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Drug Development: A White Elephant for Pharmaceutical Companies

Maria Thompson on January 8, 2013

Scientist’s Kevin Lustig recently blogged on mendelspod, explaining how the cost of drug development for pharmaceutical companies often leads to heated debates, with studies offering differing estimates and wide ranges of numbers.

Drug Development: the white elephant

Among the numerous studies that examine such costs, a high profile study from the Tufts Center for the Study of Drug Development estimated the cost of making a single drug to be $802 million in the year 2000.1 This translates into $1 billion for every drug in terms of 2011 dollars after adjusting for inflation. This number has proven to be highly contentious and has often been challenged as a case of the pharmaceutical industry overstating costs to justify high drug prices. In one such study,2 researchers at the University of Medicine and Dentistry of New Jersey argue that actual drug development costs are much lower (~$55 million) than the $802 million that the Tufts study suggests. On the other hand, a recent article in Forbes asserts that the figure ($802 billion) is not accurate since the actual costs are far higher.3 Here, the author demonstrates that the average cost of drug development is at least $4 billion and in some cases, as high as $11 billion. This apparent disparity among different studies is primarily because most studies, while calculating drug development costs, do not adjust for current failures rates.

Using a different approach, the Forbes article calculates the amount of money spent for every new drug, based on the number of drugs approved over a period of time and the total R&D costs over the same period. This analysis takes into account costs over a 15-year period and thus, prevents biases arising from short-term changes in budgets or expenses. Accounting for inflation, their analysis shows a dramatic $3.7 billion/drug cost for Amgen on the lower end to a mind-boggling $12 billion/drug for AstraZeneca. All major pharmaceutical companies lie within this broad cost range for drug development. These astronomical expenses include, among other factors:

  • Preclinical development (including biology and chemistry)
  • Clinical development – May cost $300-$450 million
  • Regulatory expenses – More stringent regulatory environment
  • Manufacturing costs

However, the biggest burden on the wallet is the abysmal success rate in drug development. Less than 10% of the drugs brought into clinical trials succeed. This number is far lower when considering all the compounds in early development that make it all the way through to clinical trials and beyond. Moreover, to develop a drug and bring it to the market can be a lengthy process and in some cases, may take as long as nine years.4 This prolonged drug development timeline further hurts the cost analysis. In addition to the current high expenses, drug development costs are further increasing at a rate 7.4% every year, over price inflation.1

Together, these factors are driving pharmaceutical companies to a point where drug development is becoming difficult to sustain in its current format. The worst-case scenario as a result of increasing costs may be a situation that entirely discourages and drives big pharmaceutical companies away from innovation. Another major consequence may be a shift in the approach of pharmaceutical companies to develop only those drugs that are likely to yield high annual sales and in turn, high profit margins.5 The latter may necessitate companies to stick to programs in areas that are clinically and hence financially viable, such as chronic conditions (diabetes, hypertension etc.) with large patient populations. As a corollary, this would require pharmaceutical companies to abandon drug development for novel and risky targets and this in all likelihood would encompass most unmet medical needs, including rare diseases.

According to Bernard Munos, industry thought leader and founder of InnoThink. “The industry faces a triple challenge: we need more innovation, we need better innovation, and we need affordable innovation. We need to successfully address the triple challenge if we are to secure our future.”6

To overcome this vicious innovation-stifling circle, expenses need to be streamlined and the process of drug development needs to be made efficient and cost effective. Newer business models are necessary and are already being tested, for example, selective outsourcing, or Network research models. Bernard Munos again: “Network research models are very cost-effective; their economics are very compelling.”6

An increasing number of companies are using functional service providers like contract research organizations, which helps conserve and prioritize resources. This so-called fully integrated pharmaceutical network4 will help maintain leaner resources, lower drug costs and make drug development economically viable for pharmaceutical companies. In addition, the rapid development in science and technology, including advancements in the field of “-omics” will improve research models. These changes will likely be reflected in terms of increased speed of drug discovery and lower costs of drug development to companies. To paraphrase a quote from the Forbes article, “We can only hope that newer, efficient business models along with new technologies and a better understanding of biology will turn things around for the pharmaceutical world.”

  1. DiMasi JA, Hansen RW and Grabowski HG. (2003) The price of innovation: new estimates of drug development costs. Journal of Health Economics, 22(2), 151-185 (PMID: 12606142).
  2. Light DW and Warburton RN (2005) Extraordinary claims require extraordinary evidence. Journal of Health Economics, 24(5), 1030-1033 (PMID: 16087260).
  3. Matthew Herper (2012) The Truly Staggering Cost of Inventing New Drugs. Forbes.
  4. Kaitin KI (2010) Deconstructing the drug development process: the new face of innovation. Clinical Pharmacology & Therapeutics, 87(3), 356-361 (PMID: 20130565).
  5. Rawlins MD (2004) Cutting The Cost Of Drug Development? Nature Reviews Drug Discovery, 3(4), 360-364 (PMID: 15060531).
  6. Hassan Masum (2012) Insider Views of Collaborative R&D for Health: Q&A with Bernard Munos. Center for Global Health R&D Policy Assessment