Explaining Research – How much do drugs really cost to develop?
Although this does not seem like a fact that most people would commit to memory, somehow the average American has come to know that, not only is it insanely expensive to create a new drug and bring it to market, but it is expensive to the tune of $800 million dollars. Why is this important? It is the reason most often cited for why medications are so expensive in the United States.
So what is wrong with the figure? A number of things. First, let’s just approach the study from an economic standpoint. The actual out of pocket costs for developing a drug in the Tufts study were about $400 million, half of the final number. How did it get to $800 million then? Through a fancy piece of economic sleight of hand known as “opportunity costs of capital.”
Are there any other studies out there to help us arrive at the true cost? Of course there are. In 2001, Public Citizen, a consumer safety group known best for its founder Ralph Nader, published a detailed analysis attacking the findings of the Tufts group. They made a compellingly simple argument: to calculate the average research and development costs to bring a drug to market, you only need to know the total amount spent on research and development and the total number of drugs that obtained FDA approval. Dividing the costs by the number of drugs yields the average cost per drug.
Since total costs are available through publicly available data, and drug approvals are available through the FDA, the group was able to analyze data from 1994 to 2000. They found that the average cost to develop a drug all the way through FDA approval was $161 million pre-tax, and $110 million in after tax dollars. Again, not chump change, but not $800 million.
Phi Beta Iota: Two others factors are that the Members of Congress that have extorted bribes from the pharmaceutical industry have mandated that the US Government may not negotiate on prices. Secondly, units that cost $600 in the US and $60 in Canada cost $6 (six dollars) in Thailand, South Africa, and other countries where negotiated generic agreements have placed the cost at a more realistic level. This price differential applies to the top 75 drugs purchased by Medicare and means that the out-year unfunded obligations of Medicare can be cut by 99% if we could restore an honest Congress and an honest Executive in the USA.