Drug Companies Overestimate Cost Of Developing A New Drug By Merely $1.26 Billion

from the and-there-you-go dept

Wed, Mar 30th 2011 8:07am — Mike Masnick

It's one of those numbers that comes up every single time we talk about the pharma industry: the claim that it costs $1.3 billion for pharma companies to develop a new drug. In fact, in our recent discussion on the FDA banning drugs that have been on the market for decades, it didn't take someone long to toss out such a number (they used $1.2 billion, but $1.3 billion is the "standard" these days -- just a few years after it was $800 million). Of course, every time people point this number out, I point to the excellent research by Merrill Goozner who did a massively thorough debunking of the $800 million number seven years ago, showing that the true number was closer to $35 million.

And yet, the $800 million number has lived on, boosted by inflation to $1.3 billion.

And it's still bunk. Gerd Leonhard points us to some new research that appears to have dug deeper into the question today, and found (once again) that the $1.3 billion claim is total bunk and the real number is more like $55 million -- based on the same data used by the study used to support the $1.3 billion number. In fact, they point out that it appears the pharma industry and those seeking greater protectionism appear to be overestimating the actual cost of drug development by $1.265 billion.

Now, there are some reasonable quibbles with the lower number as well, but there's a growing body of evidence that the real number is a lot closer to the lower one than the higher one. There are certainly some outliers, but the idea that the average cost to develop a new drug is over a billion dollars, and therefore pharma companies need special extra protection is bunk and certainly shouldn't be cited any more.

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Filed Under: costs, development, drugs, patents

40 Comments

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Joe Publius (profile), 30 Mar 2011 @ 8:16am

Whaaa?
A large corportation fudging the numbers so they can use that as leverage to make more money?

Never!

I love free enterprise quite a bit, but at the same time, I've never been without a healthy dose of skepicism whenever a business pleads poverty, but somehow continues to stay in business and make a profit.
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Yogi, 30 Mar 2011 @ 8:26am

America
America, the land of the bravely corrupt, and the morally free.
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Paul (profile), 30 Mar 2011 @ 8:45am

Let's just try something...
Actually, the 1.3 billion dollar figure fails even the most basic sniff test. Let's suppose there are 5000 or so drugs on the market right now.

Are you really going to claim that the industry spent 65 *TRILLION* dollars getting them there?

Hogwash. Maybe *some* drug was expensive somewhere along the line, but there isn't any possible way this is the typical cost of any drug.
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Anonymous Coward, 30 Mar 2011 @ 8:54am

I love this part
"half the Tufts Center group's estimate was the "cost of capital," i.e., revenue foregone by not taking the money spent on R&D and investing it in securities instead."

That $20 box of bagels cost them $348 (invested at 10% growth for 30 years).
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Trails (profile), 30 Mar 2011 @ 8:57am

Math
1.3 billion - 55 million = 1.245 billion.

Mike, have you overestimated their underestimation by 20 million or am I missing something?

Not that this affects the point, overestimating by 1.245 billion is just as ridiculous, just wondering.
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Trails (profile), 30 Mar 2011 @ 8:59am

Re: I love this part
That hilarious.

One could then claim the cost of securities to be ludicrously high because you aren't using that money to develop and sell pharmaceuticals.
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Planespotter (profile), 30 Mar 2011 @ 9:05am

Re: Math
No Mikes maths haven't failed...

"they point out that it appears the pharma industry and those seeking greater protectionism appear to be overestimating the actual cost of drug development by $1.265 billion"

The reports shows that as some form of average amount.
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pharmaphollower (profile), 30 Mar 2011 @ 9:06am

Whole picture
I think if you take a myopic view and say "how much did it cost to develop this particular drug" you probably do get a much smaller number. But I think you would find the number is a lot higher if you factor in the cost of all the development and trials of candidates that never make it to market, and you have to do that to get a fair number. I don't agree with adding opportunity cost, but asking how much it cost to develop just one drug is just as wrong.
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someone (profile), 30 Mar 2011 @ 9:14am

