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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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August 12, 2013

How Much to Develop a Drug? An Update.

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Posted by Derek

I've referenced this Matthew Herper piece on the cost of drug development several times over the last few years. It's the one where he totaled up pharma company R&D expenditures (from their own financial statements) and then just divided that by the number of drugs produced. Crude, but effective - and what it said was that some companies were spending ridiculous, unsustainable amounts of money for what they were getting back.

Now he's updated his analysis, looking at a much longer list of companies (98 of them!) over the past ten years. Here's the list, in a separate post. Abbott is at the top, but that's misleading, since they spent R&D money on medical devices and the like, whose approvals don't show up in the denominator.

But that's not the case for #2, Sanofi: 6 drugs approved during that time span, at a cost, on their books of ten billion dollars per drug. Then you have (as some of you will have guessed) AstraZeneca - four drugs at 9.5 billion per. Roche, Pfizer, Wyeth, Lilly, Bayer, Novartis and Takeda round out the top ten, and even by that point we're still looking at six billion a whack. One large company that stand out, though, is Bristol-Myers Squibb, coming in at #22, 3.3 billion per drug. The bottom part of the list is mostly smaller companies, often with one approval in the past ten years, and that one done reasonably cheaply. But three others that stand out as having spent significant amounts of money, while getting something back for it, are Genzyme, Shire, and Regeneron. Genzyme, of course, has now been subsumed in that blazing bonfire of R&D cash known as Sanofi, so that takes care of that.

Sixty-six of the 98 companies studied launched only one drug this decade. The costs borne by these companies can be taken as a rough estimate of what it takes to develop a single drug. The median cost per drug for these singletons was $350 million. But for companies that approve more drugs, the cost per drug goes up – way up – until it hits $5.5 billion for companies that have brought to market between eight and 13 medicines over a decade.

And he's right on target with the reason why: the one-approval companies on the list were, for the most part, lucky the first time out. They don't have failures on their books yet. But the larger organizations have had plenty of those to go along with the occasional successes. You can look at this situation more than one way - if the single-drug companies are an indicator of what it costs to get one drug discovered and approved, then the median figure is about $350 million. But keep in mind that these smaller companies can tend to go after a different subset of potential drugs. They're a bit more likely to pick things with a shorter, more defined clinical path, even if there isn't as big a market at the end, in order to have a better story for their investors.

Looking at what a single successful drug costs, though, isn't a very good way to prepare for running a drug company. Remember, the only small companies on this list are the ones that have suceeded, and many, many more of them spent all their money on their one shot and didn't make it. That's what's reflected in the dollars-per-drug figures for the larger organizations, that and the various penalties for being a huge organization. As Herper says:

Size has a cost. The data support the idea that large companies may be spend more per drug than small ones. Companies that spent more than $20 billion in R&D over the decade spent $6.3 billion per new drug, compared to $2.8 billion for those that had budgets of between $5 billion and $10 billion. Some CEOs, notably Christopher Viehbacher at Sanofi, have faced low R&D productivity in part by cutting the budget. This may make sense in light of this data. But it is worth noting that the bigger firms brought twice as many drugs to market. It still could be that the difference between these two groups is due to smaller companies not bearing the full financial weight of the risk of failure.

There are other factors that kick these numbers around a bit. As Herper points out, there's a tax advantage for R&D expenditures, so there's no incentive to under-report them (but there's also an IRS to keep you from going wild over-reporting them, too). And some of the small companies on the list picked up their successes by taking on failed programs from larger outfits, letting them spend a chunk of R&D cash on the drugs beforehand. But overall, the picture is just about as grim as you'd have figured, if not a good deal more so. Our best hope is that this is a snapshot of the past, and not a look into the future. Because we can't go on like this.

Comments (33) + TrackBacks (0) | Category: Drug Development | Drug Industry History


COMMENTS

1. Anon on August 12, 2013 8:42 AM writes...

We need to develop completely new ways to develop new drugs, urgently, otherwise ROI will continue to decline (as per Eroom's Law) until investors say "enough is enough", if they haven't already. That would mean the end of innovation, and the end of the pharma industry, because there is no other way to create real value, except through innovation.

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2. Jim D on August 12, 2013 9:08 AM writes...

