A Thought On Drug Development Costs

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The rate of drugs licensed by the EMA doubled over the period, increasing from an average of six per year from 2000-08, to 13.5 per year from 2009-16.

Pick either number there, your choice.

We can annualise the costs and revenues of the industry. That is, say that the 13.5 drugs approved in any year must, over their lifetime revenues (patent lifetime revenues, so perhaps 8 years from actual first prescription or thereabouts) cover the entire R&D costs of the whole industry.

It’s not entirely true that anything licenced in the EU will also be in the US but it’s a reasonable shorthand to assume. Thus all global R&D costs, for the one year, must be covered by the gross margins on those 8 years of sales of those 13 drugs.

It would be interesting to have those numbers really. Because it’s not entirely obvious that the industry as a whole does make a return on capital invested. Sure, the big extant companies do, we can see that in their accounts. But does the industry as a whole? How much is lost on start ups that just fizzle?

No idea where we’d start to try and find those numbers. But would be fun if someone did it…..

Why? Because we’re told that the current private sector and patent protected method of drug development is inefficient. Should be replaced with state development of everything. And, well, that’s only true if the capitalists are indeed laughing all the way to the bank, isn’t it? If the overall returns to capital are modest or even negative then it’s a system which is, in terms of the returns to those engaging in it, efficient.

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The Mole
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The Mole

Frankly I’m astonished the number is so low. Its clear what the results will look like when as you say you divide revenue of those drugs by R&D investment. If you think about how many different medical conditions there are, with this rate of development you can see why those people with rarer conditions are screwed.

It also shows why drugs companies are so keen of finding new uses for existing drugs. it gives them a wider market to recoup their investment, but its also the only way those with rarer diseases have any chance of getting new treatments.

thefat tomato
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thefat tomato

Pharma research is not profitable; if it were highly lucrative the pharma companies would be bidding wages up to hire researchers straight out of university, but they are not doing that, because in actual fact it’s not profitable as whole, so there is no competitive need to hire new talent. The political and media elites tell a consistent lie that the pharma industry has the highest shareholder profit of any industry, that is a lie masked by a misunderstanding; 1) the lie is based on looking only at the profitable companies, a false selection lie 2) the misunderstanding is equating… Read more »

Phoenix44
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Phoenix44

It’s not a misunderstanding, its somewhere between a dumb attempt to describe why health costs are so high and deliberate misinformation to excuse why health costs are so high. And in the US, deliberate misinformation to support a socialist health policy by claiming costs could be lower because drug prices could be lower.

Spike
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Spike

Yes, we’re told that private-sector drug development is inefficient (government prior restraint for safety AND EFFICACY being an assumption we mustn’t challenge. But we’re also told that profits are excessive, which is the market’s signal that firms are doing something especially valuable. This all to be replaced by state socialism, where the only benefit is that all the capital is pre-stolen so you never have to measure rate-of-return.

Phoenix44
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Phoenix44

Always suspicious of periods of time rather than actual trends over time. A couple of low figures years in one arbitrary time period a d a couple of big numbers mean you can cherry-pick the start-end dates to show anything. Did something happen in 2008 that means that’s an inflection point?

Barks
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Barks

We’ve always suspected that pharma, like airlines, on the whole, over time lose money.

Michael van der Riet
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Michael van der Riet

Pharma does okay. They don’t make their profit on drugs to cure cancer. They make it on antidepressants. BI-II-IGG profit.

Chester Draws
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Chester Draws

Pharma doesn’t need to recoup all its costs in the patent period. The “first entry” bonus will ensure that. If a drug is a massive success, then for a while after the patent ends, the first entrant will keep the bulk of the market it has already cornered. After that the trademarked name will keep sales higher relative to competitors — Prozac will always have an edge over Sarafem. If a drug is only marginally profitable, then the investment in learning how to make it won’t make sense to a new entrant — only to now have two brands fighting… Read more »

Boganboy
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Boganboy

There is an advantage for third world countries that don’t recognize the patents of wicked white Western countries. They can make the stuff for much less. Of course the Indians have a problem. Their drug industry has advanced and can now produce new drugs. So they wish to sell them in Western countries where the suckers are used to paying the huge sums needed to finance drug development. But the wicked Western drug firms oppose recognizing Indian patents since theirs aren’t recognized in India. This also inevitably leads to Neglected Tropical Diseases. The drug companies are reluctant to pay for… Read more »