Management needs paid too!
Board of directors salary/bonuses: $1.245 billion
Research and Development costs : $55 million
Cost for developing new drugs: $1.3 billion
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Anonymous Coward, 30 Mar 2011 @ 9:17am

It take 1 billion to pay off the politicians who provide all that protection.
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Michael, 30 Mar 2011 @ 9:28am

Re:
If we have learned anything in the past couple of years it is that US politicians are considerably less expensive than your number suggests.
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d_mat (profile), 30 Mar 2011 @ 9:28am

What budget?
While I'm not surprised by fudged numbers, that is one of the biggest discrepancies I've ever seen. Does the music industry even get close?

But what I am really interested in is how they might come up with such a number. Sure, a lot of lab work might not lead to specific products, but how much of that are studies showing the drugs don't have the effect we're paying for? I wouldn't mention those if I were them, considering someone might start looking.

There is one glaring omission here though. A large portion of the research that goes into these products still happens in universities and is funded, at least in part, by taxes. If they are including that in the cost, and I wouldn't put it past them, then that would explain the "discrepancy". Of course, that would not make the number right, it would just make it a double deception: the taxpayer twice, once for the research, and once for the product!
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brad tittle, 30 Mar 2011 @ 9:33am

Reference Frames
@Whole Picture has it right. When we are asked to compile costs ALL of the costs are brought to the table however we can make them. This goes for any negotiation at any level. "Look see how good we did, if you look at it this way".

I quite literally plotted the second derivative of our sales volume, so my boss could show an upward slope. What that upward slope actually meant was "We are getting worse more slowly."

This represented my first lesson in "don't believe management charts, because most managers don't understand WTF they mean!"
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Joe, 30 Mar 2011 @ 9:38am

Re: Let's just try something...
That is a great way to look at this. Keep in mind that the entire GDP of the United States in 2009 was only $14.1 trillion.

http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_mktp_cd&idim=country:USA& amp;dl=en&hl=en&q=united+states+gdp
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Anonymous Coward, 30 Mar 2011 @ 9:43am

This is the CBO's take on what is discussed here:

http://www.cbo.gov/doc.cfm?index=7615
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DCL, 30 Mar 2011 @ 9:56am

Think of the children!!!!
If the Gov't doesn't' protect the drug companies the children of the executives will only be getting low end BMW's not M3's. And they may actually have to go to a less expensive Ivy League school and not drink top shelf alcohol.

And because those kids are not spending all that money and not tipping as well and getting their cars detailed every week the folks that serve them the alcohol in bars and wash their cars won't be able to afford the overly priced drugs they need to have a decent life!!

Come on people! it will be a horrific painful death spiral for America if we don't save the drug companies! Bail them out for $2 Billion right away!!!

The horror!

That was sarcasm.... or was it an actual Lobbyist speech?!?!?!
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Anonymous Coward, 30 Mar 2011 @ 10:02am

Only a small small fraction of potential drug candidates ever get close to market. Most of research R&D money goes to prove what is not possible (or rule a particular strategy or compound out). It's spinning the reels on Nature's slot machine, and gambling costs money. You will rarely (sometimes never) hit a jackpot of a sellable drug even after spending hundreds of millions. That's life.
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Trails (profile), 30 Mar 2011 @ 10:11am

Re: Re: Math
RTFA FTW!

Thanks Planespotter.
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Joe Publius (profile), 30 Mar 2011 @ 11:36am

Re: Re: Re: Math
Bonitis acting up?
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Mike Masnick (profile), 30 Mar 2011 @ 11:40am

Re: Whole picture
I think if you take a myopic view and say "how much did it cost to develop this particular drug" you probably do get a much smaller number. But I think you would find the number is a lot higher if you factor in the cost of all the development and trials of candidates that never make it to market, and you have to do that to get a fair number

The numbers include the cost of failures.
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Anonymous Coward, 30 Mar 2011 @ 11:47am

Re:
I call shenanigans on this. I would place a very large wager that most current pharmaceuticals are merely derivatives of other, older drugs that have been R&D'ed, Tested, released, and lost patent - then are reformulated and re-released under a new name.
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Anonymous Coward, 30 Mar 2011 @ 11:53am

While I don't believe the $1.2 billion number the corporations are throwing around, the warburton study that slate wrote about is equally flawed. The truth is the number is somewhere in between.

