The Tufts Center for the Study of Drug Development recently updated its 2003 estimate of the cost to develop a new drug. The latest estimate, $2.6 billion, roughly triples a single drug's alleged R&D costs.
Why hasn't this report set off alarm bells at the Federal Reserve Board, whose job includes worrying about inflation? I would suggest it is because anyone with even a rudimentary understanding of corporate accounting knows the claim is bogus, designed more to justify the sharply rising prices of new specialty drugs than to describe economic reality.
First, a disclosure: I have an interest in dismissing this study. I wrote a skeptical book that borrowed the original number, slightly rounded, for its title.
I devoted only one chapter of that book, “The $800 Million Pill,” to debunking the Tufts study's methodology. I was mostly concerned with informing the public that government-funded scientists initiated, and in some cases, actually developed many of the most significant biomedical discoveries of the final quarter of the 20th century—from AIDS drugs to cancer therapies to the human genome.
If I were to rewrite the book today, I would adjust some of its basic assertions. In this century, the locus of drug discovery for pressing medical needs has shifted to the private sector, even though government-funded research through the National Institutes of Health remains the backbone of basic medical science.
But systematic cutbacks in congressional support for the NIH eviscerated its role in the critical translational research process. Today, it is mostly venture capital-funded biotechnology spinoffs near the nation's leading research universities that take basic science discoveries about the roots of diseases, validate technologies for intervening and then transform that knowledge into potential products.
When these small-scale firms succeed in bringing a new therapy close to final-stage clinical trials, they are usually snapped up by big pharmaceutical firms, whose own pipelines have performed poorly in recent decades despite the billions poured into research.
If you want anecdotal evidence to illustrate this trend, look no farther than the history of Sovaldi, the hepatitis C drug that cost $1,000 a pill. Gilead, its owner, didn't develop the drug. It purchased it on Wall Street by buying Pharmasset for $11 billion, which received government grants in its early days and spent less than $300 million on its development.
The Tufts study ignores this bottoms-up approach. Instead, the study surveyed 10 pharmaceutical firms with 106 drugs in development over a 12-year period; calculated the total spent on R&D; adjusted for inflation (bringing nominal dollars into current dollars), divided by the number of FDA approvals in the crop; and came up with the whopping number.
Adjusting for the time value of money ignores the fact that R&D is a current expense, not a capital investment. Current drug purchasers, not investors, pay for that expense. Drug companies even get a tax credit, which lowers the cost. Without that improper accounting, the total is reduced to $1.4 billion.
But even that is too high. The drug industry includes a lot of expenses in R&D that are questionable. A hefty portion of industry research is aimed at giving a company an entry in already lucrative markets—so-called me-too drugs. Of the 29 drugs approved by the FDA in its fiscal 2013, 17 were deemed not a significant medical advance over existing therapies. Some clinical research funded by industry is thinly disguised marketing.
So what does it really cost to discover a new drug? My conclusion today is no different than it was a decade ago. It can be anywhere from a few hundred million dollars to an infinite amount. Why infinite? What does it cost to discover a new Alzheimer's drug? Billions have been spent on research, yet the denominator—the number of new drugs that are truly effective—remains zero.
Advances in medicine occur only when dedicated scientists have solved the mysteries behind disease causation, giving other scientists the ability to intervene using drugs, devices or other therapeutic approaches. When that basic knowledge is in hand, the development process needn't be exorbitantly expensive.
Pouring money into drug companies through high prices will never expedite that process. We'd be better off putting the money into basic research.