a number as low as $43M.

  6. Analytical Scientist says:

    The Slate article (and the corresponding cited research) is absolutely breathtaking in it’s naive lack of understanding of this business. I have individual clinical trials (and not even Phase III ones!) that cost as much as their average estimate of total cost.
    The conspiracy of evil corporations and their wrongdoings in pursuit of excessive profits are favorite conspiracy theories among the liberal set. Normally it’s a moderate conspiracy theory that such companies make “too much profit” and “take advantage of sick people”, but the Slate article elevates this to a Al-foil hat level, in my opinion. Though the details of individual drugs are not disclosed, the net profits for pharma operations are disclosed publicly for all publicly traded companies. They should know what we spend in research and what this results in in terms of actual approved drugs, also a matter of public record. How could this possibly pass the red-face test??

  7. chris says:

    I’ve read the article twice and for the life of me I can’t see how $43M is anything other than a hand waving exercise.
    Sadly though it is likely to be taken up as a stick to beat the Pharma industry. I’ve worked with a number of not for profit agencies who very diligent about keeping costs down and I’ve never seen anything to suggest a number as low as $43M.

  8. TJM says:

    I agree with Derek’s point that the author’s contempt has seeped into their prose and approach to the issues. It rankles me when I see good topics and data taken to anything other than objective analysis. For instance:
    1) Cost of capital varies according to risk. Selection of 11% may have been on the high end, but was typical of businesses (not government prescriptions that seldom reflect or have experienced the downside of risk.) cites the overall WW ROIC (Return on Invested Capital) for all industries as 10%. Boeing is 11.05% Apple is 12.44%. Potash (fertilizer is pretty low risk) is 10.4% Citing a 3-7% as “reasonable” is a blatant lowball, especially considering the relative risk vs. other industries.
    2) Taxpayer paying for R&D. Unfortunately, the authors fail to note that the “39%” subsidy by tax deductions for R&D is claimed by all US companies. So McDonnel-Douglas’ development of weapon systems, as well as Apple’s development of the Ipad/Iphone were also “funded” by the taxpayer, by the same argument.
    I actually know more about the process they pick apart on drug development risk, attrition, duration, etc. than taxes & such, but I am sure other commenter’s will have plenty to say on those topics… In fact, while I was reading the article, so many similar flaws came up that I gave up noting them. But my real problem is again with how our society has encouraged polarization to the point where it is accepted in what are ostensibly objective analyses. It is now expected one creates a Red/Blue framing of the issues on any topic. And that we cannot recognize the line between commentators with an angle (PHRMa included!) and true objective news or science. Harking back to a recent topic – this is one area where scientific training would be of GREAT value to society: More citizens and discussions that are skeptical, but objective and weigh issues on the data and merit without bias.

  9. SVI says:

    PharmaHeretic, that is possible.
    Likewise if we discount friction my truck gets 400mpg.

  10. Mark says:

    A good rule of thumb for clinical trials is that it will cost you $10K per patient and overhead (data collection, processing, etc) costs are another $5K.
    The $43M cost cited to completely develop a drug, in reality, would barely cover the costs for a clinical trial of 2200 patients. Note, this doesn’t include the cost of manufacturing the drug, marketing, sales, employees, regulatory expenses, etc, etc.
    Hell, the cost of filing a NDA with the FDA is north of $1M alone.

  11. NoDrugsNoJobs says:

    Thanks for fouling up yet another day for me Derek. Everybody klnows phase 3 clinical costs alone are well in excess of these silly numbers and for most drugs, the FDA now requires two. Patent costs, licensing costs, research costs, clinical costs, failed projects, all add to this. Funny people – I think I may switch to journalism, I like to make things up some times as well but my Bosses prefer that I don’t.
    Isn’t it possible to take all the R and D expenses from the industry, sum them and then divide that by the number of approved drugs in a given year? I know that is probably some sort of gross error but I think one would get closer than the Slate article….

  12. stuff says:

    Then there are all the clinical failures to take into account – at least 4 in 5.
    Plus pre-clinical is not free either.
    All adds to the cost of each successful molecule.
    I guess for a small indication drug requiring a small clinical trial and the company being lucky their first shot hits target, $43m is possible. Unlikely, but possible.

  13. Anonymous says:

    Confused about the issue re: opportunity cost of capital. If buying stock would get you 7% (or whatever) and you think that this would be a better investment over time than R&D in your pharma company, why not do that? Because you are effectively placing a bet on yourself/your company that you will outperform other potential investments over time. Why is it considered a cost? I understand why salaries and reagents, etc are considered a cost – because it is actual dollars out the door. And tax issues, etc since those are embedded in the process. But, why do you get to claim that “my decision to pursue this research rather than doing something else with the money” in and of itself is a cost. Its not a cost, its a bet. No one forced you to make it.
    Can someone explain this to me?

