R&D Costs For Cancer Drugs Are Likely Much Less Than Industry Claims, Study Finds

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Cancer drugs cost far less to develop than industry-backed research asserts, an analysis published Monday asserts. Research and development costs are a major reason that drug companies justify high prices, so this dispute has a direct bearing on the cost of medical care.

The analysis, published in the current issue of JAMA Internal Medicine, concludes that it costs, on average, $650 million to develop a new cancer drug. The authors add in another $100 million or so to account for income those companies could have had if that money had been invested in the stock market instead of in new products.

That total is far lower than the $2.7 billion figure that the drug industry frequently points to when it justifies the soaring cost of medicine. (It's far higher than $320 million — an inflation-adjusted figure from a 2001 study by the consumer group Public Citizen).

To arrive at this new figure, cancer physicians Vinay Prasad, at Oregon Health and Science University, and Sham Mailankody, at the Memorial Sloan Kettering Cancer Center, took a novel approach. They identified 10 companies that each had a single cancer drug on the market. They looked up the companies' research and development costs, as reported in their federal stock reporting paperwork, to come up with the average figure of $650 million.

The companies reaped substantial rewards. On average, the study found each product produced seven times as much revenue as it cost in research and development — and the drugs will yield profits for years to come.

"I think these results would suggest that pharmaceutical drug development is extremely lucrative and the current drug prices are not necessarily justified by the R & D [research and development] spending on these drugs," Mailankody says.

It's hard to compare their findings directly with the industry's benchmark figure of $2.7 billion ($2.6 billion in 2015 dollars). That figure comes from an analysis by the Tufts University Center for the Study of Drug Development Research. The analysis is based on about 100 new drugs; not just those used to treat cancer. The center, which receives industry funding, doesn't disclose which drugs it uses in its analysis and isn't transparent about its methods, Mailankody says.

One challenge to accurately estimating a company's cost of research and development is putting a dollar amount on the cost of failures. Pharmaceutical companies often spend hundreds of millions of dollars on potential drugs only to discover that they don't work or aren't safe. It's a risky business, so the winners have to pay for the many losers that companies spend money on along the way.

The new analysis estimates the cost of failures by looking at the total research and development costs for the companies they studied. Prasad and Mailankody figure that each company has, on average, three other drugs in development thathave been costing money in research and development but not producing any revenue.

"By doing that, I think we actually account for the cost of failure as well," Mailankody says.

Joseph DiMasi, director of economic analysis at the Tufts Center for the Study of Drug Development, disagrees. "They're not including companies that have had only cancer drug failures, or had a high percentage of their cancer drugs fail." He tells Shots that, by his estimate, only one drug in eight makes its way through testing to the market – and the new study doesn't account for that degree of failure.

The pharmaceutical industry is also critical.

"Ignoring the R&D costs from the many companies that have not received a U.S. Food and Drug Administration approval indicates a lack of understanding of the risk companies' face at the outset of an uncertain project, and the role of economic incentives in ensuring investment despite steep odds," the industry group PhRMA writes in an email to NPR. "The risk inherent in R&D is the key reason why 90 percent of publicly traded biopharmaceutical companies in 2014 did not make a profit."

Malinkody and Prasad say these differences could be easily resolved if pharmaceutical companies would make public the data that would allow analysts to work from common ground.

In an invited commentary that accompanies the JAMA Internal Medicine analysis, Merrill Goozner, editor emeritus of the magazine Modern Healthcare, notes that "the industry consistently generates the highest profit margins among all U.S. industries."

He argues that the enormous value of patent protection for drugs far outweighs the inherent riskiness of pharmaceutical research and development. And he agrees with the study authors when he writes: "Policymakers can safely take steps to rein in drug prices without fear of jeopardizing innovation."