R&D Investment Does Not Justify High Cost of Cancer Drugs

Roxanne Nelson, BSN, RN

September 11, 2017

The cost of developing cancer drugs may be much lower than previously believed, according to new findings.

Newer cancer drugs have increasingly higher price tags, which has often been justified by the large investment need for research and development (R&D) before a drug finally enters the US market.

The estimated cost most often cited comes from the Tufts Center for the Study of Drug Development, which states that the average cost of developing a new drug is $2.56 billion ($2.7 billion for 2017).

However, two experts disagree and report that the actual cost is much lower than that.

In an analysis published September 11 in JAMA Internal Medicine, Vinay Prasad, MD, MPH, from Oregon Health & Science University, Portland, and Sham Mailankody, MBBS, from Memorial Sloan Kettering Cancer Center, New York City, found that the cost to develop a single cancer drug is $648 million (2017 US dollars).

When including a 7% and 9% per annum cost of capital (or opportunity costs), the median cost was still substantially lower at $757.4 million and $793.6 million, respectively.

These results suggest that pharmaceutical drug development is "extremely lucrative," note the authors, and that the current prices charged for these drugs are not necessarily justified by the R&D spending.

Their analysis includes 10 oncologic drugs that had received US Food and Drug Administration (FDA) approval over the past 10 years.

The total revenues from their sales was $67 billion, which was more than 7 times higher than the total spending for R&D.  Because the median duration of market exclusivity for these products is about 14 years, they will continue to earn billions in revenue.

Of the 10 manufacturers surveyed in the current analysis, 9 had higher revenues than R&D spending and 4 had more than 10-fold higher revenues than spending.

"The current system of drug pricing is not a free market, but a rigged market, where years of pharmaceutical lobbying has allowed Pharma to charge CMS [Centers for Medicare & Medicaid Services] whatever it wants and CMS cannot negotiate or say no — at least to cancer drugs," said Dr Prasad.

He pointed out that in the current system, drug prices vary wildly, depending on negotiations with individual payers, and are not transparent.

"I think we need to ensure that pricing at the patient level is affordable, and at the payer level is sustainable," Dr Prasad told Medscape Medical News.  "Currently, it is neither."

While efforts to lower price remain his priority, Dr Prasad added that "standardization would also be of help. Of course, single payer or other such proposals may introduce more standardization."

Rising Prices, New Approach Needed

The price tags of cancer drugs has been steadily rising, and prices in the United States are the highest in the world. New drugs coming out of the pipeline are routinely priced more than $100,000 per year of treatment, the authors note, and some have crept up close to the $200,000 per year threshold. Depending on the dosing and treatment duration, drug costs can even reach the $1 million per year mark.

A persistent argument to justify the high cost of drugs is the amount of money that pharmaceutical companies invest in R&D programs to develop and ultimately bring a drug to market. While the cost cited by Tufts is the one most often referenced, it is 8 times higher than an estimate from Public Citizen, a nonprofit consumer rights advocacy group.  The consumer group's estimate was $320 million (inflation adjusted for 2017 US dollars).

Dr Prasad pointed out that the Tuft analysis is entirely nontransparent and that "we have no idea which companies or drugs were included, and no one can check their work."

Drs Prasad and Mailankody decided to update these estimates using a different approach. They focused on 10 publicly traded pharmaceutical companies that had only one drug approved by the FDA. All 10 companies were also simultaneously developing other compounds, with a median of 3.5 drugs in clinical development during the study period (range, 2 to 11 drugs).

To estimate total costs, they used US Securities and Exchange Commission filings from the approximate time of discovery or the initial acquisition of the compound to its approval and entry to the marketplace. Because all of the manufacturers were developing other products, the analysis also takes into account the cost of failure.



Table. Estimated R&D Spending and Sales Revenue



Drug Manufacturer Date of FDA Approval Total R&D Costs in Millions (Inflation Adjusted) ($) Revenue Since Approval in Millions (Inflation Adjusted) ($)
Eculizumab Alexion Pharmaceuticals March 2007 817.6 12,987.8
Pralatrexate Allos Therapeutics September 2009 178.2 304.8
Brentuximab vedotin Seattle Genetics August 2011 899.2 1034.3
Ruxolitinib Incyte Corporation November 2011 1097.8 2251.5
Enzalutamide Medivation August 2012 473.3 21,068.3
Vincristine liposome Talon Therapeutics September 2012 157.3 204.1
Cabozantinib Exelixis November 2012 1950.8 341.9
Ponatinib Ariad Pharmaceutical December 2012 480.1 5457.9
Ibrutinib Pharmacyclics November 2013 328.1 22,275
Irinotecan liposome Merrimack Pharmaceuticals October 2015 815.8 1065.2

Findings "Broadly Representative"

The authors point out that approximately 15% of all new molecular entities with an oncologic indication were approved during this period. The median time to develop a cancer drug in the current analysis was 7.3 years (range, 6 to 15 years) and is consistent with previous estimates.