  14. Neil says:

    That’s what I thought when I came across this article in a Nature Medicine blogpost:
    That post says “Last year, US federal regulators approved only 21 new drugs, despite the industry reportedly spending more than $60 billion on research and development.”
    60/20 = $3 billion per drug.
    It’s very quick and very dirty, but feels more right than $43 million.

  15. Frank Adrian says:

    Unfortunately, most people do not understand the process of discovering a new drug and bringing it to market. More unfortunately, the drug companies are quite complicit in this ignorance with their non-transparency and PR protestations about costs that sound more like defensive lies and hyperbole than actual facts (see non-transparency issue).
    In reality, the only thing that the drug company’s customers see are continually rising prices, releases of “me-too” drugs, or releases of similar drugs for patenting purposes. As this is about all they have to go on, they attribute nefarious and rapacious drug companies as the main villain.
    So, what to do? Really, it’s all about transparency, managing expectations, and reasonable PR. Drug companies have to be a lot more open, even on a drug-by-drug basis, of actual costs incurred. Yes, it sucks, but the customers’ “trust me” limit has been reached. In addition, drug companies need to show that they’re on board with society as a whole – i.e., stop laying off folks in first world countries by moving work to the third world. People would be a lot more forgiving on the corporate side if the companies were more generous on the societal side of things. Stop making press releases aimed at making the finance guys and Wall Street happy rather than at ones that make your customers less unhappy. Finally, there has to be something done about the price gouging of one country to subsidize sales in another.
    Of course, I’m sure that folks here will deride me as a “socialist”. Personally, I think it’s about managing your image and not putting forward an picture of yourself that you’re screwing everyone you can in the name of profits. To me, that’s good business.

  16. Lester Freamon says:

    In fairness, there are 2 different cost figures that should be considered: The actual money spent directly on one project leading to an approved drug, and the total R and D spending divided by the total number of approvals.
    The “direct” cost spent on one drug is reasonably between $150M and $500M, depending on trial size.
    The “general” cost of R and D, however, can only really be calculated by the actual R and D spending numbers and the actual numbers of drugs approved. Pfizer spent $60B to get ~12 drugs approved last decade, or $5 billion per drug.

  17. RM says:

    The difference between ‘failure’ and ‘withdrawal’ is important, because many observers suspect that companies withdraw or abandon therapeutically important drugs for commercial reasons.
    I’m not sure I’m following the reasoning here. They’re apparently claiming that drug industry costs (I guess on a per drug basis) should be lower because there supposedly exist drugs that were removed from trials because of “commercial reasons”.
    The problem I have with this is that “commercial reasons” really means “we’re going to spend more on this than we’ll ever make back”. And if you’re doing it correctly, what’s already been spent is counted as a sunk cost, so it really means “even ignoring what we’ve *already* spent, doing anything more on this will cost us more than we’ll make back.” (Costs here include opportunity costs, etc.)
    Elsewhere in the paper they claim that it’s the median cost, rather than the average cost that should be considered. Apparently their ideal pharma company makes 1000s of low R&D cost drugs that aren’t profitable because no one buys them, and a few high R&D cost drug that lots of people buy, but still aren’t profitable, because they aren’t allowed to charge much for it as the median cost of R&D is low.

  18. Nick K says:

    Do the authors of this study seriously believe that finished clinical candidates emerge from HTS and virtual screening? If this is the case they are hugely ignorant of the drug discovery process and have little or nothing of value to say about it.

  19. johnnyboy says:

    To John #4: Big pharmas offer dividends because they are big companies, and that’s what big companies do to keep their stock attractive. Big companies often have much less growth potential in their stock price, so they pay a dividend to keep investors interested. Dividends are also seen by financial types as a way to keep a company’s financial management responsible – when you know that your shareholders expect a certain amount to be paid out every year, you make sure that your finances will allow it. Cutting a dividend is one of the most alarming thing to investors, so you make damn sure to avoid it if you can.
    Yes you can argue that the dividend money could be better invested into R&D, but the same can be said of every company expense (marketing, executive salaries, etc…). In the end, it’s part of the cost of doing business.

  20. Anonymous says:

    The good news is that if this make-believe stuff is rolled into policy: the country’s drug costs will go down; the pharma execs will continue to make a boat load just like the Coke and Pepsi guys do; there will be no more pharma or biotech R&D jobs in the US and EU for chemists to loose; and as we all get sick and start dying we won’t have to choose between a new I-pad and some life-saving meds – people always vote for toys over meds!

