PHARMA: $1.7bn R&D for a new drug? Surely you jest, Bainies?

PHARMA: $1.7bn R&D for a new drug? Surely you jest, Bainies?


In an study in the news yesterday Bain, the big management consulting firm, said that the cost of bringing a drug to market was $1.7bn.  I’ve heard the $7-800m number many times before and scoffed but this one made me do some basic math.  The CMS (a newly pharma-friendly organization) put out a report this year that suggested that R&D for pharma would be $30 billion (see chart on page 13), although the same report suggested that R&D spending was 13% of revenues of branded drugs revenues of $130bn. So that actually indicates that the number was $17bn.  But let’s go with the $30 billion number and assume that it’s constant over a ten year period (which it hasn’t been).  When I last looked at this about 2 years ago there were about 500 drugs with over $10m sales in the US, and who knows how many more worldwide. In the US according to this list of the top 200 prescribed drugs some 80 odd (or 40%) were generic. So assuming that to be true for the top 500 drugs, means that there are 300 branded drugs.  Assume further that in a 10 year period there’s turnover of 80% of the branded drugs (and it’s probably faster than that), the back of the envelope calculation is that some 500 drugs of any reasonable size come onto the market every decade. Yet at its most generous assessment, R&D spending is only $300bn in decade–leading me to guesstimate that the cost of R&D per product is, at the outside, in the $5-600m range, not more than 3 times that.

Now Bain is playing both sides of this.  It’s acting on behalf of its pharma clients to keep their line about the costs of R&D in the press, but it’s also interested in frightening them into serious restructuring to combat their lack of revenue from new blockbusters and to get them to spend consulting dollars on the development of new business models.  But if you thought these numbers had me perplexed, my anonymous pharma veteran who is an occasional contributer to THCB is foaming at the mouth about it:

    What the hell; let’s do a study to show that it actually costs $2 Billion to bring each new drug to market.  Stick in all fixed costs  (maintenance, landscaping, inspections, property taxes, perquisites for senior management, depreciation, anything else we can think of.)  Yes, let’s show that Big Pharma is in a real pickle and they should get a federal bailout.  Highest return on equity of any industry? On sales?  Guys like Ray Gilmartin sitting around with $90 Million in unexercised options and Hank McKinnell getting $40 Million a year?  Nah, none of that matters.  Blame the foreigners (Old Europe, the Canucks, everyone else) for not allowing unconscionable profits the way we do.  Blame the retirees for not adequately planning for themselves, blame baby boomers for being too short sighted.  Hell, if none of that sticks, then just grease the politicians and make sure we get a bunch in there who can do business on a bought-and-paid-for basis.  It’s just like the advocates and opinion leaders we’re always buying off, only this will be easier because there’s no goddamned competitor with enough hash to pay them to go the other way.

And then he calms down, somewhat

    Oops, sorry, that was my Texas alter ego that got out of the cage.  I just stuffed him back in there, together with some crony capitalists, militarists, jingoists and religious fundamentalists.

    But his hyperbole does have a point.  I recently completed a study for a Big Pharma client who gave me the actual dollar costs to develop two, recently launched products.  Take the smaller of the two spurious figures (i.e., $800 Million), divide it by 20 and you’ll be in touch with reality.  Looking at the range of drug development costs, these products were on the low side because they’re in a category where Phase III trials enroll between several hundred and 3,000 patients.  If you go to something such as hypertension where trials often enroll upwards of 15,000 patients, costs will be higher but still within the $200 million range and not the billion dollar level.  Only by throwing in the kitchen sink and dividing all R&D costs by the number of new products do the whores at Tufts get to $800 billion.  The other whores at Bain throw in the toilet and shower as well by including costs for marketing, sales, bribery and what not.

Now the pharma veteran’s alter ego has flown off the handle somewhat, and he may not be including the costs of failed drugs in his calculations (although there aren’t that many highly expensive failures). But let’s remember what this is all about.  It’s about convincing the WTO and the US trade negotiators that price setting by foreign governments is a restraint on trade, and that far from Canadian prices coming here, ours should go to Canada, and Europe and Japan, etc!

This is not a joke.  Said the man from Merck (Ian Spatz, VP for public policy), "This is all going on in this larger context of growing unrest in the United States that other countries are not paying their share of the cost of pharmaceutical research."  And PhRMA is starting with Australia. The poor Aussies, who sent soldiers to Iraq over the objections of the vast majority of their citizens in order to get a free trade deal that would enable their agricultural goods to get onto US dinner tables, did not see this one coming! But if big PhRMA manages to convince us all that those costs are real, why wouldn’t they at least try to take them to the rest of the world? You may have thought that "growing unrest" over drug pricing here was all about American seniors taking the bus to Canada to buy drugs cheap. PhRMA thinks instead that we’re all upset about subsidizing the Canadians, and if we’re not we should be! After all the best defense is a good, pre-emptive, offense!

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2 Comments on "PHARMA: $1.7bn R&D for a new drug? Surely you jest, Bainies?"

Oct 2, 2008

Marcia Angell addressed this issue in her book, “The Truth about the Drug Companies” a few years ago. If you factor in tax breaks and government financial assistance with research, for example, it’s about 200 million dollars, so the high cost of drugs here is not justified in any way.
However, the cost of bringing a biological drug to market exceeds a billion dollars.

David Lapidus
Apr 13, 2006

How much of the US GDP spent on health care annually is spending towards health care R&D?