February 22

PhRMa R&D Costs Are Much Lower Than Claimed

For decades, the pharmaceutical industry has claimed that its high prices for drugs in the developed world, are justified by the very high costs of research and development (R&D). Industry-funded economists at Tufts Center for the Study of Drug Development, produced a wholly artificial R&D cost of $1.3 billion for a new drug. That artificial estimate, which is widely cited by government and industry– has served to hugely enrich the pharmaceutical industry.

A just published article, Demythologizing the High Cost of Pharmaceutical Research , by Donald Light and Rebecca Warburton, debunks industry’s inflated claim by dissecting the calculations in the authoritative Tufts-PhRMa supported study that concocted the extraordinary high R&D cost estimate.     

Light and Warburton found that the net median corporate R&D costs varied greatly: from $13 million to $204 million, depending on the kind of drug. They estimate the median net corporate R&D cost per new drug was only $59.4 million, plus the unknown cost of discovery, which varies 30 fold.  This $59.4 million estimate, they point out, is in line with audited figures submitted by companies.

The Tufts authors who concocted the $1.32 billion estimate, failed to include the substantial contributions by US taxpayers through R&D-related tax write-offs. Taxpayers indirectly pay for about 39% of company R&D cost–and then get hit by inflated costs.

Furthermore, "Half the $1.3 billion estimate is not real costs but a high estimate of profits that companies would have made if they had not developed drugs but just put their money in bonds or equities."

Professor Light explains that: “Estimated profits get converted to ‘costs’, and then companies press to get that money back as well as a good return on it.  This amounts to charging high prices to get profits on profits.” 

Pharma-supported Tufts economists have hugely inflated R&D costs; overstated  the cost of clinical trials and time for development–and they have exagerrated corporate risk.

Professor Light is a medical and economic sociologist who has been analyzing the efficacy, safety and affordability of medicines. His book, The Risks of Prescription Drugs, Columbia University Press, 2010, succinctly covers controversial medical flashpoints, providing readers a quick overview of the troublesome issues including: lack of protections from harmful drugs approved by the FDA, commercialization of medical decisions, medicalization of social issues, risk scares to increase sales.  

Excerpt below. Full article 

  Vera Hassner Sharav

BioSocieties advance online publication 7 February 2011

Demythologizing the high costs of pharmaceutical research

Donald W. Light and Rebecca Warburton

Light:  Program in Human Biology, 450 Serra Mall, Building 20, Stanford University, Stanford, CA 94305, USA.
University of Medicine and Dentistry of New Jersey, c/o 10 Adams Drive, Princeton, NJ 08540, USA. E-mail: dlight@princeton.edu

Warburton: School of Public Administration, University of Victoria, Victoria, BC, Canada.E-mail: rnwarbur@uvic.ca


It is widely claimed that research to discover and develop new pharmaceuticals entails high costs and high risks. High research and development (R&D) costs influence many decisions and policy discussions about how to reduce global health disparities, how much companies can afford to discount prices for lower- and middle-income countries, and how to design innovative incentives to advance research on diseases of the poor. High estimated costs also affect strategies for getting new medicines to the world’s poor, such as the advanced market commitment, which built high estimates into its inflated size and prices. This article takes apart the most detailed and authoritative study of R&D costs in order to show how high estimates have been constructed by industry-supported economists, and to show how much lower actual costs may be. Besides serving as an object lesson in the construction of ‘facts’, this analysis provides reason to believe that R&D costs need not be such an insuperable obstacle to the development of better medicines. The deeper problem is that current incentives reward companies to      develop mainly new medicines of little advantage and compete for market share at high prices, rather than to develop clinically superior medicines with public funding so that prices could be much lower and risks to companies lower as well.



In the undertaking of grand challenges and the search for vaccines and other magic bullets to
eradicate diseases of the poor, the very high costs of pharmaceutical research appear
everywhere. When companies like GlaxoSmithKline announce they will lower prices to a
fraction of what they charge in affluent countries, the initial high price is justified based on
the high risks and costs of research and development (R&D). For decades, the very high
costs of R&D have been the industry’s rationale for high prices in the developed world, and
the basis for claims that companies cannot afford research into primarily developing-world
diseases, where high prices cannot be charged. The few companies that did not abandon
vaccine R&D because prices were so low ‘solved’ that problem by charging 20–40 times
more than they used to, citing the high cost of R&D. When Michael Kremer’s version
of an ‘advance market commitment’ (AMC) swept the policy world and was embraced
by the G8 as a fiscal magic bullet that would result in new vaccines for malaria or AIDS,
it was premised on meeting the allegedly high costs of R&D for multinational corporations,
whose innovative researchers would find a vaccine for malaria or AIDS, where public or
university researchers had failed (Kremer and Glennerster, 2004, pp. 10–11; Farlow, 2005).
Industry executives, well supplied with facts and figures by the industry’s global press
network, awe audiences with staggering figures for the cost of a single trial, like tribal
chieftains and their scribes who recount the mythic costs of a great victory in a remote pass
where no outside witnesses saw the battle. Companies tightly control access to verifiable
facts about their risks and costs, allowing access only to supported economists at consulting
firms and universities, who develop methods for showing how large costs and risks are; and
then the public, politicians and journalists often take them at face value, accepting them as
fact. The global press network never tells audiences about the detailed reconstruction of
R&D costs for RotaTeq and Rotarix that found costs and risks were remarkably low up to
the large final trials, and that concluded the companies recovered their investments within
the first 18 months (Light et al, 2009). The companies could now sell these vaccines for
rotavirus for one-tenth their Western price and still earn profits.