  21. As usual, spot on. 43 million dollars is so 2008, your typical Wall Street CEO’s salary.

  22. andy kaufman says:

    my company spent $43M on 6 sigma training alone last year.

  23. oldtimer says:

    Even when I was doing R&D $43M was an unrealistic figure except perhaps in the 1960’s. Recognise this for what it is, an unrealistic analysis followed up by a polemical blog and have a laugh, humour is a good way to deflate such things. If challenged ask people to estimate what a 1 year 10,000 patient trial for a cardiovascular drug costs. Also ask them what it costs to develop a new automobile, or the next generation multi blade razor, I am sure there are figures out there.
    However, comments about transparency made above are important, the industry can be its own worst enemy.

  24. daen says:

    $43 million is a ridiculous figure. There’s a lengthy and detailed paper from the OTA from 1993 (“Pharmaceutical R&D: Costs, Risks, and Rewards”, now in the FAS OTA archive at in which they conclude that:

    for drugs first entering human testing in 1970-82, the after-tax cost per successful drug, capitalized to the point of FDA approval for market, was somewhere between $140 million and $194 million (in 1990 dollars).

    Either the OTA were hoodwinked in 1993, or the cost of R&D really has declined by 70-80% … right.

  25. Licensed says:

    Pharma companies typically pay $100M for a PhI and $500M for a Phase II drug from a bio-tech co when there are still Ph III trials left to run (and significant risk) Doesn’t that provide some idea of a market driven price for the cost of developing drugs? I agree that Big Pharma costs are difficult to derive, but one could piece together a couple of projects using licensing costs and the associated trials and find out that any number

  26. HelicalZz says:

    Tufts study assumes 11% returns, which is just not anywhere near realistic.
    The 11% number is not a market return consideration, but one based on historic returns within the industry itself. The historic ROIC (return on invested capital) for pharma as I recall (might be a similar metric). Opportunity cost considerations should indeed be based on industry based opportunities, and thus this was appropriate.
    But yeah, the historical returns for pharma have not headed up over the past decade (sigh), so yes it is too high. It is something of an ironic twist that the less successful you are, the lower your opportunity cost constraints.

  27. TJM says:

    To Anon #3;
    The opportunity cost of capital is not something you deduct to reduce your taxes, it is a way of looking at where a business should or should not invest. Like in R&D. If your R&D produces a Return on Invested Capital (ROIC) of say, 10%, and your cost of that capital is 7%, you are expecting a 3% incremental return.
    You also have to consider the timeline and the relative risk of that return (called risk-adjusted return or rate of return.) We generally all agree that Pharma takes a long time to see returns and that there are higher risks than say in producing corn. If the 3% gain that Potash gets seems to be the same and less risky, then Pfizer should sell more R&D off and buy acreage in the corn belt. We might have more food but abandon addressing the economic losses to Alzheimer’s and obesity. Unless the economic realities guide them to stay in therapeutics, the system will drive investments instead into corn, fertilizer or just gold or more marketing projects.
    Another issue with Light & W’s arguments on Development times: Their times again are cherry-picked. While overall time to develop have decreased (mostly through regulatory harmonization in the 1990’s), this is more a result of a shift towards therapeutic areas like anticancer drugs by the entire industry. Such therapeutic areas require shorter times as a result of the nature of the disease (e.g., extending time to live on the order of months.)
    Other areas like Alzheimer’s may take clinical trials spanning the decades the condition develops over (unless surrogate markers are proven.) It is interesting that the economic slant of this treatise fails to try and quantify the value to society of approved drugs, and of the potential for those that are being tested. For instance, in the USA, (not Canada), it is projected to cost $20 TRILLION from 2010 to 2050 to care for patients unless a more cost-effective therapy can be developed. That compares to the $44 Trillion the census bureau projected our budget shortfall from Medicaid and Social Security. If the game changes such that the ROIC is insufficient, the time to realize such therapies will be extended, if at all pursued. We can instead have more iPads in our dottering years. (by the way, just how much do we pay for toys & gadgets .vs medications as society?)

  28. HelicalZz says:

    #13 Anonymous.
    Confused about the issue re: opportunity cost of capital.
    Many are. Even Wikipedia can’t give you a simple answer, but do read the entry.

