Biotech Values

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The price of failure - A startling new cost estimate for new medicines is met with scepticism
http://www.economist.com/news/business/21635005-startling-new-cost-estimate-new-medicines-met-scepticism-price-failure

IN THE pharmaceuticals business there are few issues more loaded than the cost of developing a new drug. For a number of years estimates from industry groups on either side of the Atlantic have put it at $1.2 billion-1.8 billion. A new study by the Centre for the Study of Drug Development at Tufts University in Massachusetts reckons the average cost for drugs developed between 1995 and 2007 was $2.6 billion. Among those rejecting this new figure as highly misleading are Médecins Sans Frontières, a charity, and the Union for Affordable Cancer Treatment, a patients’ group.

The main point of controversy over such estimates is that they roll in the costs of those drugs that failed to win approval and, for good measure, the cost of capital required for the R&D. Tufts’s estimate includes $1.2 billion for the return on capital forgone while a drug is in development, on the assumption it would have otherwise earned a generous 10.5% a year. The remaining $1.4 billion is the average R&D cost of a random selection of drugs, multiplied by risk factors that account for the chances of failure at each stage.

Successful drugs cost far less than even the lower, $1.4 billion figure. But the road to approvals is littered with casualties such as the $800m that Pfizer blew on torcetrapib, a potential treatment for high cholesterol, before giving up in 2006. Jeff Williams, the boss of Clinipace, a contract-research organisation, has said that the small to medium-sized drugs firms his company works for manage to get their candidate drugs through development for less than $500m.

Another criticism of Tufts’s work is that it is based on secret data provided by a self-selected group of drug companies. The Tufts study group gets much of its funding from the industry; it says the group’s members are independent academics. Another criticism is that although such estimates embrace all the risks of developing drugs, they say little of the rewards.

The industry inevitably quotes such figures whenever it is suffering criticism for the high price of patented drugs. James Love, the head of Knowledge Ecology International, a group that studies and comments on issues of social justice, says drugs giants have used these big estimates of average costs to try to talk developing countries like India out of breaking the patents on specific medicines that, in practice, cost a lot less to develop.

Joseph DiMasi, director of economic analysis at the Tufts centre, says the most useful aspect of the $2.6 billion figure in his study is that it is comparable with previous figures. In 2003 his centre put the cost of drug development at $802m. This implies that in real terms costs have risen by 145%. Mr DiMasi says the increase has been caused by larger and more complex trials, a greater focus on chronic and degenerative diseases, and higher failure rates.

However, the life-saving cancer drugs that feature in many of the most emotional disputes over pricing are far from typical. Regulators often pass them after far smaller clinical trials than for other, less urgent medicines, thereby greatly reducing the most costly element of their development. Such drugs are also likely to qualify for “orphan drug” tax credits—an issue the Tufts study does not consider. It may be that the average is being inflated by other types of new drug, such as psychotropics, which may be only a bit more effective than existing ones but require big, expensive trials to gain approval.

It is not only patients’ groups and aid charities that are sceptical about the startlingly high estimates for drug-development costs that are bandied about. The boss of one of the largest drugmakers, Sir Andrew Witty of GlaxoSmithKline, last year said that even when the industry talked of a figure as low as $1 billion, this was a “myth”. He said it was “entirely achievable” for drugmakers to make their research more efficient: “If you stop failing so often you massively reduce the cost of drug development.” Indeed, what patients and policymakers need to know is not what it does cost the industry to produce a new medicine, but what it ought to.