Research and development of new medications

R&D Costs & Drug Pricing

R&D Costs & Drug Pricing

An article from Kenneth Kaitin, PhD, Professor and Director at Tufts Center for the Study of Drug Development.

This article was originally published by Tufts CSDD Insider.

Kenneth Kaitin, PhD, Professor and Director at Tufts Center for the Study of Drug Development.

Earlier this week, I was interviewed by a National Public Radio affiliate for a segment to be aired in the coming days on whether high drug development costs justify the high prices of many new pharmaceutical products. As many of our readers are aware, Tufts CSDD is known internationally for its series of studies estimating the true cost of pharmaceutical R&D. Our latest study (DiMasi et al, J Health Econ 2016;47:20-33) determined that the fully-capitalized cost to bring a new drug to market, including the cost of failures, is $2.6 billion, a 145% increase in constant dollars over our previous report published in 2003.

At more and more public and professional forums these days, I find myself addressing a common misconception about the relationship between R&D costs and drug prices. Much of this misunderstanding, I believe, comes from confusing messaging by the pharmaceutical industry. For example, when asked to explain why drugs are so expensive, the response is often, because it costs so much to develop new drugs (“The Tufts Center says it costs $2.6 billion to develop a new drug!”). On the other hand, when asked to provide the actual cost data for a specific drug, the response is often, “The cost to develop a drug has no bearing on the price of that drug.” A sane individual might ask, “How can both of these responses be correct?” The bottom line is that they both ARE correct.

As I explain it, average R&D costs represent the cost to maintain R&D operations. In other words, across a company’s marketed drug portfolio, average prices must be high enough for the company to generate sufficient revenue to maintain its R&D operations and (hopefully) develop tomorrow’s breakthrough drug. An individual drug’s price, however, typically reflects that drug’s perceived therapeutic and economic value, the competitive landscape, and the ability to obtain reimbursement. In other words, drug pricing is not unlike pricing of any other product.

The public debate over drug prices and the cost of healthcare in general is certain to continue into the foreseeable future. Greater transparency on how companies determine drug prices and how that relates to R&D costs would go a long way toward improving public understanding and furthering the discussion.