Is $2.6 billion the real cost of drug development?
Thursday, January 01, 2015
You might see an article or news headline claiming that it now costs $2.6 billion to discover, develop and get a new drug to market. The pharmaceutical industry will make sure everyone becomes aware of this staggering cost number. After all, the high risk and high cost of research are the foundation for justifying high drug prices.
So where did this number come from?
Well, every few years the Tufts Center for the Study of Drug Development publishes a study that tries to determine the "average cost of developing a drug and gaining market approval." Every time I see these studies published, I wonder about the validity of "the number" in the context of reality.
From my experience, they have always seemed high, and this time my instincts tell me $2.6 billion is extraordinarily high. Here are a few things that make it difficult to take this number at face value.
1. Actual data?
If you don't look closely, you might be led to believe the study is based on actual data "from 10 pharmaceutical companies involving 106 investigational compounds." That is certainly the implication until you read beyond the headline.
In reality, the methodology and analysis is complex and filled with amalgamated data, company-provided survey information on aggregate costs, estimates, assumptions, inferences and extrapolations. Not actual data.
2. Cost of capital
"The number" also includes an estimate for the cost of capital or return-on-investment expectations for out-of-pocket expenditures over estimated development and approval timelines. This is a big number at more than $1 billion of the $2.6 billion.
I don't know how to evaluate "cost of capital" or whether it is even a valid inclusion. I find it interesting that cost of capital is accounted for, but not R&D tax credits, write-offs or other global research incentives that can offset and lower actual research costs.
3. Building a number
All the estimates, assumptions and financial manipulations whittle away at the credibility of the study. It leaves the impression — which is probably the reality — that there are few data points based on actual costs. This leaves tremendous opportunity for building a number rather than reporting or calculating an actual cost.
4. Report the median
Is reporting the average cost really the best and most helpful way to present this information? While this certainly supports the pharmaceutical and biotech agenda, the number of variables with the averaging of averages and estimates just compounds the distortion of reality.
If you don't have actual data, why not at least also report median — high and low?
5. Small sample size
It is hard to tell if the 10 companies included in the study are really representative of all companies doing drug development. With thousands of companies doing drug development, 10 is certainly a small sample size.
What about the small companies that have brought high-profile drugs to market that clearly didn't have the financial wherewithal to spend anywhere near $2.6 billion?
With all the concerns about academic conflicts of interest — especially with industry — I find it interesting that there is no financial disclosure in the Tufts press release for this study. I guess they did this without any pharmaceutical or biotechnology company funding, and the authors have no financial or other ties with pharmaceutical or biotech companies.
I'm as skeptical of this as I am of "the number."
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