How Expensive Is Drug Innovation?

High prices for patented drugs are quite often attributed to the exorbitant cost of drug innovation, by the global pharma players. This argument is played, replayed again, again… and again by them, in various ways and forms, especially when many eyebrows are raised, failing to fathom the primary reason for ever escalating prices of life-saving new drugs.       

I find the same argument often getting echoed by some section of both the global and local media too, and also through some cleverly disguised and apparently sponsored articles on the subject. 

In this article I shall dwell on this sensitive issue.

A strong justification: 

The Institute for Policy Innovation (IPI) based in Texas in the United States, in an article titled “The High Cost of Inventing New Drugs–And of Not Inventing Them”, published on April 16, 2015 reiterated that the financial cost of developing new drugs is indeed a big one.

It argues that “there is also a big cost to not developing new drugs, and that cost can be both financial and human. People may be able to live with the pain that an undiscovered drug might have alleviated, but they may not be able to do all the things they would have.”

The paper asks, “A cancer patient might still have a few productive years after a diagnosis, but how much would it be worth to the patient—and to society (think Steve Jobs), if a new drug could extend a patient’s life indefinitely?”

“The drug manufacturers poured money into finding a treatment for AIDS once it became clear the disease would take thousands of lives. The research and development was costly and didn’t emerge overnight, but being diagnosed with AIDS is no longer a death sentence,” the authors elucidated.

This is a very cogent argument, and nobody would dispute it. This issue lies somewhere else, as I would try to explore in this article.

The supporting data: 

We also find supporting published data to justify the high cost of innovation with numbers.

On November 18, 2014, a new study by the ‘Tufts Center for the Study of Drug Development’ highlighted that developing a new prescription medicine and gaining its marketing approval, which is a process often lasting longer than a decade, is estimated to cost US$ 2,558 million.” This number is indeed mind boggling by any yardstick.

While many details of the study remain a secret, only slightly more than half of this cost is directly related to research and development (R&D). For example, US$ 1.2 billion are “time costs” – returns that investors might have made if their money wasn’t tied up in developing a particular drug.

Not many takers:

Besides the above reason, for several other factors, there does not seem to be many takers for this exorbitant cost of innovation and bringing a new drug to the market.

The above study has become a contentious one and has, therefore, been challenged by many experts. I would give here just one example, out of many, from a highly credible source.

May 14, 2015 issue of ‘The New England Journal of Medicine’ questioned the methods used to generate the US $ 2.6 billion figure and raised the following interesting points in the above Tufts Center study: 

  • The analysis was based on data that 10 unnamed drug makers provided on 106 unnamed investigational compounds that they had “self-originated.”
  • The raw numbers on which the analysis is based are not available for transparent review, and are likely never to be divulged. 
  • Since a balanced assessment would have to take into account the costs of failures as well as successes, it is hard to evaluate the key assumption that more than 80 percent of new compounds are abandoned at some point during their development, which is a key driver of the findings.
  • Nearly half the total cost of developing a new drug (US$ 1.2 billion) was ascribed to this cost of capital, with only US$ 1.4 billion attributed to the funds actually spent on research. These capital costs were assessed at 10.6 percent per year, compounded, despite the fact that bonds issued by drug companies often pay only 1 to 5 percent.
  • In terms of access to capital, it’s interesting to note that large drug makers are among the U.S. firms with the highest amounts of profits held overseas. Two pharmaceutical companies are ranked third and fourth among all the U.S. corporations in this regard: Pfizer (US$ 69 billion) and Merck (US$ 57 billion), respectively. Collectively, another eight drug companies reportedly have an additional US$ 173 billion of capital that is retained overseas, untaxed by the United States. Such funds could potentially help with the cash-flow problem that plays such a large role in these estimated costs of drug development.
  • The Tufts calculations also explicitly do not take into account the large public subsidies provided to pharmaceutical companies in the form of research-and-development tax credits or substantial payments received from the federal government for other research activities, such as testing their products in children. 
  • The US$ 2.6 billion figure does not consider drug-development costs borne by the public for the large number of medications that are based on external research that elucidated the disease mechanisms they address.
  • One recent analysis showed that more than half of the most transformative drugs developed in recent decades had their origins in publicly funded research at nonprofit, university-affiliated centers.
High innovation cost fails to justify high drug prices:

That even the high cost of innovation fails to justify high drug prices, was also echoed in an article published in ‘The New York Times’ on December 19, 2015.

The article categorically said, ‘there is ample evidence that drug prices have been pushed to astronomical heights for no reason other than the desire of drug makers to maximize profits. Prices in many cases far exceed what’s needed to cover the costs of research and clinical trials, and some companies have found ways to rake in profits even without shouldering the cost of drug development.’

Yet another justification of high new drug prices:

Yet another justification of a slightly different kind also frequently comes from the global pharma players for high prices of new drugs.

