E-DRUG: Lancet on R&D costs
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[Nathan alerts us on this interesting piece in the Lancet on R&D costs for
drugs.
Anyine interested to comment? Copied as fair use. WB]
Lancet 17 January 2004
Commentary
Research and development costs for drugs
How much in revenues do drug companies have to generate to maintain current
levels of investment in research and development? Joseph DiMasi and
colleagues1 try to answer that key question in the estimation of the costs
of
pharmaceutical research and development (R&D). These researchers used survey
data from ten drug companies to compile R&D costs for 68 investigational
compounds. Their estimations indicate that for every one new chemical entity
brought to market, firms can expect, on average, US$403 million in actual
cash
outlays for R&D (all values are adjusted for inflation to constant year-2000
US$ unless otherwise indicated).
This estimate includes preclinical and clinical costs for compounds that
actually make it to market and for compounds that do not make it to market.
Opportunity costs of not investing that $403 million elsewhere--referred to
as
the cost of capital and estimated1 at 11%--increases the total to $802
million
for each new chemical entity. Although some argue against including the cost
of capital, it is especially important in answering the above question since
firms could invest elsewhere.
When considering the precision of these estimates, there are important
issues
to keep in mind. First, estimates of the cost of capital do not account for
the sometimes substantial tax advantages for R&D expenditures. For example,
a
1993 study2 used a marginal corporate tax rate of 34% that reduced estimates
of drug-company capital expenditures from $259 million to $171 million
(adjusted to 1990 US dollars). Second, DiMasi and colleagues' estimates1 are
based on survey data from a small number of firms (10 of 24 firms responded)
that may well have had a vested interest in the outcome of the study. Third,
the underlying data have high variance, so point estimates are inexact
representations of costs that a firm may incur. A better representation of
the
data would be the range DiMasi found using Monte Carlo simulation, in which
1000 cost estimates were generated by simultaneously selecting different
values for each variable from its probability distribution. In this
random-generation process, Monte Carlo simulation provides a distribution of
estimates that captures the uncertainty in the underlying data. In the
DiMasi
simulation, for example, 95% of cost estimates that included cost of capital
fell between $684 million and $936 million.
Even though these Monte Carlo results provide a sense of the variance in the
underlying data, they do not account for bias in the underlying data. To
show
their results are on target, DiMasi and colleagues1 compare their estimates
of
percentage of expenditure to other sources. However, when large figures are
being evaluated, small differences in percentages (eg, 11�8% vs 11�4%) can
mask large differences in actual expenditure. They also compare their actual
estimates to industry totals as published by the industry group, the
Pharmaceutical Research and Manufacturers of America, and found similar
results. However, the validity of this comparison is also uncertain since
both
estimates use data self-reported by the industry.
The pharmaceutical industry uses the high cost of R&D to justify monopoly
pricing and continued product protection. Yet these high costs provoke the
question: are we overinvesting in this type of research? According to the US
National Science Foundation, manufacturers of pharmaceuticals and medicines
(as categorised by the Foundation) report industry spending on R&D to be
almost $13 billion in 2000 alone. This number was just over $12 billion in
1999 (in 1999 US dollars)3 and has been steadily increasing since the 1960s.
Given limited resources, should the goal of policy be to continue the
current
trend of investment? Are there still sufficient benefits to justify this
level
of investment? Can society afford to continue paying for expensive new drugs
and other medical advancements? These are all open questions.
Some might argue that society can afford it. Sean Tunis, chief medical
officer
at the US Center for Medicare and Medicaid Services, was quoted in reference
to expensive new medical procedures: "if the technology was effective, we
would find a way to pay for it. There is no dollar value per life per year
at
which Medicare would decline to pay."4 Yet how much longer can society
continue to "find a way to pay for it"? Are there better options? Is it
possible to spend more to reduce poverty and improve education and
infrastructures, thereby improving people's health and other aspects of
their
lives? In so doing, could we also reduce the need for new drugs and other
medical advancements, and direct more resources toward other technologies?
This is certainly not to belittle the efforts made in pharmaceutical
medicine
in the past century, but perhaps society needs to think about re-evaluating
its investment portfolio. Before that can be done, however, more research is
needed to validate these firm-level cost estimates and to quantify the
societal costs and benefits of these advances. Only then can we have an
informed discussion about setting policies to optimally allocate resources
for
developing new drugs and other medical advancements.
My opinions and conclusions do not necessarily represent those of the US
Bureau of the Census.
T Lynn Riggs
---
US Bureau of the Census, Center for Economic Studies, Chicago Census
Research
Data Center, Chicago, IL 60604, USA (e-mail:tlriggs@frbchi.org)
1 DiMasi JA, Hansen RW, Grabowski HG. The price of innovation: new estimates
of drug development costs. J Health Econ 2003; 22: 151-85. [PubMed]
2 US Congress, Office of Technology Assessment. Pharmaceutical R&D: costs,
risks and rewards. OTA-H-522. Washington, DC: US Government Printing Office,
February, 1993.
3 National Science Foundation, Division of Science Resources Statistics.
Research and development in industry: 2000. NSF 03-318. Arlington, Virginia:
National Science Foundation, May, 2003:
http://www.nsf.gov/sbe/srs/nsf03318/start.htm (accessed Nov 3, 2003).
4 Kolata G. Newest treatments create a quandary on Medicare costs. New York
Times National Aug 17, 2003: Sect YT:1;13.
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