Dec 05 2012
What does a new drug cost? Part II: The productivity problem
You are currently browsing comments. If you would like to return to the full story, you can read the full entry here: “What does a new drug cost? Part II: The productivity problem”.
20 Responses to “What does a new drug cost? Part II: The productivity problem”
Some of the newer drugs seem to be no more than serendipitous discoveries of beneficial side-effects. I was recently prescribed such a drug (eye drops) for dryness that only works for about a third of people. My insurance declined coverage and I can’t really say I disagree with them, although I would like to have tried it to see if I was one of the “lucky” users. I thought of paying myself, but the cost would be hundreds of dollars per month–for eyedrops that were found to help some people only because of reported side effects (at least that is what the ophthalmologist told me).
I found, on balance, that I could manage with the OTC products. But if my insurance had paid, I would have been oblivious to the cost of this drug. I shudder to think what such ignorance does to medical costs. For the first time I have some sympathy for insurance companies (but not much). I realize there were costs involved in the development of the original drug, and that the drug company is trying to recoup some of that money, but still…
This is an interesting problem and likely to become increasingly vexing as time goes on. The high cost of developing and bringing a new drug to market incentivizes companies to spend most of their resources pursuing and promoting drugs that have the potential to be blockbusters. The other side of this coin is that absent the promise of substantial payoff, development of a drug is likely to be terminated early in the process. This does not bode well for the treatment of diseases that are neither true orphans nor widespread maladies.
I find the figures confusing. For example
Oops, something went wrong with blockquote.
It seems to me the most likely explanation for at least part of the decline in productivity is that the easy targets have already been hit. We learned a huge amount about biochemistry and cell biology and hormone and cytokine regulation, genetics, in the latter half of the 20th Century, and we’ve reaped benefits. But now we’re getting into much more complicated territory where discoveries are narrower and the complexity of systems makes intervention more perilous. No telling whether the trend will reverse — maybe some line of inquiry will open up a new cornucopia — but at least it appears to me that new molecular entities will have narrower targets.
Look at cancer. We used to talk about “curing cancer” but now we know it’s a thousand different phenomena of genetic abnormalities. We’re finding effective new drugs, but they only work for a small number of people.
@cervantes
” it appears to me that new molecular entities will have narrower targets. ”
And this, I think, is part of the rub. Costs of development are high and getting higher. But the burgeoning cost of health care is bringing resistance to high priced therapies. When those factors collide with a small potential patient population a drug company is unlikely to make the investment.
Don’t forget that because the drug industry is profit driven and has large upfront costs, it can’t work without monopoly power to prevent copying. If a potential drug cannot be patented and competition prevented, and monopoly pricing assured, then a drug cannot be a good investment.
Because drug producers only make profit when they sell the drug, there is a large disincentive to restricting sales. This is why the largest use of antibiotics is in animal feed. Once an antibiotic becomes generic and anyone can produce and sell it, there is no incentive to not induce bacterial resistance to it.
If the drug producer has higher priced non-generic drugs that are effective, the continued effectiveness of a generic competitor hurts sales and profits. When an antibiotic goes off patent, the plant that produces it has already been paid for and can produce it very cheaply. Because it is now generic it will never produce high blockbuster profits. It makes good business sense to “kill” the now generic drug by having widespread resistance so that different higher priced (and higher profit) antibiotics must be used instead.
Don’t blame the pharmaceutical companies that do this, they are only acting rationally given the incentives that the laws and the marketplace produce.
Lots of problems, definitely. But no really evident way to make it any better. If I might bastardize some Churchill, “Big Pharma is the worst way to produce new medications, except all the others which have been tried.”
An e-mail correspondent said the medical system is flawed and tarnished by greed. Yes, it is. But the diet supplement industry and CAM in general are even more flawed and tarnished. Why reject a flawed system only to replace it with one that is even more flawed?
“An e-mail correspondent said the medical system is flawed and tarnished by greed.”
As opposed to the financial services industry. Or, for that matter, politics. Neither whining about the tawdry greed nor minimizing it by comparison with the even tawdrier resolves the problem.
Picking up on Daedalus’:”Don’t blame the pharmaceutical companies that do this, they are only acting rationally given the incentives that the laws and the marketplace produce,” one is forced to wonder whether the purely capitalist model* is the best model for pharmaceuticals.
In 2010 prescription drugs accounted for 10% of total US health care spending** and was growing at a much slower rate than any other category. Hospital care accounted for 31% of spending and physician services for a bit under 20%.
*Suggesting that pharmaceuticals currently follow a purely capitalist model is probably misleading. A good deal of research is funded with federal dollars. Further, pharmaceuticals operate in a highly regulated environment that further distorts normal marketplace relationships.
