Yes, that is what the global CEO of one of the Pharmaceutical giants of the world commented in a very recent interview with Reuters. Adding further to this comment he said, “US $1 billion price tag for R&D was an average figure that includes money spent on drugs that ultimately fail… If you stop failing so often, you massively reduce the cost of drug development … It’s entirely achievable.”
Therefore, he concluded his interview by saying that the pharmaceutical industry should be able to charge much less for new drugs by passing on efficiencies in R&D to the customers.
The above comment does not seem to be a one off remark. A recent study on R&D productivity of 12 top pharmaceutical companies of the world by Deloitte and Thomson Reuters highlighted that the average cost of developing a new medicine is now US$ 1.1 billion with the most successful company in the group studied incurred an average cost of just US$ 315 million, while at the other extreme, another company spent US$ 2.8 billion.
How much of it then covers the cost of failures and who pays for such inefficiencies?
Some experts have gone even further:
Some experts in this area have gone even further arguing that pharmaceutical R&D expenses are over stated and the real costs are much less.
An article titled “Demythologizing the high costs of pharmaceutical research”, published by the London School of Economics and Political Science in 2011 indicates that the total cost from the discovery and development stages of a new drug to its market launch was around US$ 802 million in the year 2000. This was worked out in 2003 by the ‘Tuft Center for the Study of Drug Development’ in Boston, USA.
However, in 2006 this figure increased by 64 per cent to US$ 1.32 billion, as reported by a large overseas pharmaceutical industry association.
The authors of the above article also mentioned that the following factors were not considered while working out the 2006 figure of US$ 1.32 billion:
▪ The tax exemptions that the companies avail for investing in R&D.
▪ Tax write-offs amount to taxpayers’ contributing almost 40% of the R&D cost.
▪ The cost of basic research should not have been included, as these are mostly undertaken by public funded universities or laboratories.
The article commented that ‘half the R&D costs are inflated estimates of profits that companies could have made if they had invested in the stock market instead of R&D and include exaggerated expenses on clinical trials’.
“High R&D costs have been the industry’s excuses for charging high prices”:
In the same article the authors strongly commented as follows:
“Pharmaceutical companies have a strong vested interest in maximizing figures for R&D as high research and development costs have been the industry’s excuse for charging high prices. It has also helped generating political capital worth billions in tax concessions and price protection in the form of increasing patent terms and extending data exclusivity.”
The study concludes by highlighting that “the real R&D cost for a drug borne by a pharmaceutical company is probably about US$ 60 million.”
Another perspective to the “R&D Factor”:
A book titled “Pharmaceutical R&D: Costs, Risks, and Rewards”, published by the government of USA gives another perspective to the “R&D Factor”. It articulates that the three most important components of R&D investments are:
Money is just one component of investment, along with a long duration of time, to reap benefits of success, which is intertwined with a very high risk of failure. The investors in the pharmaceutical R&D projects not only take into account how much investment is required for the project against expected financial returns, but also the timing of inflow and outflow of fund with associated risks. It is thus quite understandable that longer is the wait for the investors to get their real return, greater will be their expectations for the same.
This publication also highlights that the cost of bringing a new drug from ‘mind to market’ depends on the quality and sophistication of science and technology involved in a particular R&D process together with associated investment requirements for the same.
In addition, regulatory demand to get marketing approval of a complex molecule for various serious disease types is also getting more and more stringent, significantly increasing their cost of clinical development in tandem. All these factors when taken together, the authors argue, make the cost of R&D not only very high, but unpredictable too.
Thus to summarize from the above study, high pharmaceutical R&D costs involve:
- Sophisticated science and technology dependent high up-front financial investments
- A long and indefinite period of negative cash flow
- High tangible and intangible costs for acquiring technology with rapid trend of obsolescence
- High risk of failure at any stage of product development
Even reengineered R&D model may not be sustainable:
Many research scientists have already highlighted that sharp focus in some critical areas may help containing the R&D expenditure to a considerable extent and also would help avoiding the cost of failures significantly. The savings thus made, in turn, can fund a larger number of R&D projects.
The areas identified are as follows:
- Early stage identification of unviable new molecules and jettisoning them quickly.
- Newer cost efficient R&D models.
- Significant reduction in drug development time.
