Fact or Fiction – $1 Billion to Develop a Drug?
March 19th, 2013 // 3:29 pm @ jmpickett
FDA Hands Out CAPA 483s Like Candy
After years of debate over the cost of developing a drug, GlaxoSmithkline ceo has uttered a sentence that might resolve the issue once and for all – or reignite the argument. Speaking at a healthcare conference in London last week, Andrew Witty explained that the $1 billion cost to develop a drug, which is often cited as the reason why some medicines have high price tags, is actually “one of the great myths of the industry.â€
How is that? Well, $1 billion actually is an average figure that includes money spent on drugs that ultimately fail, he explained. And “if you stop failing so often, you massively reduce the cost of drug development… it’s why we are beginning to be able to price (drugs) lower,†he confided. “It’s entirely achievable that we can improve the efficiency of the industry and pass that forward in terms of reduced prices†(here is the story).
His remarks are gaining some notice, given that the pharmaceutical industry has long espoused the notion that the cost of drug development is always climbing. The industry explanation for the $1 billion figure – a staggering amount as far as critics are concerned – reflects a variety of expenses that are required to take a compound from its earliest stages to the medicine chest.
For instance, a report issued last December by Deloitte and Thomson Reuters determined that the average cost of successfully bringing a drug to market remained “relatively constant†at $1.14 bilion, an increase of 4 percent from $1.1 billion in 2010. And the internal rate of return fell to 7.2 percent, down from 10.5 percent two years earlier, which meant drugmakers were just about able to cover the cost of capital (here is a link to the report).
Just the same, the price tag has long been widely and wildly debated, especially after a piece was published two years ago in BioSocieites that claimed the median corporate cost to develop a new drug, on a net basis, was closer to $56 million at the time (read here). The analysis was a response to the oft-cited cost figures from the Tufts Center for the Study of Drug Development, which used confidential cost data for its estimates.
We recall many years ago how the former ceo of one large drugmaker once sketched out the different sides of the argument on a diner napkin and offered a similar assessment of the large, average cost figure, although he used the word “b…….,†not myth. The conversation was on background, so we cannot disclose identities, unfortunately. At the time, however, the pharmaceutical industry maintained the average cost to develop a drug was around $350 million.
Of course, some efforts do cost less than others. Whether Witty can succeed in lowering that average remains to be seen. As Derek Lowe points out, medicines are not widgets, so reducing expenses is a tricky business full of unpredictable outcomes. Moreover, drugmakers and biotechs are increasingly focused on new therapeutic categories, since these represent new opportunities that have not been mined.
Some may say an extreme example of this trend would be rare diseases, which give way to drugs that are granted orphan status and carry extremely high price tags to treat each patient for a year. Just the same, the pricing reflects a willingness among payers – public and private – to bear costs. And drugmakers know this. Granted, there is growing pressure in Europe to reduce prices, but the US has generally not yet acted in the same manner.
Witty may have made the right kind of noise by appealing to the denizens who argue over true development costs, but he has the same incentives as his rivals to raise, maintain or lower prices. And most likely, lower prices will occur in response to still more government pressure or perhaps competition. You know, if Pfizer cuts the prices of its widgets – we mean drugs – then maybe Glaxo (GSK) will do the same. Or maybe not.
