Cost of Developing a New Drug

By March 16, 2020 Commentary

Okay, so on to the last of the Journal of the American Medical Association articles on prescription drug issues, this one discussing what it costs to develop a new drug.   (JAMA Article)   Drug manufacturers have of course promulgated numbers that are very high and use those to justify exorbitant prices.  Part of the reason estimates vary widely, from around $300 million to $2.8 billion per drug, is that methods of calculating the costs for development are also very variable.  Drug manufacturers want to include the cost for failed drugs in the cost of those that are successful.  That obviously raises the costs significantly.  These researchers looked at development of new drugs approved between 2009 to 2018.  Publicly filed documents from public companies were largely used to ascertain development costs.  These authors did include costs for failed drugs, allocating those to successful ones based on a percentage of all drug candidates that ended up being approved method.  The costs get inflated by using a cost of capital rate on the actual cash outlays.  Personally, I think this is nonsense.  All that really matters is how much cash is actually paid out in research and development costs.  Whether or not you get a return on those costs is irrelevant, once you have made the decision to spend the cash.  If you are running your business correctly you will get a return, otherwise you are not being smart in spending the money in the first place.

In any event, the researchers developed a cost estimate for 63 drugs, with 23 of the estimates judged to be high quality.  The median cost was estimated at $319 million per drug and the average was $374 million.  Median costs were higher for biologics than for traditional drugs.  The average number of years to get to market was over 8.  If you include failed drugs, and the bizarre cost of capital calculation, the median goes up to $985 million and the average to $1336 million.  Taking out the capitalization alone decreases the average to $885 million.  Adding in potentially missed preclinical development costs raised the average to $2215 million.  I don’t believe that for a second.  The drug companies should voluntarily, and if they won’t do it voluntarily, should be forced to, disclose all their actual detailed costs for research and development, or they can just stop using these costs as a justification for excessive prices.  For many new biologics, such as cell and gene therapies, the FDA has dramatically reduced trial sizes and even the number of trials required, cutting development costs to a fraction of normal spending.  Yet these therapies are priced at truly astronomical levels.

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