In fact, Warburton herself admitted as such. When called on it, she backtracked and said that her figures only included the "D" part of R&D. Something no one really picked up on:

http://pipeline.corante.com/archives/2011/03/08/that_43_million_rd_figure.php

Probably a more interesting site than the slate article after that came out, one blog had some reader involved in pharm crowdsource their R&D numbers:

http://lifescivc.com/2011/03/choose-your-own-numbers-crowdsourcing-the-cost-to-produce-a -new-drug/

with a couple models putting the figure between 300 million and 1.6 billion. Probably closer to reality.
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MAC, 30 Mar 2011 @ 1:25pm

Drug over costs...
As a survivor of a massive Mercer infection brought about by a brown recluse bite I can tell you about high drug costs.

My doctor gave me an antibiotic (one of the very few) that is effective against Mercer. It costs $1000 for 20 pills. That's 50 bucks a pill.

If it weren't for a government program to subsidise this cost I would have died.

I cannot fathom the reasoning behind charging so much for medicine that is one of the few lines of defense against a major epidemic in this country. And yeah, Mercer is an epidemic...
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Revi (profile), 30 Mar 2011 @ 1:26pm

This is just the drug companies' usual markup practice. Isn't the usual price of a drug 2300% of what it takes to produce?
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MAC, 30 Mar 2011 @ 1:29pm

Re: Re: Whole picture
If that's the case then they wasted their money on the trials.

Why, look at all the 'new' drugs that are worse than the symptoms and diseases that they are supposed alleviate.

It's kinda like marijuana and cancer.
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vastrightwing, 30 Mar 2011 @ 1:30pm

Embellish to deceive
This reminds me back when it's was popular to tout there were over 3 million homeless people and it was a travesty. Turns out this was made up. I can't remember how that magic number was arrived at. It's well known that in order to make a case and lie, you need to use made up stats that no one can easily verify. The R&D numbers are hard to verify and the number of homeless people also is hard to verify. The PRESS certainly is not known for its facts; right Mike Barnicle and Jayson Blair? This is why the internet is such a threat to "real" journalists: they get called out on their made up "facts". The only fact you can believe when reading most main stream stories is that very little fact checking went on and the reporter parroted what ever someone told him. Yea, he might have done a little internet checking, but that's about it.
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Trails (profile), 30 Mar 2011 @ 2:38pm

Re: Re: Re: Re: Math
Don't you worry about my Bonitis, let me worry about blank.
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Lawrence D'Oliveiro, 30 Mar 2011 @ 3:30pm

Real Pharmaceuticals Costs
That $1.2-1.3 billion range of figures is most likely lumping in promotion and distribution costs, which are the lion�s share of the costs to the pharmaceutical companies.

As should be obvious to everyone by now, R&D is only a tiny part of the budget of the drugs firms. Yet people always seem to be surprised when this is pointed out.
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Any Mouse (profile), 30 Mar 2011 @ 5:46pm

Re: Drug over costs...
Slight correction: It's MRSA, short for Methicillin-resistant Staphylococcus aureus.
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Anonymous Coward, 30 Mar 2011 @ 7:08pm

I believe the report underestimates the cost of clinical trials, but I agree that cost of capital is a bogus figure in terms of costs. One thing to keep in mind though is that the shareholders do look at the cost of capital. Do I buy Pfizer stock or do I buy Apple?

One way to look at it is for J&J. Wanna guess how long it has been since J&J has actually brought a drug to market? (without having to buy another company for their drug) It is over 10 years now. So you could factually state that they average cost of R&D to NDA's J&J can't be calculated because the success rate is zero. I am pretty sure they have spent over $1.2 billion over all those years.

