New Drugs Cost Even More Than You Think

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The standard figure for drug discovery thrown around by the industry's most avid critics is the Light and Warburton estimate of roughly $43 million.  Most serious analysts think that's way too low (I agree--their assumptions were bizarre, and their attempt to defend them in the comments to this Tim Noah piece is painful to read).


The industry, and its supporters, prefer Joseph DiMasi's figure of around $800 million.  But critics point out that it was derived using confidential data, which can't be verified, and they are very critical of the method, which includes opportunity costs--the returns that pharmaceutical firms didn't earn by spending the money elsewhere.

Now along comes a new method, from Matthew Herper at Forbes.  It uses only public, audited data, and it's breathtakingly simple: over a 15-year period, they divided each company's R&D spend by the number of drugs they got approved.  The result: DiMasi is also way too low.  For every approved drug, pharma spent between $4 billion and $11 billion on R&D.  Yes, there's probably some wiggle room on the accounting, but not that much--your auditor is not going to let you reclassify your new delivery trucks, or a Human Resources SVP, as a research expense. 

As Herper points out, this isn't necessarily a vindication of pharma--one could demand to know why they have to spend so much money to develop new drugs.  Yes, I know, it's getting harder to find approvable new drugs, but the industry has been flailing for ten years, and so far, the only answer they have hit on seems to be "more layoffs!"  Maybe they're just trapped in a bad place, but since the layoffs clearly aren't working, I sure hope they come up with something else.  

Still, it's a useful corrective to the notion that pharma just wanders down to the university labs once a year to harvest the new drugs, then spends the rest of the year sitting back and idly watching the royalty checks pour in through the mail slot.  Finding an approvable new drug is a long, expensive process that too often goes awry--and often, the rules we impose make things worse, and even tax policy.  We should think about these numbers every time someone like Marcia Angell suggests that really, Big Pharma barely does anything.  Unfortunately, Big Pharma is doing a lot, although not necessarily effectively as they could.  Even more unfortunately, a dry pipeline hurts us at least as much as it hurts them.



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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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