New study dismantles myth of high drug development costs

I'm embarrassed to admit that when I was a medical reporter for The Boston Globe in the '90s, I (along with many other journalists) would unthinkingly use the $800 million that the pharmaceutical industry said it cost to develop a new drug product. Industry apologists routinely threw out that exorbitant figure whenever anyone complained about high drug prices, and they made sure to note that it was based on "real research," studies done by the Tufts Center for the Study of Drug Development.

What I didn't realize then was that the $800 million was a highly inflated cost estimate produced by a center that received substantial industry funding and has very little credibility. The same goes for the latest cost estimate of $1.3 billion per new drug bandied about by the same folks.

Now, in a newly published report in Biosocieties journal, researchers at Stanford and the University of Medicine and Dentistry of New Jersey have taken apart both of these inflated cost estimates and shown exactly where they are wrong. Don Light and Rebecca Warburton note, for instance, that neither the $800 million or $1.3 billion estimate includes the substantial contributions made by taxpayers through tax write-offs for research and development. As it turns out, taxpayers indirectly pay for about 39 of drug company R&D. In addition, the industry-based figures are based on clinical trials (and number of participants) much larger than actual trials reported by the FDA and the National Institutes of Health.

Perhaps most disingenous, half of the industry estimates are not real costs, but exaggerated estimates of profits that companies might have made if they had not developed the drugs but just put their money into the stock market. As Light and Warburton note, "even if one were to accept the argument that profits foregone should be included as a 'cost' (which no other industry does), US government guidelines call for using three percent, not the 11 percent used by (the Tufts group). Light and Warburton argue that the pharm industry "cannot have it both ways."

They cannot treat R&D costs as if they are a long-term capital investment when tax authorities do the industry the favor of treating them as an ordinary business expense, fully deductible each year.

In their report, Light and Warburton attempt to reach a more realistic estimate for drug development, which, as they acknowledge, is hampered by the fact that the pharmaceutical industry is exceedingly secretive about its R&D data. But building on some of the data gathered by the Tufts Center and research done by Merrill Goozner of gooznews among others, they conclude that the real cost per "self-originated" drug product is closer to $180-231 million, a big reduction from the estimates that continue to be thrown out by industry spokesmen whenever they want regulatory concessions or more government spending. The latest example of this can be found in Christoph Westphal's op-ed in The Boston Globe, which I blogged about here.

The myth of high R&D costs not only exerts a destructive influence on state and federal policy, but it provides drug companies with an excuse for focusing on high-priced me too drugs (like Paxil and Seroquel), instead of developing lower priced drugs that might really save lives -- such as vaccines and treatments for disease. As Light and Warburton note:

The mythic costs of R&D are but one part of a larger, dysfunctional system that gives us mostly new medicines that have few or no advantages and serious side adverse reactions that have become a leading cause of hospitalization and death.

I couldn't have said it better.