Alleged R&D Costs: Not A Transparent Driver Of Drug Prices 04/03/2016 by Intellectual Property Watch 3 Comments Share this:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window) The views expressed in this article are solely those of the authors and are not associated with Intellectual Property Watch. IP-Watch expressly disclaims and refuses any responsibility or liability for the content, style or form of any posts made to this forum, which remain solely the responsibility of their authors. By Daniele Dionisio* Whether laws enforcing transparency on costs would help curb extortionate drug prices in today’s world is hardly predictable now that pharma companies and their allies are lobbying governments to scupper any rules that would require them to disclose the real R&D costs and profits of their medicines and the rationale for charging what they do. In today’s world, almost unaffordable prices involve a wide majority of newly introduced medicines, with Hepatitis C drug prices as high as $80,000-90,000 for a 12-week course of treatment, and many of the new cancer drugs being priced beyond $100,000 (over $150,000 in some cases) for a year’s dosage. That is without mentioning, for example, the more than $300,000 per year price of Vertex’s cystic fibrosis drug Kalydeco and the case of Turing Pharmaceuticals, which has hiked the price of Daraprim, a seasoned yet life-saving anti-microbial drug, to $750 a pill, almost by 5000 percent. In this context, it comes as no surprise that the prices of existing drugs not unusually rise 10 percent at least year by year, outpacing the inflation rate. As reported, the prices of older drugs for multiple sclerosis have risen from about $10,000 per year in the late 1990s to more than $60,000 now, even as market competition has increased following new products introduction. According to a May 2015 Credit Suisse report, drug price increases are a key driver of profit growth for many multinational pharmaceutical companies. As such, a key question arises about the real cost to develop a prescription drug. The most featured estimate of $2.56bn (or $2.87bn should post-marketing R&D costs be included) was released in November 2014 by the Tufts Center for the Study of Drug Development in Boston. This is well below the shocking $4-11 billion per new drug R&D cost estimates set by an article in Forbes! In either case, the factors responsible for such staggering costs reportedly include larger and more complex clinical trials, a greater focus on chronic and degenerative diseases, more “comparator drugs” in clinical testing, as well as the costs of the large number of drugs that fail to reach the market, particularly in late clinical development. In the face of this, opponents challenge the figures above and defend the notion that a new drug can be developed for a fraction of the cost the Tufts report suggests. They also contend that the reported record estimates pave the way for more government subsidies and protections (ultimately paid for by consumers) than brand companies would have ever expected. As argued by MSF: “Today nearly half of R&D spending is paid for by the taxpayer or by philanthropy, and that figure continues to rise as governments do more and more to make up for the pharmaceutical industry’s R&D shortcomings. Not only do taxpayers pay for a very large percentage of industry R&D, they are in fact paying twice because they then get hit with high prices for the drugs themselves….” The stand above draws on current experience supporting that new drugs can be developed for as little as $50 million (or up to $186 million by taking failure into consideration). Inherently, the Drugs for Neglected Diseases initiative (DNDi), a research network devoted to the development and roll-out of medicines for diseases primarily affecting the worst-off people in poor countries, was able to produce the anti-malaria combination treatment ASAQ for $17 million. Moreover, it brought out a new chemical entity drug candidate fexinidazole for sleeping sickness at a cost of $38 million. DNDi also developed SSG&PM, a visceral leishmaniasis-targeting combination therapy for $17 million. The examples above let one assert that DNDi works wonders in the real world while combining high research efficiency with affordability, since its research products are available as low-price generics on the market. All things taken together, what are the real reasons for stiff drug prices? Big Pharma defends the price hikes as a needed strategy to fund research for new drugs development. However, as per a recent survey of a number of public drug companies, routine R&D expenses are lower than company overheads, including marketing costs. And often after-tax profits largely exceed those so high R&D costs the corporations allege. As disclosed by the May 2015 Credit Suisse report, while ordinary sales, general and administrative expenses increased by 4 percent year-on-year in 2014 for several transnational pharmaceutical enterprises, the whole promotional costs increased by 17 percent, far more than upward movement of sales. As such, one can infer that end-users fork out more money to finance marketing campaigns and profits of Big Pharma than to back genuine research of new drugs. This is without prejudice to the awareness that the money spent on research is, at the moment the drug is brought out, a sunk cost. This means that earmarked resources for research have already been used and the economy doesn’t refund the invested researchers’ time and funds should fewer people buy a drug developed by them. In the face of this, new molecular compounds currently account for only about 15 percent of the new drugs approved by the US Food and Drug Administration. Admittedly, this comes as no surprise if we take patent monopoly into account as the core reason for the ever-upward spiral of drug prices. Indeed, at a time when innovation costs money and patent monopoly enables industry to keep prices