On May 2, 2015 ‘The Washington Post’ also published an article, which recapitulated this oft repeated justifications for keeping the prices of new drugs high, especially those for rare diseases, including many types of cancer. The key rationale of this argument: the smaller is the number of patients who need the drugs, more would be the need of the company to price the drugs high to recoup the significant costs of drug development.

On the face of it, this justification too may sound convincing. However, on the ground, even if this argument of the global drug companies fails to stand on its feet, post robust scrutiny of the experts. In that context, I shall cite two recent examples.

Two new research studies broke this myth too:

The Following two April 2016 study conclusively demolishes the above justification of the global drug companies:

1. On April 28 2016, a new study was published in  JAMA Oncology, throwing  a great deal of light on the robustness of the above reasoning. In this paper, the researchers looked at 32 oral cancer medications and found that launch prices of these drugs have spiraled upward, even after adjusting for inflation. The average monthly amount insurers and patients paid for a new cancer drug was less than US$ 2,000 in the year 2000, but it skyrocketed to US$ 11,325 in 2014. 

2. In April 2016, another study published in Health Affairs found, when a drug became useful to a larger number of patients, the price also shot up. It, therefore, concluded as follows:            

“Our findings suggest that there is currently little competitive pressure in the oral anticancer drug market. Policy makers who wish to reduce the costs of anticancer drugs should consider implementing policies that affect prices not only at launch but also later.”             

Are high new drug prices, then arbitrary?

According to a July 2015 article published in JAMA Oncology, the high prices of new drugs, especially for cancer, are arbitrary. This is vindicated in the discussion of the article that clearly states, as follows: 

“Cancer drug prices are rising faster than the prices in other sectors of health care, drawing concern from patients, physicians, and policy researchers. We found little difference in the median wholesale price of 21 novel drugs and 30 next-in-class drugs approved over a 5-year period (next-in-class drugs, $119 765; novel drugs, $116 100; P = .42).”

“Our results suggest that the price of cancer drugs is independent of novelty. Additionally, we found little difference in price among drugs approved based on time-to-event end points and drugs approved on the basis of RR (disease Response Rate). Our results suggest that current pricing models are not rational, but simply reflect what the market will bear.” 

Thus, the derived fact is, the high prices of new drugs are neither dependent on high cost of drug innovation, nor on the number of drug users – high or low. Higher drug prices, therefore, appear to be nothing but arbitrary, the public justifications being no more than façades. 

Is the real cost of drug innovation much less? 

This question brings me back to the moot point, ‘What is then the real financial cost of drug innovation?’

The search for a generally acceptable answer to this question gets even more complicated, when one reads the paper of The Bureau of Economics, Federal Trade Commission’ in Washington, DC, published on March 7, 2006 in Health Affairs – the leading journal of health policy thought and research.

The paper estimates the cost per new drug to be US US$ 868 million. However, it says, “Our estimates vary from around US$ 500 million to more than US$ 2,000 million, depending on the therapy or the developing firm. The paper recommended that variations in cost estimates suggest that policymakers should not use a single number to characterize drug costs.


This situation arises, because the drugs with brand names, whether patented or off-patent, do not compete on price in the pharma market, across the world. The primary reason being a consumer is neither the prescription decision makers nor can they exercise their brand choice in any manner. For any patients, a doctor always takes this decision, who is often influenced by the drug manufacturers, and may not be even aware of the drug price, as is generally alleged, globally.

This process is quite unlike to any other essential commodities. However, the ongoing marketing campaigns for branded drugs are quite a keen to commonly used consumer goods, carrying brand names and backed by high profile branding campaigns, where high prices rather add greater perceived value to the brand status.

But the irony is glaring. The administration of life-saving highly expensive drugs is not optional for any patient, whether poor or rich. These are necessary to save lives. Thus, does not merit arbitrary high-profit driven pricing, at least, from the standpoint of patient-centric ethical business practices.

It still happens, even at the cost of access to such drugs by a large majority of the global population, who requires them the most. In all probability, this process is likely to continue in the near future too, irrespective of the quest of many to fathom how expensive is the drug innovation, unless the government or other payers actively intervenes. I shall discuss this issue in my next article in this Blog. 

Nevertheless, the answer to the crucial question, ‘How expensive is the drug innovation’ would continue to remain elusive to many, at least in the near term. This because, no global drug company is likely to allow any competent and independent experts group to arrive at this number in a transparent manner, which can also be peer reviewed. Nor would the pharma players, in all probability, furnish this information to any Government to justify the high price of their respective new brands.

Till this is done, pricing decisions of new lifesaving drugs would continue to remain arbitrary, primarily driven by high-profit motives. It is unlikely to have even a remote direct linkage to the cost of drug innovation, limited consumer access notwithstanding, just as what happens with many branded consumer goods.

By: Tapan J. Ray 

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.


Leave a Reply

You must be logged in to post a comment.