Unfortunately, sustainability of the above model too still remains in the realm of a wishful thinking and raises a serious question mark to many for various other reasons.
Should Pharmaceutical R&D move away from its traditional models?
Thus the critical point to ponder today, should the Pharmaceutical R&D now move from its traditional comfort zone of expensive one company initiative to a much less charted frontier of sharing drug discovery involving many players? If this overall approach gains acceptance sooner by all concerned, it could lead to increase in R&D productivity significantly at a much lesser cost, benefiting the patients community at large.
Finding right pathway in this direction is more important today than ever before, as the R&D productivity of the global pharmaceutical industry, in general, keeps going south and that too at a faster pace, prompting major cuts in the absolute R&D expenditure by many, as compared to the previous year.
A global R&D spend comparison (2011 and 12):
R&D expenditures in absolute terms of the following global companies in 2011 and 2012, without drawing any relationship to their respective R&D productivity, were reportedly as follows:
% of Sale
Source: Fierce Biotech, March 18, 2013
This particular table points out that five out of the reported ten companies had to spend less towards R&D in 2012 as compared to 2011 and four out of the remaining five players were able to increase their R&D spend just marginally.
Thus the same question comes at the top of mind yet again: is the current pharmaceutical R&D model sustainable and working with optimal productivity and cost efficiency for the benefits of patients?
Towards greater sustainability of the R&D model:
A July 2010 study of Frost & Sullivan reports, “Open source innovation increasingly being used to promote innovation in the drug discovery process and boost bottom-line”.
It underscores the urgent need for the global pharmaceutical companies to respond to the challenges of high cost and low productivity in their respective R&D initiatives, in general.
The ‘Open Innovation’ model assumes even greater importance today, as we have noted above, to avoid huge costs of R&D failures, which are eventually passed on to the patients through the drug pricing mechanism.
‘Open Innovation’ model, as they proposed, will be most appropriate to even promote highly innovative approaches in the drug discovery process bringing many brilliant scientific minds together from across the world.
The key objective of ‘Open Innovation’ in pharmaceuticals is, therefore, to encourage drug discovery initiatives at a much lesser cost, especially for non-infectious chronic diseases or the dreaded ailments like Cancer, Parkinson’s, Alzheimer, Multiple Sclerosis, including many neglected diseases of the developing countries, making innovative drugs affordable even to the marginalized section of the society.
“Open Innovation” is very successful in IT industry:
The concept of ‘Open Innovation’ is being quite successfully used in the Information Technology (IT) industry since nearly three decades across the world, including India. Web Technology, Linux Operating System (OS) and even the modern day ‘Android’ are excellent examples of commercially successful ‘Open innovation’ model in IT,
In the sphere of Biotechnology ‘Human Genome Sequencing’ is another remarkable outcome of such type of R&D model. Therefore, why not a similar model be actively pursued in a much larger scale to discover newer and innovative drugs at a much lesser cost for greater access to patients?
In the evolving process of ‘Open Innovation’ in pharma there are some issues to be addressed and at the same time some loose knots to be tightened to make the process increasingly more user friendly and robust. Many experts feel that the key issues for the ‘Open Innovation’ model are as follows:
▪ Who will fund the project and how much?
▪ Who will lead the project?
▪ Who will coordinate the project and find talents?
▪ Who will take it through clinical development and regulatory approval process?
That said, all these issues do not seem to be insurmountable problems at all to add greater speed and efficiency to the process, as the saying goes, ‘where there is a will, there is a way’.
Having deliberated on this issue as above, I reckon, there is a dire need to make the process of offering innovative drugs at affordable prices to the patients sustainable over a long period of time, for the sake of all.
This can happen only when there will be a desire to step into the uncharted frontier, coming out of much beaten and a high cost tract of R&D, especially after having picked-up the low hanging fruits. Dove tailing the passion for business excellence with the patients’ interest, dispassionately, will then be the name of the game.
As the Reuters article quoting the CEO of a global pharma major points out, in addition to improvements in research, increasing global demand for medicines and the explosion in the volume of products sold in emerging markets should also contribute to lower unit costs of the innovative drugs ensuring their greater access to patients.
This process, in turn, will help fostering a win-win situation for all stakeholders, exploding “one of the great myths of the industry” – The ‘R&D Factor’.
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.