** http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/downloads/highlights.pdf
@Dr. Hall: Someone made the same argument to me on Facebook. But if we are going to talk about medicine and CAMs in terms of profit motive, that is to say in the rhetoric of free market economics, then CAMs are just as suspect and capitalistic as medicine (my interlocutors were discussing medicine in the context of capitalism). Even without taking science into consideration, I would much rather side with medicine (done well) than with CAMs. Medicine is heavily regulated. Those regulations tend to be consistent in developed countries. And medicine is also governed by a consistent code of deontology. CAMs are not.
Okay, I feel I keep repeating the same things over and over again…
I worked for Upjohn in R&D for awhile. There I learned that over a third of drug candidates die early in the pipeline due to cardiac effects, as tested in myocyte cell lines. If exposure produces changes in contractility or other issues, then further development is terminated. The potential risk of taking such a drug into humans, even if it turns out to be an artifact, is something that companies simply don’t wish to risk, for good or bad. I do think that risk-aversion is huge in the industry, and this drives up costs simply because of the number of leads that fall by the wayside.
For awhile we had “targeted drug design” and the idea that advances in protein structure analysis would accelerate drug discovery. A strategy now known as “methyl, ethyl, butyl, futile.”
It’s a real problem. I’m so glad I took the permanent job in academia instead of pharmaceuticals. It was easier to get tenure than to stay employed in pharma. Saw too many leads get canned, along with the teams who developed them. Upon reflection, perhaps this is another problem with the field – lack of long-term investment in the scientists who develop the drugs.
The classic way to deal with monopoly power is through regulation. Drug manufacturers need to have monopoly power to justify investment in R&D, that monopoly power needs to be more effectively regulated on both ends.
Electric utilities are regulated monopolies. There isn’t any new technology (essentially) in bulk power generation that utilities develop. Equipment suppliers may develop new technology and new equipment, but utilities themselves don’t.
I think the problem is mainly a US problem. The US is something like 40% of the world market for drugs. A lot of the reason for that is the extremely expensive US health care system where Medicare doesn’t negotiate reduced prices for drugs (by law). The big drug companies tolerate the byzantine FDA regulations because they are an effective barrier to entry.
I think it is similar to US military procurement. The US spends about half the worlds total military budget. You could use the same type of system for drug discovery and production. The advantage of a government owned and controlled drug discovery and development system is that once drugs are found that work, there wouldn’t be the incentive to over sell them and then make them obsolete. The problem with government sponsored and controlled R&D is that congress will want to micromanage it based on what lobbyists tell them and who their donors are. That is the problem that NASA has. They are micromanaged by Congress, and then the NASA managers micromanage people down the food chain.
The way to deal with that is with competition, but raw competition allows for gaming the system. Not following FDA regulations is an example of gaming the system. Billion dollar fines are not enough to prevent pharma companies from gaming the system. People have to go to jail, otherwise it is just a cost of doing business.
Pass laws that if FDA regulations are not followed, and people are harmed, the senior management of the company gets charged with criminal violations, assault, manslaughter, wrongful death. But then, management one step below where criminal liability stops will game the system.
Daedalus said, “Pass laws that if FDA regulations are not followed, and people are harmed, the senior management of the company gets charged with criminal violations…”
I enthusiastically agree. But it seems unlikely that Congress will.
The financial services industry drove the world economy to the brink of collapse yet there have been essentially zero successful criminal prosecutions. Even Jon Corzine who presided over the recent collapse of MF Global and the loss of billions in supposedly sequestered investor funds is contemplating a return to political office rather than a long stretch in a federal penitentiary. This says far more about the power of Wall Street to shape legislation that fits its desires than the lack of culpability of the ‘lords of the universe’.
A Congress that is scientifically illiterate and easily swayed by any group with a fat checkbook and a table at the Old Ebbitt Grill is unlikely to pen legislation that will jail their benefactors.
But continuing with Daedalus’ argument favoring a public hand in pharmaceuticals, it wouldn’t be too difficult to set up a not-for-profit manufacturing operation (or even a GSE) for drugs that are off patent, then expand that to include new drug discoveries coming out of government-funded research.
I also ponder Jan’s question. Are the costs being averaged out or are they talking about a single product?
I work in biotech, and if I didn’t see the financials I’d have a hard time believing how much money we burn through for R&D and then manufacturing any approved projects. For example, the amount and cost of water to make biotech products is inconceivable to the average Joe. I’m not sure there are many businesses that can survive burning through so much money. If our profit wasn’t so high we wouldn’t even be able to produce the products that are approved. Most biotechs in this area fold–it’s rare to find that flagship drug that finances all future endeavors.
My company has many products in the pipeline, but many of those products won’t make it past clinical. We might get one or two products out of hundreds. However, for a drug to get to market, we still need to manufacture the products for clinical trials with all the cost that entails. Nothing sucks more than to get a drug all the way to phase 3 and have an issue with the product. That’s many many hours of work literally down the drain.
