Pharma and Its Golden Hoard

© Chrisjeanes | - Smaug - The Hobbit Photo

© Chrisjeanes | – Smaug – The Hobbit Photo

The debate over the cost of drug development goes all the way back to the late 1950s. The then Chairman of the U.S. Senate’s Anti-Trust and Monopoly Subcommittee said that the pharmaceutical industry had: 1) predatory pricing and excessive margins related to their patents; 2) that extravagant increases in costs and prices were due to large expenditures in marketing; and 3) most of the industry’s new products were no more effective than the ones already on the market. It seems that little has changed over the past fifty-five years.

An often-quoted 2003 study on the cost of drug development by DiMasi et al., “The Price of Innovation,” concluded that it cost an estimated $802 million in 2000 dollars to bring a new drug to market. The 2014 profile released by PhRMA, the advocacy group for the U.S. pharmaceutical industry, estimated that it cost $1.2 billion to develop a new drug. PhRMA noted that: “some more recent studies estimate the cost to be even higher.” In contradiction of the higher R&D estimates of DiMasi and PhRMA, Light and Warburton suggested that: “R&D costs companies a median of $43.4 million per new drug.” This is less than 1/18th of the $802 million estimate by DiMasi et al.

Deciding whose figures to trust can be tricky. For example, Light and Warburton pointed out that the Tufts Center for the Study of Drug Development, where the DiMasi study was conducted, has received “substantial industry funding for years.” Among the concerns they had with the DiMasi study were: inflated costs for drug trials; exaggerated time for R&D; corporate financial risk for R&D was much lower than reported; average costs based on “means” and not “medians,” leading to inflated figures. Using the median trial costs reported by DiMasi (74% of the mean trail costs), they said: “the $802 million figure would have been reduced to $593 million had median costs been used.”

Scott Gavura in “What Does a New Drug Cost” part 1 looked at both the DiMasi study and its critique by Light and Warburton. Gavura said he found the Light and Warburton figure “implausibly small.” In “What Does a New Drug Cost” part 2, he elaborated, saying that he thought their estimates “were based on a sequence of highly implausible assumptions;” the average drug development cost would be higher in the real world. He asked if the low-hanging fruit in drug development is gone. “A growing concern with the pharmaceutical industry is its overall productivity in delivering new drugs.” Gavura concluded his article by stating that he thought criticism of the pharmaceutical industry was justified, if it was done for the right reasons.

Being skeptical of R&D estimates is wise. Data on individual drugs is not transparent, and estimates must incorporate a number of assumptions which have the potential to bias the conclusions.  This lack of transparency fuels suspicion of the process. But we should also be equally skeptical of arguments that dismiss or diminish the growing problems with R&D. There is good evidence to suggest that drug development is a risky, expensive endeavor, and that this work is getting harder.

In a 2008 article published in PLOS Medicine, “The Cost of Pushing Pills,” Gagnon and Lexichin explored the reported expenditures of the pharmaceutical industry and concluded that: “pharmaceutical companies spend almost twice as much on promotion as they do on R&D.”  Their estimate was made from highly reliable sources, one of them being IMS Health, a company relied upon by both the federal government and the pharmaceutical industry for information on the healthcare industry.

Their revised estimates for promotional spending in the US for 2004 was $57.5 billion, twice that of IMS Health. This compares to the $31.5 billion reported by the National Science Foundation for domestic industrial pharmaceutical R&D in 2004. “These numbers clearly show how promotion predominates over R&D in the pharmaceutical industry, contrary to the industry’s claim.”

Allen Frances, the chair of the DSM-IV, has become an outspoken critic of modern psychiatry, the DSM-5, and “Big Pharma.” He reported in Saving Normal that worldwide pharmaceutical sales exceed $700 billion each year. Half of that figure is spent in North America and another one fourth in Europe. Rick Newman reported that Pharma’s profit margin was 16.4 percent, the seventh highest among the industries tracked by Morningside, an independent investment research firm.

The justification of high prices and huge profits by pharmaceutical companies was “mostly fluff,” according to Frances. “Drug pricing has no relation to real cost or value and instead reflects Pharma’s monopoly position in the market and its dominance over politicians.”  At its worst, he said that pharmaceutical research is a “deceptive shell game” meant to seduce and mislead doctors and the public. “The claim that drugs are so expensive because they require so much research is pure smoke screen.”

In The Desolation of Smaug, the final scene shows the dragon Smaug rising up out of molten gold. Goaded by the unsuccessful attempt of the dwarves to destroy him, he flies off to take his revenge on the unsuspecting Lake-town of Esgaroth. Over the past sixty years we have allowed Pharma to gather a golden hoard through its profits from drug development. Like Smaug, Pharma jealously guards its hoard. If we take on a quest to right this injustice, we must be careful not to loose an angry, vengeful dragon upon an unsuspecting humanity by mistake.

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