Still not understanding drug development costs

Yes, cancer drugs are expensive. Yes, they\’re so expensive that some people who would benefit from them don\’t get them. But that\’s not an excuse for people to misunderstand the actual costs of drug development.

Daniel Vasella, former chairman and chief executive of Novartis, the manufacturer, said the original price charged for Glivec in 2001 was considered \”high but worthwhile\” and was estimated to yield annual revenues of $900 million, enough to cover its development cost in two years. A decade later its annual revenues in 2012 were $4.7 billion.

The cancer specialists say the revenue earned by Glivec over the last 10 years \”represents generous profits to the company\”.

It\’s absolutely true that this particular drug has made vast profits. But that\’s not actually the way that drugs are, or even should be, priced.

For the drug companies also need to cover all of the costs of all of the research that failed to produce a drug that was usable. And these costs have to be covered whatever system we use to try and discover drugs. If it was entirely nationalised, government paid for everything, we would still have the costs of research that leads up blind alleys. The costs of dropping a drug when Stage III trials show that it kills more than it saves (that\’s a $500 million or so cost right there generally).

The drugs that do well have to pay for the development of the entire portfolio of drugs, not just for their own development.

To make an analogy to something currently fashionable: the arts. The hit shows, the hit movies, they have to be the revenue for the entire arts ecosystem, to cover all those terribly exciting duds that continually happen. The innumerable La Bohemes for the masses are what subsidise the occasional performance of The Green Knight.

Perhaps pharmaceuticals would be better produced by some other system: it\’s certainly worth the conversation. But that won\’t change this basic fact: the hits do not have to pay for themselves only, the hits have to pay for everything.

12 thoughts on “Still not understanding drug development costs”

  1. It’s interesting to note that films get individual investors and drugs don’t – there might be a case for the NMEs being separated so investors can put money into each one separately.

    Obviously, if the individual drug never gets anywhere, then the investors lose all their money, making these much more high-risk, high-reward investments than investing in a drug company which has already spread its risks across a number of drugs.

    One of the concerns is that drug companies over-invest in their “best prospects” and don’t diversify their risks over enough NMEs – that might be an argument for investment diversification being done by investors rather than by drug company bosses.

  2. #1
    Maybe that’d work when tailored molecules becomes more state-of-the-art but drug research doesn’t work like that. Big seller’s Viagra. But it wasn’t developed to put a spring in the step of declining middle aged lotharios. It was a not particularly successful heart drug. Or the baldness cure’s a side effect of another drug. No-one invests in a film on the basis it might turn out to be a good shoe polish.

  3. @Mr Gadsen,

    A lot of the NME stuff is done independently. Small biotech, often spun off from a university department does the pre-clin, maybe even phase I with venture capital funding. If it still looks promising they get sold to one of the big boys that have the financial clout and expertise to run the later-stage trials. If it doesn’t look promising the backers lose their money.

    Big pharma hasn’t given up on drug discovery entirely, but it is definitely cheaper to buy in.

  4. Not at all incidental – but the regulatory cost to getting drugs on the market has increased a lot over recent decades. That’s entirely right and proper (well I would say that since I earn my living from seeing that relevant regulatory hoops are jumped through, but I do genuinely think at least some of it is sensible). What hasn’t happened is that the patent still expires after give or take 20 years. From registration, not marketing. So drugs have less time than ever before to recoup their development costs (and those of failed products).

    So if we want (a) new drugs to be cheaper, and (b) long term to still be getting new drugs, we need to extend the patent term. A lot. But that would mean taking money from poor old ladies and giving it to evil pharma capitalist bastards. Which is why it will never happen.

  5. James
    Can I suggest a compromise? Have the patent term run from date of drug approval, not date of initial patent application.

  6. For the drug companies also need to cover all of the costs of all of the research that failed to produce a drug that was usable.

    Same as my comrades when they drill and hit a duster.

  7. If it still looks promising they get sold to one of the big boys that have the financial clout and expertise to run the later-stage trials.

    Again, the similarity with my industry. It is often a lot easier to buy a field off somebody else than to discover your own. A lot of these oil companies are little more than exploration companies who make money from flogging their finds, maintaining only enough production to fund their exploration activities.

  8. JamesV #4

    You make a very persuasive case. You also have my sympathy; it never ceases to amaze me that even tobacco companies get a better press than pharmaceuticals.

  9. “If it was entirely nationalised, government paid for everything, we would still have the costs of research that leads up blind alleys.”

    Will Rogers had some good advice how to avoid this problem although he expressed it in terms of the stock market:

    “Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.”

  10. I think we can agree that copyright / patent is a snafu.

    Picasso: nearly eternal (droit de suite)
    Cliff Richard: four score years and ten
    i phone app: 25 years (eh?)
    life saving drug: ten years if you’re lucky.

    With all due respect to Cliff Richard…

  11. Drug companies also have to pay for all the expensive jollies that they put on in order to butter up the consultants they hope will introduce their drugs into the NHS.

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