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How Big Pharma distorts the costs of developing new drugs

A new study systematically dismantles the industry's claim that the research and development cost of bringing a new drug to market is $1.3 billion.

April 03, 2011|Michael Hiltzik
  • A new study focuses on "the wholly artificial 'fact' of average R&D costs per new drug."
A new study focuses on "the wholly artificial 'fact' of… (Joe Raedle / Getty Images )

Every time I come across a big-number statistic about the size or significance of some industrial activity, my nose wrinkles.

You know the figures I mean: The porn business takes in $10 billion to $14 billion a year. California's marijuana harvest is worth $14 billion a year, making it the state's biggest cash crop. NCAA March Madness costs employers $1.8 billion in lost productivity.

Figures like these have several things in common: They're eye-catchingly big, they're unverifiable by empirical means and they reek of fakery.

The statistic that may be most hazardous to your health is one pegging the research and development cost of bringing a new drug to market at $1.3 billion. Its purveyor is the Pharmaceutical Research and Manufacturers of America (PhRMA), which exploits the number's shock value to secure its lobbying agenda on Capitol Hill.

Tax breaks for drugs for rare diseases? Faster drug approvals by federal regulators? Stronger protection against competition from generics? All these goals have been achieved, based at least partially on the claim that drug makers require huge profits to fund R&D.

The supposedly high cost of research and development is also cited to argue against the reimportation of cheap drugs from Canada and direct negotiation over drug prices by Medicare.

These arguments are backed by truckloads of cash: Big Pharma has been the biggest spender on Washington lobbying of any industry, laying out $2.1 billion over the last dozen years to get its way, according to congressional figures.

The industry's R&D claim has been questioned for years, but seldom as thoroughly as in a recently published paper that calculates the true mean R&D cost as less than $60 million per drug in 2000 dollars ($76 million today).

The study's authors, Donald W. Light of the University of Medicine and Dentistry of New Jersey and Rebecca Warburton of the University of Victoria in Canada, systematically dismantle what they call "the wholly artificial 'fact' of average R&D costs per new drug" by removing inflated multipliers and calculating the tax breaks drug companies get for their R&D, among many other steps.

And they underscore that the industry's estimate always has been based on raw data the drug companies keep confidential. That's a major issue because the industry has an obvious incentive to maximize its R&D claims; this way, they can't be double-checked.

"The most important takeaway is that nobody knows the real cost of R&D because no one has seen the data," Light told me last week.

The basis for the industry's estimate, and the main target of Light and Warburton, is a 2003 study by the Center for the Study of Drug Development, an industry-funded institute at Tufts University. That study's authors, led by the center's director of economic analysis, Joseph A. DiMasi, determined that the capitalized cost of R&D per new drug was $802 million in 2000; industry lobbyists updated that figure for inflation to $1.32 billion as of 2006.

Light and DiMasi have been taking potshots at one another in peer-reviewed journals and other venues for a long time. Tufts responded to the most recent broadside with an exasperated-sounding statement that the claims by Light and Warburton had been "thoroughly rebutted" in 2005 and that the latest paper had almost nothing new to say.

The university vouched for the "scholarship, integrity, and validity" of its published paper, and it's fair to say that the DiMasi study is a very sophisticated analysis of pharmaceutical R&D financing that openly sets forth its assumptions and limitations.

The trouble with the Tufts paper isn't so much its authors' work, it's that their findings have been grossly distorted by drug industry lobbyists to make a claim the study doesn't support.

DiMasi himself isn't entirely comfortable with how PhRMA characterizes his findings. "I try to stay away from language that refers to 'single drugs' or 'cost per drug,' " he told me. "It's a little ambiguous. People who are not familiar with the studies might make the wrong interpretation."

But as Light and Warburton point out, there are other issues with the Tufts study. The biggest one is that the raw data are secret. The study is based on research and development costs for 68 unidentified drugs, provided to the researchers in confidence by 10 unidentified drug companies. Therefore it's impossible to verify which drugs were used in the study, whether they were truly representative of all Big Pharma research during the study period of 1990 to 2001, or if the cost data provided by the companies are even credible to begin with.

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