Does it really cost $2.6 billion to bring a new drug to market?

A recent editorial (Avorn J. NEJM 2015; 372: 1877-79) helps provide some perspective on a recent unpublished study that “it costs pharmaceutical companies $2.6 billion to develop a new drug.”  (

Dr. Avorn notes that when this study is published scrutiny over the methods is needed; however, the authors of the study note that their methods are unchanged from a previous 2003 study (NEJM 2015; 372: 1972). Apparently the analysis was based on data from 10 drug makers regarding compounds that they had ‘self-originated.’

Some preliminary criticisms:

  • Nearly half the costs were attributed to the cost of capitol rather than direct spending. This cost indicates that the money being used for drug development was not available for other purposes (“opportunity costs”); however, the capital costs were assessed at a very generous 10.6% per year, compounded.
  • The analysis did not include the large public subsidies provided to pharmaceutical companies in the form of research-and-development tax credits.
  • Pharmaceutical companies remain highly profitable and only spend a small fraction of their revenues on truly innovative research.
  • Many of the drugs brought to market are not “self-originated.”
  • Many drug costs are borne by the public via research at university-affiliated centers with the pharmaceutical companies taking the new discovery the last mile.  “Gilead Sciences did not invent its blockbuster treatment for hepatitis C, sofosbuvir (Sovaldi)…it acquired the product from a small company founded by the drug’s inventor, a faculty member at Emory University, much of whose work on the usefulness of nucleoside viral inhibitors was federally-funded.”

Bottomline: While pharmaceutical companies invest heavily in new drug development, the huge numbers often attributed to research costs may be overestimates; these type of analysis likely underestimate how much taxpayers have paid in subsidizing the foundation for new treatments.

Related blog post: The Difficulty with Drug Development | gutsandgrowth


Why U.S. Consumers Pay More For Medications

The NY Times has highlighted the high cost of medical care in the U.S. in a series of articles.  While only affecting about 10% of the total U.S. health cost, the wide variation in the cost of medicines between the U.S. and other countries leaves the U.S. consumer feeling ‘ripped-off.’

Here’s the link: (from Jay Bookman) and here’s an excerpt:

Pulmicort, a steroid inhaler, generally retails for over $175 in the United States, while pharmacists in Britain buy the identical product for about $20 and dispense it free of charge to asthma patients. Albuterol, one of the oldest asthma medicines, typically costs $50 to $100 per inhaler in the United States, but it was less than $15 a decade ago, before it was repatented.

“The one that really blew my mind was the nasal spray,” said Robin Levi, Hannah and Abby’s mother, referring to her $80 co-payment for Rhinocort Aqua, a prescription drug that was selling for more than $250 a month in Oakland pharmacies last year but costs under $7 in Europe, where it is available over the counter…

Unlike other countries, where the government directly or indirectly sets an allowed national wholesale price for each drug, the United States leaves prices to market competition among pharmaceutical companies, including generic drug makers. But competition is often a mirage in today’s health care arena — a surprising number of lifesaving drugs are made by only one manufacturer — and businesses often successfully blunt market forces….

On the same topic, in Forbes: …

In the U.S., the FDA must deem a drug safe and effective before allowing it on the market.  But at that point, there are no economic barriers to the use of those medications.  By contrast, drugs in the United Kingdom must go through economic analyses by a unit known as NICE—United Kingdom’s National Institute for Health and Clinical Excellence.  Being safe and effective is not enough to pass muster with NICE.  The drug must also be cost effective. …

Should we demand proof of cost effectiveness before allowing drugs on the market?  Or before agreeing to pay for them in Medicare and Medicaid?  Doing so would undoubtedly reduce healthcare expenses.  With medical spending threatening our fiscal future, it makes no sense that Medicare is prevented by law from considering the cost of care when making coverage decisions.  You heard that right—forbidden by law!

Related Blog Post:

Should Physicians Dispense Drug Coupons? | gutsandgrowth

Should Physicians Dispense Drug Coupons?

This is a good question.  Before you answer, consider some of the following information from a recent commentary (NEJM 2013; 369: 1188-89):

  • “Commercial drug-insurance…have tiered pharmaceutical formularies..requiring small patient copayments…for inexpensive generic drugs and higher copayments…for brand-name drugs. Manufacturers use coupons…so that…the out-of-pocket costs are the same as those for generic drugs.”
  • “Coupons were used for approximately 100 million dispensed prescriptions in 2010 –about 11% of prescriptions for brand-name drugs.”
  • The authors performed analysis ‘by manually abstracting information on each coupon advertised in March 2013 at”  They found that with 62% of coupons there were lower-cost therapeutic alternatives available.  58% had generic alternatives and 8% had less-expensive brand-name therapeutic equivalents (some drugs had both generic alternatives and less-expensive brand competitors).

The arguments against coupons:

  1. “On a population level, drug coupons undermine the tiered-formulary system that commercial insurers have implemented to limit prescription-drug spending.”  Insurers must still pay the higher cost of the brand-name drug.  This leads to higher insurance coverage rates for all patients.
  2. Some have argued that these coupons should be disallowed as illegal kickbacks by subverting the cost-sharing arrangements in patients’ insurance contracts.
  3. The costs for these medications for the patient usually are more in the long run as these coupon offers are often limited to 6-12 months.

Bottomline: when there are lower cost therapeutic alternatives, drug coupon programs increase long-term costs and undermine efforts for patients to have ‘skin in the game.’

Related blog:

Can the FDA prohibit free speech? | gutsandgrowth