It would be interesting & perhaps prudent in rounding out the picture to look at the small failed companies that approve nothing in this same time period.

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3. Anonymous on August 12, 2013 10:03 AM writes...

More shots on goal is just a scam run by molecular biologists.

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4. Erebus on August 12, 2013 10:03 AM writes...

If the FDA weren't always moving the goalposts, and if the drug-approval system were generally more friendly to innovation, it might not be as bad.

@1, I think that regulation will ease up a bit before we get to that point. It's not about 'ways to develop new drugs.' Never has been.

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5. Hibob on August 12, 2013 10:20 AM writes...

"As Herper points out, there's a tax advantage for R&D expenditures, so there's no incentive to under-report them (but there's also an IRS to keep you from going wild over-reporting them, too)."

Wall Street does provide an incentive for companies to reduce (if not quite underreport) R&D. R&D represents a big black hole to current investors. It means revenue years from now, when some other stockholder or broker will be take part in the gains. However If companies could just call those R&D dollars a marketing expense everybody would be happy. Instead they move marketing costs to the R&D column (cough, Vioxx, Gabapentin) which seems to make everyone unhappy for some reason.

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6. petros on August 12, 2013 10:22 AM writes...

Some interesting data and a clear counterpoint to those who denigrate the figures that Tufts estimates it costs.

It is also fascinating to note that only a couple of companies managed to average one NCE per year. In his articles on the Innovation Deficit Jurgen Drews estimated that companies needed to produce 1-2 NCEs each year to sustain revenues

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7. Vanzetti on August 12, 2013 11:27 AM writes...

>>>We need to develop completely new ways to develop new drugs, urgently

Any idea how do develop a way to model the entire human body, urgently?

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8. Anon on August 12, 2013 11:42 AM writes...

@7: Good point, it's easier just to bury our heads in the sand and laugh off the problem, or hope it goes away by magic.

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9. Vanzetti on August 12, 2013 11:46 AM writes...

@8 I'm mainly laughing here at the suggestion to not just do an extremely complex thing, but to do it urgently.

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10. Anon on August 12, 2013 11:53 AM writes...

@9: And I'm looking at the alternative, which is the death of all new drug development, in short order.

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11. MDACC Grad on August 12, 2013 12:06 PM writes...

I came up with a new animal model for screening when back in academia a few years ago. Myself and two professors thought it would work, however we didn't have a grant to develop it. Now it just sits in some folder at the tech transfer office, having only ever been reviewed by one member of their staff.
I get the feeling there are ideas out there...they just get batted down too soon and the inventors know there is no way to ever maintain substantial ownership/equity with most routes to commercialization.

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12. David Formerly Known as a Chemist on August 12, 2013 12:57 PM writes...

@11, MDACC...if you really believe the screening model will work why don't you license it from the tech transfer office and develop it further? I'm sure your TT office would even grant you a no-cost option license for a period (1 year perhaps). Then you could take it and get SBIR money, raise money through angel/VC investors, etc. That technology will continue to sit in a folder until someone who believes in it makes the effort to do something with it. And to your point about maintaining substantial ownership (depends on your definition of "substantial"), unless you're independently wealthy and can finance the development yourself, you're correct, investors will take a sizable chunk of ownership, as they should. But owning 20% of a big pie is better than owning 100% of no pie, right?

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13. DR on August 12, 2013 1:01 PM writes...

What % of the total cost is Phase III,? not even PhI or II, just III. I think it is insane the amount of money hospitals and clinics charge for that "service." I don't blame on the FDA regarding scrutiny on safety and efficacy. They have to do what they have to do. Why so many drugs gets rejected in Phase III (I think AR is close to 30% in that phase)? Too many costly questions

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14. Drug Developer on August 12, 2013 1:17 PM writes...

One way this analysis is over-simplistic: it doesn't account for life-cycle management investment. Abbott has spent a great deal investing in new indications for Humira, for example, and is certainly reaping the benefits -- but here it just looks like "lost money" since it doesn't produce another NCE. As it gets harder to get new compounds past FDA the LCM projects for already-approved drugs look better and better.

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15. CMCguy on August 12, 2013 2:26 PM writes...