Drugs that received accelerated approval were less costly to develop compared with those receiving regular approval, but this finding did not reach statistical significance (median, $328.1 million [range, $157.3 million to $899.2 million] vs $817.6 million [range, $473.3 million to $1950.8 million]; P = .08).

Spending for R&D on novel drugs was higher than for next-in-class drugs (median, $899.2 million [range, $328.1 million to $1950.8 million] vs $473.3 million [range, $157.3 million to $815.8 million]; P = .047).

Likewise, R&D costs were also higher for self-originated drugs than acquired  products (median, $899.2 million [range, $480.1 million to $1950.8 million] vs $328.1 million [range, $157.3 million to $815.8 million]; P = .02).

Ponatinib, ibrutinib, enzalutamide, vincristine liposome, and pralatrexate were acquired by other companies, at costs ranging from $204.1 million to $21 500.0 million (2017 dollars). Nine of the drugs (90%) achieved higher revenues than their R&D costs (range, 17.5% to 6789.1%), and sales revenue was more than 10-fold higher than R&D spending for ponatinib, ibrutinib, enzalutamide, and eculizumab.

The authors point out that 60% of the drugs in this analysis were approved on the basis of a surrogate endpoint (such as progression-free survival) and 40% were approved on the basis of overall survival or patient-reported improvement in quality of life, which is a proportion similar to that seen among all cancer drugs that are approved on the basis of a surrogate. Half of the drugs in the analysis also have a novel mechanism of action.

Therefore, despite the relatively small size of this analysis, the results are "broadly representative" of recently approved cancer drugs, according to the authors.

These results demonstrate that there is room to lower the price of drugs without stifling innovation, explained Dr Prasad. "There are many ways to lower the cost of drugs. Options include value-based pricing, reference pricing, allowing Medicare to negotiate price, importation of foreign drugs, shortening patent lengths, and the government providing reasonable compensation for licensing rights for NIH [National Institutes of Health]–funded therapies."

"These have all been criticized as 'stifling innovation,' but our results would suggest they will not stifle innovation," he added.

Fresh Perspective

In an accompanying editorial, Merrill Goozner, MS, editor emeritus at Modern Healthcare, points out that industry critics and journalists  had repeatedly questioned the assumptions of the Tufts study.

In this analysis, he notes that the "fresh perspective" taken is powerful because the authors chose not to challenge the core assumptions of the Tufts study, including the cost of failed experiments and giving equal value to new products that mimic the therapeutic approach of previously approved drugs.

Thus, their results show that the actual cost of developing a new drug is approximately one fourth of the estimate cited by Tufts, he says.

"The implications of the present study seem clear," writes Goozner. "Current pharmaceutical industry pricing policies are unrelated to the cost of research and development. Policymakers can safely take steps to rein in drug prices without fear of jeopardizing innovation."

Not Looking at the Whole Picture

However, Holly Campbell, a spokesperson for the Pharmaceutical Research and Manufacturers of America (PhRMA), the trade organization for the pharmaceutical industry, notes that this study "significantly understates the incredible investment biopharmaceutical companies make in the development of new cancer therapies by focusing only on companies that have been successful and omitting the significant early-stage R&D costs for many of the companies analyzed."

"Thanks to the tenacity of biopharmaceutical companies, we have therapies unimaginable just a decade ago that attack cancer at the molecular level and are tailored to the unique needs of individual patients," she told Medscape Medical News.

Campbell also pointed out that ignoring the R&D costs from the many companies that have not received an FDA approval indicates a "lack of understanding of the risk companies face at the outset of an uncertain project and the role of economic incentives in ensuring investment despite steep odds."

"The risk inherent in R&D is the key reason why 90% of publicly traded biopharmaceutical companies in 2014 did not make a profit," she said.

Campbell also emphasized that setbacks are an inevitable part of the R&D process and biopharmaceutical researchers use the knowledge gained to better understand and inform research on other medicines in development. "In cancer, this knowledge has yielded more medicines being approved, but while we are making major progress, there are many cancers that still lack effective treatments," she said.

Dr Prasad is funded by the Laura and John Arnold Foundation. Dr Mailankody is supported in part by support grant/core grant P30 CA008748 from the National Cancer Institute Memorial Sloan Kettering Cancer Center. Dr Prasad has disclosed no relevant financial relationships. Dr Mailankody reported serving as a principal investigator for clinical trials with research funding from Juno Therapeutics and Takeda Oncology and receiving personal fees for speaking at the Wedbush Pacgrow Healthcare Conference 2016. Mr Goozner has disclosed no relevant financial relationships.

JAMA Intern Med. Published online September 11, 2017. Abstract, Editorial

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