It is so, so easy to confuse the question “How much does it cost to develop a drug?” with the similar question “how much did it cost to devlop THIS drug?” The latter is fairly easy to answer–it is the total that was spent to get THIS drug to market. It even might be used to justify the cost of THIS drug to the patient.
The first question invites folks to include the costs of failures, etc. That cost can be a bottomless pit, and is very poorly defined. It is tempting just to put the R&D budget in there. That might give you the cost to develop an “average” drug (whatever that is), but its relevance is not immediately apparent.
@Jan: Here is a more detailed explanation from the paper:
There was a decreasing number of observations in each interval, as would be expected. For each interval, they calculated the mean, median, max, min and Sdev for all drugs they had data on. They multiplied the mean cost in each interval times the number of compounds that historically had to make it into that interval in order for a single drug to make it to market. (ref: pg 34+)
But what does the 899 million dollar stand for? Estimated average total R&D costs (including those of all dead ends) per marketed product?
The phrase
is simply not clear enough to me, even though in the two previous sentences the words ‘single drug’ and ‘average ‘ occur.
Assuming this figure to be indeed per marketed product, one can imagine the annoyance of a pharmaceutical company when someone comes along and blames them for the high price of a product that can be easily synthesized.
I don’t quite understand how 0.9 billion becomes 1.5 billion. I seems to rely on roughly the following argument: A pharmaceutical company A spends 0.9 billion cash with as result just 1 marketed product. The management wants to know how much money they (i.e. the management) would have had if they hadn’t spent it on their own research. Of course they wouldn’t have put all the cash in some kind of vault, but they would have invested it, for example in buying stocks of pharmaceutical company B* (which is spending money in actual research). So the 1.5 billion represents a share of the company’s value based on how the public (the stock buying public) perceives the future earning capacity of the company based on their track record, or maybe of an average pharma company. This future earning capacity is partly based on the prices the company can ask for their new products. Actually the amount spent on PR is probably much more, and all this spending on PR is ultimately paid for by the consumers.
Somehow it doesn’t seem fair to mark this extra 0.6 billion as R&D costs. The 1.5 billion is the amount by which a company’s total value on the stockmarket increases (annual dividends included) which can be assigned to their R&D effort if you use a proportional** method of assignment. Spend 0.9 billion to increase your value to 1.5 billion. If it’s true then medicines are overpriced. A hefty amount of each new drug’s price is (A) for the cost of getting the patient to use it and (B) for satisfying the monetary desires of the shareholders.
I don’t claim any originality for the above. It is just my rendering of a part of Ben Goldacre’s Bad Pharma.
* Maybe the management thinks about investing in some other lucrative business such as Enron or subprime mortgages, but let’s not assume that.
** But why should you? If a company spends 1 billion in R&D and 2 billion in PR, and 3 billion in other costs why should the increase in a company’s worth be allotted in a ratio of 1:2:3 to each of these? Why do any allotting at all?
@Jan Willem Nienhuys and the cost of money:
I think you are looking at two different questions when you are comparing 0.9 billion to 1.5 billion for research costs. It is rather like looking at housing – are you asking the question “how much does a house cost”, or the question “how much does a family have to pay for housing if they buy a house?” The first question you can answer simply by looking at the real estate section of the local newspaper; the second question requires you to consider the cost of a mortgage with interest and upfront costs, upkeep on the house, insurance, taxes, requirements to comply with housing codes or any homeowner associations, and so on. The question of how much the homeowner gets when he sells the house is also pretty much fixed at the selling price. How much profit he makes from buying to selling the house, however, depends very much on how you calculate how much he paid for the house – do you include just the buying cost, or do you include all the maney that was put into the house, while trying to subtract the money he would have spent on housing if he didn’t own a house? And which costs get included?
Likewise, it is fairly easy to calculate how much money a company makes from selling a drug; just look at prices and volumes. Trying to decide which costs should be included when you are trying to calculate how much the company spent to make the drug is much more difficult. The money that gets spent upfront to develop a product is not cheap, especially when it has to be spent so many years before the success of the project will become obvious.
fledamus:
My remarks also apply to the following:
(my emphasis)
The 11% interest sounds plausible, because when the expenditures for a single drug are increasing (a full scale Phase III trial is more expensive than lab tests) then the overall result of investing the same amounts in the given 11.5 year may yield a final amount that is 65% higher than the total of the cash invested. I maintain that this a strange way of computing, because instead of investing elsewhere in drug development they could also invest in themselves, namely by paying for their own research – which is what they actually do – and then the investment’s yield is a function of the money earned by one’s own research. The money earned is payed as dividend to the shareholders, and together with the current interest rate and the prospects of the company this in its turn determines the market value of the shares.
I am not an economist, but counting the revenue of what you invest in your own business as expenses seems seriously wrong. The comparison with a house and a mortgage is faulty. A house is not a means of production, and pharmaceutical companies don’t have to borrow money for their research. They pay for their research (and their PR and their production facilities) with the money they earn from those activities.