Pharma Companies Spent $985M On New Drug Development

March 09, 2020 - Biopharmaceutical companies spent an estimated $985 million on new drug development and research over a decade, counting expenditures on failed trials, according to researchers from the London School of Economics and Political Science.

The study published in JAMA Network Open leveraged publicly available data approved by the FDA between 2009 and 2018 to estimate the research and development expenditure required to launch new therapeutic drugs and biological agents in the healthcare market. 

The data were accessible from smaller firms, orphan drugs, products in specific therapeutic areas, first-in-class drugs, therapeutic agents that received approval, and products approved within the study frame.

Researchers found that the median cost to introduce a new drug to market was $985.3 million after accounting for the costs of failed trials, while the mean investment was $1,335.9 million. Estimates by therapeutic area ranged from $765.9 million for nervous system agents to $2,771.6 million for antineoplastic and immunomodulating agents, the report stated.

Between 2009 and 2018, the FDA approved 355 new drugs and biologics. Spending on new therapeutic agents capitalized at a capital rate of 10.5 percent per year. Research and development expenditures were available for 63 (18 percent) of products developed by 47 different companies.

Twenty-three of the estimates were judged high quality, 18 medium quality, and 22 low quality. 

Rising drug prices are a continuous challenge in the US and the main concern is the scale of research and development investment by biopharmaceutical companies that launch new market drugs.

The most widely cited studies found the cost of developing a new drug increased the mean cost of developing one new therapeutic agent from $1.1 billion in 2003 to $2.8 billion in 2013. 

Back in 2017, Prasad and Mailankody estimated the total cost to bring a single cancer drug to the healthcare market to be $780 million. This capitalized at a real capital rate of 7 percent per year based on a sample of 10 drugs. 

Researchers uncovered failure rates using data on aggregate clinical trial successes. The percentage of FDA approvals were 13.8 percent for therapeutic agents entering phase 1, 35.1 percent for those entering phase 2, and 59 percent for those entering phase 3, the report said. 

“While these expenditures are undoubtedly high, as shown in the study, it is important for policy makers, regulators, and payers to know the exact scale of these investments. This knowledge can inform the design of pricing policies that give adequate rewards for innovative drugs that bring value to healthcare systems,” the report stressed.

Companies must account for drug price spending when looking to launch a new drug in the market. Not only do drug prices affect the manufacturers, but payers are also affected as well. 

Last year, new guidance from CMS addressed the ongoing challenge of prescription drug prices spreading throughout the country.

Price spreading occurs when pharmacy benefit managers (PBM) retail a specific amount of the price that a managed care program pays for a prescription drug rather than giving those savings to the pharmacy. 

Price spreading creates a gap between how much a PBM pays for a drug and the amount the pharmacy is reimbursed for that drug. The PBM then profits off the sale. For example, if the PBM and managed care plan agreed on a drug price of $70, and the PBM then sells the drug to the pharmacy for $60, the PBM profit is $10.

In turn, the managed care plan still reports a $70 drug cost which increases the bill for taxpayers who fund state Medicaid programs.

“I am concerned that spread pricing is inflating prescription drug costs that are borne by beneficiaries and by taxpayers,” CMS Administrator Seema Verma said in the guidance. 

“PBMs cannot use spread pricing to upcharge health plans and increase costs for states- spread pricing must be monitored and accounted for, and not used to inflate profits.”