  29. Bruce Hamilton says:

    There seems to be a focus on big Pharma companies.
    If the cost was only $43 million then small companies, with lower overheads and wages, pushing a single novel drug through the typical approval process should only need to spend that amount to get the drug to market. Their funders would not be so keen to partner/sell to big pharma.
    Excluding drugs following abbreviated paths, does anyone know how many companies have got a novel drug approved for total cost of less than $50 million?.

  30. Wagonwheel says:

    Folks that don’t work in the industry simply cannot grasp that within one large pharma company for instance, thousands of basic researchers go to work year on year without ever delivering anything which generates revenue. Hell, I think my company hasn’t delivered a marketed compound from internal research for 12-15 years. We just aren’t communicating this to the general public.
    Elsewhere in biotech, the market rate for a phI ready compound from a biotech company could be between $20-100 mill depending on the attractiveness of the target. That’s costs plus a nice chunk of profit, however, that doesn’t take into account all the money and time down the drain in failed biotech.
    As said, then start adding up clincal trials costs and factor in all these more expensive failures!

  31. Lacerta Bio says:

    We also blogged about this paper this morning. It really takes a few reads to get the gist of what they are saying. For example, the $43 million figure is a median net cost of R&D without using a cos of capital adjustment, so it is purely fictitious, but statistically and economically interesting.
    The last paragraph of the paper prior to the Conclusion section is the key takeaway, The authors think that using available data and reasonable assumptions, you can come up with an estimate that is absurdly low or absurdly high.
    The deeper problem here (according to the Author’s and to Derek’s point) is that nobody really knows how much is really costs to develop an NCE. Is it $800 MM? $1 billion? $500 million? What if a company in-licenses an NCE with a robust Phase II package? The authors themselves call the $43 million figure “unbelievable”.

  32. HelicalZz says:

    Some links of interest on this topic.
    I believe I have linked before here the study from the Congressional Budget Office on Pharmaceutical R&D. If that source causes you to snicker, then prepare to be fairly impressed by what is a very good, relatively brief, industry overview.
    The 2006 report is essentially a review article on pharmacoeconomic research. Section 3 is titled ‘What Does it Cost to Develop a New Drug’ and does a nice review and critique of past studies. The report also looks at federal spending and crowding out concerns, factors effecting pharma productivity, as well as comparisons of Pharma to other R&D intensive industries. It is a very good report, and really should be read by most all here.
    And while on esoteric accounting considerations, I’d also link (re-link?) this presentation on a study into the ‘cost of capital’ for the venture funding of biotech.
    Venture funding sometimes gets mocked in science circles, but is a very important (essential?) capital source for the industry. That the venture community has not, over the last few years, been able exit investments with returns that exceed their capital costs is not long term sustainable and should seriously concern many here about the long term health of the industry. I optimistically hope that the potential for the big pharma cutbacks of the last few years eventually results in ‘creative destruction’ within the industry, but also worry that this won’t be true without a flourishing venture funding base.

  33. Anonymous says:

    FYI – To the point about “regulatory review time” data – BCG and the California Healthcare Institute just issued a report on FDA times to regulatory action and then approval (pre-PFDUFA years to 2007), along with some estimated costs of U.S. human drug review based on FDA Drug and EvaluatePharma databases.

  34. daen says:

    Rebecca Warburton has responded to the lengthy debate on the article that Derek references.
    One point relevant to Derek’s discussion is that the the figure of $43 mn (or the median figure of $59 mn, if you like) is across all drugs, not just NMEs, and is just for the “D” in “R&D”, not the “R” (something that we all appear to have missed). The publication “does not include basic research costs, for which there is no reasonable estimate available.”

  35. daen says:

    Here’s another fun way of showing the stupidity of the Light and Warburton figures. According to the CHI paper posted in #33 above, the cost of human drug review in 2009 was $855 mn, for a total of 26 approved drugs, or about $33 mn per approval. There is no way on this earth that it costs almost as much to review the drugs as it does to develop them in the first place.

  36. Joel West says:

    Derek, while I agree with almost everything, there’s nothing wrong with 10/24 responses (42%). In any survey, there’s a general presumption of validity with a response rate of 20% or more; 40+% is phenomenal.
    Now a) it’s small numbers — it’s hard to generalize to an entire industry from 10 companies; b) as you say, we don’t know how representative are the projects these companies picked.

  37. Hap says:

    #31’s point is more disturbing – how do you make financial sense of anything in drug development if you have no idea how much it costs to develop a drug? You can’t manage what you don’t know. (Of course, I guess you can be paid lots to manage what you don’t know, at least until you find something else to manage into oblivion.)
    If that were their point, it would actually be a pretty effective way of saying that we’re screwed. I guess we can start arguing over the body now.