Costs for pharma are not in the development of the drug but the testing (clinical trials) of the drug, because that involves people and the FDA are requiring more and more people be included in the trials.

Tell the truth, pharma wants to determine faster and faster which drug suspects to kill, there is nothing worse than seeing a Phase 3 drug be cancelled when it could have been killed in Phase 1 or 2.

As for letting the govt. bring a drug to market, good luck with that one.
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oleginger, 30 Mar 2011 @ 11:29pm

looking at both sides
For the sake of open discussion you may want to take a look at arguments why the quoted calculation model is flawed:
http://pipeline.corante.com/archives/2011/03/07/the_costs_of_drug_research_beginning_a_rebu ttal.php
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The eejit (profile), 31 Mar 2011 @ 3:00am

Re: Re: Drug over costs...
MErcer is the phonetics of the acronym, FYI. :)
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The eejit (profile), 31 Mar 2011 @ 3:02am

Re:
I'd argue that the firgure of $500-600mil is accurate - the rest is marketing, which is clearly a part of development.[/sarc]
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The Devil's Coachman (profile), 31 Mar 2011 @ 6:05am

Re: America
Hey, everyone seems to like it that way!
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The Devil's Coachman (profile), 31 Mar 2011 @ 6:07am

Re: Management needs paid too!
That sounds about right
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Mark Atwood, 31 Mar 2011 @ 10:04am

Go read "In The Pipeline"
This was analyzed and firmly debunked over at the blog "In The Pipeline".
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Gene Cavanaugh, 31 Mar 2011 @ 9:45pm

Pharma drug development costs
Well done, Mike!

Perhaps sometime you could also expose how much drug development uses taxpayer money?
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Anonymous Coward, 1 Apr 2011 @ 7:40am

While taxpayer money is used for drug development, those costs (outside of funds used to purchase rights to those drugs) are not included in the pharma R&D estimations.
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YouDirtyMind1, 23 Aug 2012 @ 9:44pm

Re: Drug over costs...
Not that I'm doubting your post, but there's no such ailment as "Mercer". If you did, in fact, have a brown recluse bite, the related infection you may be referring to is probably MRSA, an abbreviation sometimes pronounced "mursa". Maybe it was someone you knew who had this bite? Anyway, $1000 is a small amount to pay to save your life. Vancomycin is a preferred way to treat MRSA, and does indeed cost almost as much as you say. However, you would not have died if you didn't have the money. You would have either been subsidized (as you were) or given an alternative to that medication.

Still, your point is taken. But it doesn't diminish how much it costs the pharma company to develop a drug like vancomycin that can treat drug-resistant bacterial strains. So the reasoning for charging that much is that it's expensive to make. Not understanding the reasoning for that is like saying you don't know why all cars aren't $250. After all, many people need them to survive...
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Nunc, 28 Jan 2015 @ 8:02am

Compare it with Tech
Looking at successful projects and then concluding they're making too much money is ridiculous.

"Hey let's look at the cost structure of Candy Crush and from that make assumptions of the whole market"

"We also included King's not-so-succesful Bubble Witch Saga game. Now we have the real cost of making games."

"We even compared with other companies like Supercell and their Clash of clans, Boom beach etc. Now that we have done this we have the real cost of making a game"

ALL WRONG. You have to look at the whole market, including players who aren't playing anymore. Companies like Facebook, Apple, Google, Microsoft & Yahoo are all dependent on acqhires and support an enormous economy of startups whose only value is a potential takeover. 10-person startups that just try it a few years before their parents money runs out.

It's just like that in the pharmaceutical industry. A smaller firm like Pharming has run a loss of 10-55 million per year for >15 years straight. The potential of a takeover by Big Pharma is basically the reason Pharming still exists.

In a market where CHANCE is a big factor we have seen the same model develop twice. Both in pharma and the internet we see that a few massive and highly profitable businesses are the anchor for a high-risk/reward cloud of small firms. Killing the profitability of Big Pharma may not be wise if you're interesting in new developments.
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