You sometimes see the claim that only twenty per cent of drugs that make it to the market actually recoup their development costs. Here’s a recent sighting, and there are more. This figure has never seemed quite right to me, though.
There certainly are drugs that don’t earn it back – of that there can be no doubt. But 8 out of 10? Keep in mind that we’re not talking about failure rates during development; these are marketed drugs that don’t turn a profit. (There’s little doubt about clinical failure rates, because both clinical trial registrations and FDA approvals are public knowledge). But what’s not public knowledge are the development costs for a given drug, making profit and loss calculations impossible on a case-by-case basis.
Here’s a post at Lyman BioPharma Consulting on this topic, and it’s well worth a look. Stewart Lyman makes several good points, including:
1. The biopharma industry spends more on R&D, as a percentage of revenues, than almost any other. I’ve talked about this as well, but nothing seems to stop the “Drug companies spend more on marketing than R&D!” folks. And don’t forget the companies that have no revenues (yet) who are spending like crazy on research, too.
2. At the same time, the drug industry has been highly profitable. Some of the analyses in this area suffer from survivorship bias and similar effects, but the fact remains that if your drug company is actually earning a profit, it’s probably a very good one as a per cent of revenues. (If you try to achieve those profit margins without going through Point One above, though, then you risk turning into the next Valeant!)
So how does that two-out-of-ten figure add up? The answer is that it almost certainly doesn’t. Lyman has tried to track this number back to its origins, and he believes that it goes back to a 1994 study (which has some significant problems itself). In other words, this is almost certainly a garbled myth. It’s hard to imagine how the industry could function with the preclinical failure rates we have (very hard to quantify, but high, when you consider how many projects you’ve worked on in your career versus how many actually were recommended for development), the clinical failure rates (documented, somewhere in the high 80% to over 90% range depending on time period and therapeutic area), and then add an 80% not-even-profitable-once-approved rate on top of that. No, this business is hard enough already without making it look even harder than it is. BIO and the others using this number should back off of it – would they really like to try to document it? Didn’t think so.