as high as the market can bear, the transnational companies roll out non-stop newly patented variations on existing drugs (the so-called “evergreening”) that demand less in terms of time, cost and risk. These drugs are the main output of R&D so far. In other words, instead of genuinely engaging in new drug development, the pharmaceutical industry invests in adding on to the list of already existing, effective treatment solutions. On the other hand, the introduction of ‘me-too’ drugs does solve the competition problems bound up with the patent system. Since companies are not allowed to reverse-engineer patented drugs, the only way out is to roll out similar though not identical ones. As a rule, ‘me-too’ drugs are exceedingly priced as well, sadly leading to the awareness that imitation, not innovation, rewards under the current patent regime. These circumstances may explain why 85-90 percent of all newly sanctioned products of pharmaceutical R&D are judged to be little better than existing ones. This echoes a report whereby, out of over 112 drugs recently examined on the Dutch market, no less than 55% had no therapeutic added value; 7% percent were even worse than those already available; in the case of 35% it was doubtful whether they had any added value; and only 4% were considered to improve on the existing remedies. The same report discloses that similar results can be found in most countries. This would be the case for the French market, where it points out that less than 25% of new drugs were judged to be a better alternative to what is already on the market (and around 15-20% were in fact worse). Astoundingly, this occurs at a time when a large amount of Big Pharma R&D costs are borne by others. In the US context, these include the National Institutes of Health (NIH, through which the government invests over $30 billion on biomedical research yearly), other national research programs, venture capitalists funding biotech and foundations. How to Fix Drug Prices? Governments should place much more emphasis on therapeutic added value in their health policies. Unfortunately, there are no silver bullets at the moment, with the US administration being lobbied by the pharmaceutical corporations, the European authorities doing almost nothing to check the tide of ‘me-too’ drugs, and the European Medicines Agency testing new medicines only in terms of safety and efficacy compared with a ‘pretend’ drug. Under these circumstances, It would be appropriate to have clinical trial tests publicly funded and fully public, with all sanctioned medicines available in a free market at just a fraction of the current ‘brand’ prices. As such, it is good news that pressure is seemingly mounting to make that happen: A recent US bill states: “If a prescription drug demands an outrageous price tag, the public, insurers and federal, state and local governments should have access to the information that supposedly justifies the cost.” Accordingly, so-called ‘pharmaceutical cost transparency bills’ have been introduced in a number of US state legislatures so far, aiming to make drug manufacturers justify their prices. Some of the bills require disclosures for drugs priced $10,000 or more per year, whereas others would force companies to declare the manufacturing, marketing and advertising costs, or would allow the states to act on simple information, not just disclosure. Pennsylvania’s would allow insurers to deny drug payments should companies refuse to disclose the required information. More recently, a California Assembly Bill 463, called the ‘Pharmaceutical Cost Transparency Act’, would force pharmaceutical companies to report production and marketing costs linked to any drug treatment priced at $10,000 or more. In detail, the bill would impose manufacturers to declare the drug relevant profits, the costs bound up with R&D, clinical drug trials and manufacturing, as well as the government grants bearing the research, marketing and advertising expenses. On the same wavelength, an online calculator called DrugAbacus is currently operational at the Memorial Sloan Kettering Cancer Center, to compare present costs for a lot of cancer drugs with theoretical prices assessed by variables like side effects, R&D costs, expected added-life years, and the number of people could benefit by each drug. Unfortunately, most of the aforesaid state bills, which are backed by a number of health insurers and consumer groups, have not progressed nor been put into practice so far. The pharma and biotech industry groups run contrary to and maintain that transparency bills would add them burdensome costs to comply with, would generate misleading information, or, even worse, would allow proprietary data to fall into the hands of competitors. Overall, the initiatives highlighted here are grounded in the hope that transparency in costs would help curb extortionate drug prices. But whether this goal would be achieved is hardly predictable now that pharma companies and their allies are lobbying policy decision makers to scupper any rules that would force them to disclose the real R&D costs and profits of their medicines and the rationale for charging what they do. *Daniele Dionisio is a member of the European Parliament Working Group on Innovation, Access to Medicines and Poverty-Related Diseases. He is an advisor for “Medicines for the Developing Countries” for the Italian Society for Infectious and Tropical Diseases (SIMIT), and former director of the Infectious Disease Division at the Pistoia City Hospital (Italy). Dionisio is Head of the research project PEAH – Policies for Equitable Access to Health. He may be reached at email@example.com http://www.peah.it/ https://twitter.com/DanieleDionisio Share this:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window) Related "Alleged R&D Costs: Not A Transparent Driver Of Drug Prices" by Intellectual Property Watch is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.