  38. fat old man says:

    $43M??!! Hah!
    I’ve had a project that required $35M just for comparator costs for 1 yr for one Ph 3 trial. I’ve never felt so divorced from the ivory towers I left so long ago.

  39. wwjd says:

    Maybe there were enough fish oil pills and XD & XR formulations to make the median not include any NCEs.

  40. MIMD says:

    heir claim is that the median R&D cost for a new drug is about $43 million. This figure is wrong.
    Hmmm…I’m not an expert in finance or business, but considering I was expending $13 million annually just to run MRL’s drug discovery support library, I think $43 million per drug is just a little bit low.
    Perhaps it might be better to create a “probability curve” of what drug discovery costs.
    When I was asked about the ROI of my department’s expenses, I replied in kind with a graph, the y-axis being 0-100 representing odds or likelihood, the x-axis being ROI, labeled from a negative ROI to a ROI equal to the company’s entire annual margin.
    A roughly bell shaped curve skewed towards the left (lower ROI than the entire margin) using various rough figures and assumptions was the result.

  41. pharmadude says:

    These guys have a point. Think about all the homeopathic remdies, did those cost 800 million each to find? I think not! Big pharma = Big rip off. Ginseng can cure many medical problems and you can grow it in your garden. Hell, grow some mint for your tea and you’ve just tossed in remedies for stomach aches and sleep disorders too.

  42. Mucco says:

    Pharma R&D spend is about $100b, but ~25 drugs get approved by the FDA per annum. Do you own math

  43. drug_hunbter says:

    One could argue that we should just ignore this ridiculous article entirely rather than seriously rebutting it point by point.
    So, a question for the group: Do we believe that this is going to have any impact at all? Is it going to affect government policy? Funding? Public perception?
    Who actually cares what a couple of blatantly ignorant, deceptive, political hacks think?

  44. weirdo says:

    Do we really need to take seriously two doofi who use a made-up word as the first word of their title, and then cannot even spell “Eli Lilly” correctly?
    There you have your fact checking.

  45. Glen says:

    I agree, the authors made their point pretty well early on, but made a rapid descent down the rabbit-hole in the second half. The estimates seemed to be dropping by sheer force of will, not data.

  46. Druceratops says:

    @31 Lacerta
    I think there is a reasonably good idea of what new drug development costs but the answer to that question is that it is highly variable and context dependent. There is no one size fits all price for a “new drug”. Any estimate must take into account the nature of the candidate and the disease indication.
    Although not without exceptions, the costs of developing drugs and vaccines are typically correlated with the degree of innovation that they embody.
    A new product that the $43MM cited by the articles authors will buy you would be a reformulation of an existing, well characterized drug (e.g., a modified release formulation for GI delivery of an already approved antibiotic). While technically a “new drug”, this certainly is not what the public thinks of when the term “new drug” is used. You might also be able to get a $43MM product by re-purposing a failed Phase II/III compound for a new indication that already had extensive safety and manufacturing data available, but then it is pretty disingenuous to claim that the drug cost that little to develop.
    Also, I think you citation of the term “unbelievable” as used by authors is out of context since it the full quote is as follows “Such low estimates seem unbelievable until one learns that the audited costs of all clinical trials submitted by pharmaceutical companies in the late 1990s to the Internal Revenue Service averaged only $22.5 million (Love, 2003, pp. 7–8).”
    They are clearly not recognizing the flaws in their estimate and are in fact trying reinforce it with a poorly reasoned application of data from another source. The Love reference cited (see is referring only to the data for orphan drug programs which included a substantial number of applications that comprised new indications for existing drugs, but Light and Warburton disingenuously cite it as if it is for all classes of drug.

  47. CMCguy says:

    #43 drug-hunter I wish this could be ignored but it is stuff like this that seems to be taken by media, public and politicians as factual (go read Pharmalot for spouted nonsense). It infuriates me how much traction people like Angell receive when her “truths” about drugs are not, and such appears an established view when you talk to people about drug R&D.
    Unfortunately I think PhRMA/Industry has helped create the situation by over emphasis of the Tufts data high cost for self-serving motives without really bothering explaining some critical details of what is involved behind the figures, being more open about actual costs while then focusing so much on Marketing/Lobbying. I don’t have answers but know we are in high cost/high risk business with uncertain futures for most science types.

  48. drug_hunter says:

    #47 CMCguy – I suspect you are right. (Sigh.) But not every one of these nuts is going to get a lot of air time and I wonder whether we in fact stoke the fire sometimes by rebutting them point by point, as if we are accepting their premises (which, manifestly, we do not).

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