Pharmaceutical companies have a strong vested interest in maximizing figures for R&D
and supporting centres or researchers who help them do so. Since the Kefauver hearings in
1959–1962, the industry’s principal justification for its high prices on patented drugs has
been the high cost of R&D, and it has sought further government protections from normal
price competition. These include increasing patent terms and extending data exclusivity,
without good evidence that these measures increase innovation (National Institute
for Health Care Management, 2000; European Commission for Competition, 2008
(28 November); Adamini et al, 2009). Industry leaders and lobbyists routinely warn
that lower prices will reduce funds for R&D and result in suffering and death that future
medicines could reduce. Marcia Angell, the former editor of the New England Journal of
Medicine, describes this as ‘y a kind of blackmail’ (Angell, 2004, pp. 38–39). She quotes
the president of the US industry’s trade association as saying, ‘Believe me, if we impose
price controls on the pharmaceutical industry, and if you reduce the R&D that this industry is
able to provide, it’s going to harm my kids and it’s going to harm those millions of other
Americans who have life-threatening conditions’. Merrill Goozner, former chief economic
correspondent for the Chicago Tribune, points out that no other research-oriented industry
makes this kind of argument (Goozner, 2004). In fact, they do the opposite: when profits
decline, they redouble their research efforts to find new products that will generate more
profits. Not to do so guarantees their decline. The industry’s view of European ‘price controls’
(actually, large-volume discounts) is that they do not allow recovery of huge R&D costs
so that Europeans are ‘free riders’ on Americans and force US prices higher to pay for
unrecovered costs the ‘free riders’ refuse to pay. This claim has been shown not to be
supported by industry and government reports and to be illogical as well (Light and Lexchin, 2005).

 The London School of Economics and Political Science 1745-8552 BioSocieties 1–17
The purpose of this report is to sharpen readers’ critical skills in asking pointed questions
about the seemingly insurmountable barriers of R&D, about the overpriced AMC that will
result in most donations going to extra profits rather than more vaccinations (Light, 2007), and
about how much global pharmaceutical companies can afford to discount (Plahte, 2005). By
demythologizing in detail the most widely cited estimate of pharmaceutical R&D, the report
will provide lessons in how such estimates are constructed. This exercise in critical sociology
and economics builds on the substantial critiques of others (Public Citizen, 2001; Love, 2003;
Angell, 2004; Goozner, 2004) but adds several new points. The report will conclude that the
bigger problems lie elsewhere, with most R&D not being directed at discovering clinically
superior medicines, even for affluent customers, because companies are so generously rewarded
for developing hundreds of new products little better than the ones they replace. Policy needs
to move away from decontextualized magic bullets and towards context-sensitive, socioeconomic
programmes of health in which medicines can play a critical role.


The most widely cited figures (by government officials and the industry’s trade association
for its global news network) for the cost to discover and bring a new drug (defined as a ‘new
chemical entity’ or ‘new molecular entity’; not a reformulation or recombination of existing
drugs) to market are US$802 million in 2000. This has been updated by 64 per cent to $1.32
billion in 2006 (PhRMA, 2009). If R&D costs increased another 64 per cent by 2012, the
average cost would be $2.16 billion or approximately 2.7 times the $802 million estimate.
These estimates are based on the study by Joseph DiMasi, Ronald Hansen, and Henry
Grabowski done at the Tufts Center for the Study of Drug Development in Boston,
Massachusetts (DiMasi et al, 2003a). This centre has received substantial industry funding
for years and is a repository where companies submit their closely guarded figures on R&D.
Only a few people, such as these health economists, are given access to the data. There is no
more recent detailed study, and therefore this analysis will concentrate on it.
The 2003 study builds on more than a quarter-century of strategies to construct the wholly
artificial ‘fact’ of average R&D costs per new drug, as the chief vehicle for generating
political capital worth billions in tax concessions and price protection (Grabowski, 1976;
Grabowski, 1978; Hansen, 1979; DiMasi et al, 1991). This long project in ‘capitalized
uncertainty’ (McGoey, 2009) has exploited anxieties about the affordability of drugs with
emphatic facts about how the great cost and risk of their development requires high prices.
The Center was first founded at the University of Rochester with the backing of several large
companies and then moved later to Tufts. The authors note that their previous (1991) study
resulted in an R&D cost estimate more than double the estimate (in constant dollars) of
Hansen’s effort in 1979 (DiMasi et al, 2003a, pp. 153–158). They used a similar
methodology in 2003 but with changes that have resulted in an estimate about three times
greater than the 1991 study.

xxxxCUT xxxxx

Full article  available at http://www.palgravejournals.com/biosoc/journal/vaop/ncurrent/index.html

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