$1.3 b. to develop a new drug? It’s a myth!

By Shlomo  Maital


 Some numbers, with no basis in fact, become truth simply through repetition. Take, for instance, this one:  It costs $1.3 b. to develop a new drug.  We all know that, right?  That’s why medicine is so expensive. 

  Wrong.  Here is how two eminent doctors (1)  debunk that number.  And at the same time, prove that “pharmaceutical companies are price-gouging”, with the biggest 11 pharma firms piling up ever-rising net income – nearly $85 b. in 2012.

   * Half the $1.3 b. is the opportunity cost of capital invested in developing drugs.  An inflated unrealistically high rate of return is used.  Right now, the risk-free rate of return on bonds is about 1 per cent.  So – knock off fully half of that $1.3 b.   We’re at $650 m.

*  Taxpayers finance pharma’s research costs, through tax credits and deductions.  This brings the $650 m. cost down to $325 m.

* That $1.3 b. is based on the most costly one-fifth of new drugs,  NOT the average of all drugs.  Correcting this brings the cost down to $230 m.

* A few expensive drugs inflate the average.  So it’s best to use the median, not the average.  The median:  the point at which half of the research projects cost more, and half less.  This brings company research costs down to $170 m.

*  Pharma inflates the cost of basic research underlying the new drugs.  The net median corporate research cost comes down to just $125 m., when the figure is adjusted for more realistic basic research costs.  Pharma invests only 1.3 per cent of revenues in basic research; the rest goes to developing new drugs with very little advantage over existing ones, just to inflate profits.

    For cancer drugs, most of the cost of clinical trials are paid for by the U.S. National Cancer Institute. 

    What is worse – big pharma raises the prices on some of their older drugs by 20-25 per cent a year, and in the past decade, they have almost doubled their prices for cancer drugs.   This is a ‘market spiral pricing strategy’, at a time when most other new products, like iPhones, fall rapidly in price.

    Someone has to blow the whistle on Big Pharma.  They are ripping us off, and people are dying because they cannot afford costly medicine.  This is inexcusable.   

(1)   Cancer Rx: The $100,000 Myth.  By Donald Light and Hagop Kantarfian.  AARP Bulletin:  May 2014, p. 22.