Billion Dollar Babies: The High Cost Of Inventing New Drugs -- And Of Not Inventing Them

There is a financial cost to developing new drugs—and it’s a big one.  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.  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 meant that extended life could be indefinite?

The total cost to develop and gain marketing approval for a new drug is about $2.6 billion.

And it can take 10 to 12 years for that new drug to get through the Food and Drug Administration’s (FDA) approval process and hit the market—a process I call “inception to ingestion”—if it ever does.

Moreover, once the drug has made it to market, there is often post-approval research and tests to evaluate dosing strength and a host of other factors.  Estimates of those efforts can add an extra $312 million to the cost of a drug, for a grand total of $2.87 billion (in 2013 dollars).

Included in that figure is what economists call “time costs,” which is defined as “expected returns that investors forego while a drug is in development.”   Those time costs are estimated to be $1.163 billion.  Removing that figure, the actual out-of-pocket spending to create a new drug is $1.395 billion.  Combining that pre-approval out-of-pocket cost of $1.395 billion with the post-approval cost estimate of $312 million, you get $1.707 billion spent to develop a new drug.

Averaging the last 10 years—as opposed to looking at one year—rounds out some of the disparities of any given recent year, which can see a burst or a dearth of FDA approvals.  And the numbers are not adjusted for inflation, though there hasn’t been much for the past decade.

One reason for those growing R&D costs is that drug manufacturers have been transitioning away from small molecule drugs, usually taken in a pill, to much more complex biologic drugs.  And in some cases new drugs can cure (e.g., Sovaldi for hepatitis C) some of the most difficult diseases.

Plus the approval process has become more complicated and cumbersome, and there is little reason to the think the FDA, which has changed from being a checkpoint on the drug-approval road to more of a roadblock, will streamline the process without congressional and presidential pressure.

There are ways to make drugs less expensive—i.e., cut down on some of the bureaucratic oversight or lengthening the patent life, which means the manufacturers would have more time to recoup their investment—but both efforts would require a major legislative push.

The good news is that drug companies are proceeding with their research to create new and innovative drugs; the bad news is that it costs a lot to do that—however you calculate the costs.  But the public won’t get more innovative drugs by imposing price controls, which is one of the critics’ primary solutions to the high cost of drugs.

How many companies would invest nearly $2 billion over 10 to 12 years before receiving a dime in returns—if they ever do—if politicians and bureaucrats, under pressure to lower costs, decided the price of a new drug?   How many drugs would not be invented?  More importantly, how many lives would not be improved or saved?

If the cost of creating new drugs is high, the cost of not having any new drugs is immeasurable.

Part II - Antibiotic Resistance: Why Aren’t Drug Companies Developing New Medicines To Stop Superbugs?

Last year, The U.S. Food and Drug Administration approved an antibiotic to ward off a “superbug,” or strain of bacteria that causes dangerous infections and has failed to respond to any other drug. Unfortunately, it was a rare occasion. Only nine new antibiotics have been approved by the agency in the last decade, even though public health officials say the world’s doctors are in desperate need of more drugs to face a growing threat from increasingly resistant bacteria.

Already, 23,000 people die yearly from antibiotic-resistant bacteria in the U.S. and more than 2 million fall ill, according to the Centers for Disease Control. But as many as 10 million people a year could die from antibiotic-resistant bacteria worldwide by 2050 if new treatments are not discovered, according to a recent report from the Review on Antimicrobial Resistance.

Despite that urgency, most of the world’s largest pharmaceutical companies stopped making antibiotics long ago, citing high costs of development and low returns. The handful of biotech firms that are making them today have focused on the narrow slices of the infectious disease spectrum that seem most likely to generate profits. Therefore, only a fraction of the medicines that are needed are being produced.

This discrepancy has prompted the U.S. government to step in with public incentives and partnerships to stir up interest in this forgotten class of drugs, but the measures taken so far have had limited impact on the industry. Earlier this year, President Barack Obama committed $1.2 billion in his annual budget proposal -- and unprecedented amount -- to the fight against life-threatening infections caused by resistant bacteria. Researchers, drug companies and nonprofit leaders say this public investment should help revive antibiotic development, so long as the resources are smartly applied.   

By 1991, half of the drugmakers had cut funding for fighting infectious diseases from the 1970s levels. A decade later, major companies including Pfizer Inc., Eli Lilly and Co. and Bristol-Myers Squibb Co. abandoned antibiotics altogether. Today, only six of the top 50 pharmaceutical companies as ranked by sales are still pursuing this research.