I have always had issues with these types of cost evaluations (although have not closely read the full article to see if reduces normal concerns). First because typically takes a "one size fits all approach" which for Drugs when one sees wide variation across therapeutic areas, different company's capabilities and regulatory demands things get complex quickly making comparisons highly suspect. Also, as noted many times, generally dealing with time scales of 15-20 years from initiation to fruition of a project therefore a 10 year window on R&D expenditures may only be capturing part of the relevant input (no early R and mostly only costly D) plus not yet have complete outputs (drugs in pipeline for approval in next 1-5 years. The picture now must weigh over focus on blockbusters and other gating factors (dare I say poor Management) in the last couple decades that have inhibited progress. Finally can not ignore the dilution of expertise that has occurred through layoffs, some positive in getting rid of deadwood or providing critical knowledge to other companies, but most likely resulting in weaker organizations who have to outsource more (and we can argue if that saves or adds costs).

I would offer counter point that in addition to dealing with more failures the bigger companies normally do have continued revenue streams from older drugs to better support new projects. Generics have altered this accounting greatly however would trust a significant portion of past successes can be put back to support future ones. We just need to learn how to spend more wisely at all stages.

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16. dearieme on August 12, 2013 2:26 PM writes...

The trouble with various suggested tweaks is simple: even if they halved the cost of drug development, it's still astoundingly high.

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17. Jim on August 12, 2013 3:50 PM writes...

I'd like to see the cost broken down a few different ways: First, by therapeutic area - anti-cancer drugs have most of the approvals out there, and their regulatory path is clearly different enough to have a significant impact on cost and revenue. Second, it would be interesting to see if small molecules differ significantly from biologics.

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18. anon on August 12, 2013 4:02 PM writes...

"We need to develop completely new ways to develop new drugs, urgently"

about as helpful a statement as saying "we need to get people to stop dying."

Everyone involved already knows...

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19. Roger Rabbit on August 12, 2013 4:06 PM writes...

I would also add that the cost is also relative to size of the patient population. Successful drugs that focus on rare diseases (e.g.biotech) that avoid outcome studies will be cheaper to make, but ultimately won't fill the belly of big pharma.

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20. Nick K on August 12, 2013 4:21 PM writes...

Anyone heard anything from Donald Light and his estimate of $43M for the true costs of drug development?

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21. Anon on August 12, 2013 4:48 PM writes...

@18: If "everyone involved already knows" that we urgently need to develop new ways to develop new drugs, then why is everyone involved still wasting their resources on the same old target-based screening and lead optimisation approaches to chase after the same old limited set of "targets" with the same old crap chemical libraries, instead of actually experimenting with completely new approaches to find one that might work better?

Are you saying that everyone knows that change is critical, but still chooses to follow the same old doomed path? What happend to *real* science and discovery?

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22. sgcox on August 12, 2013 5:33 PM writes...

21.Anon: do you have anything more to say than exalted rhetorical questions ?
BTW, the same old crap/limited approaches are still producing new breakthrough and revolutionary medicines at a relatively steady pace, the sensational journalism aside. For example, you would not really claim that Vertex did not made *real* science and discovery with the target-based approach to Cystic fibrosis !

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23. Anon on August 12, 2013 5:58 PM writes...

@21: Yes, "the same old crap/limited approaches are still producing new breakthrough and revolutionary medicines at a relatively steady pace", but at exponentially increasing costs, so that average cost per NME has increased 100 fold, from $50 million to $5 billion per NME (adjusted for inflation) over the past 60 years. That's a 99% decrease in productivity, so productivity has halved every 9 years for 60 years, despite all the "breakthrough" technologies we have developed in drug discovery, and that's just quantity, excluding the decrease in quality (marginal benefits vs existing treatments) that we have experienced over the same period. At this rate, R&D will be gone within another 10 years, and is currently being sustained only because big pharma companies are absorbing these losses in their huge balance sheets (for now).

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24. Heteromeles on August 12, 2013 6:16 PM writes...

I'd suggest that getting the cost down for SOME drugs is rather more important. We do need to get the pipeline for effective antibiotics speeded up and cheaper, simply because we're running out of effective ones. Good fungicides (think valley fever and similar) and parasite treatments (malaria) are needed too. Treatments for rare diseases? That gets a little trickier.

There is an awkward solution: transform medicine. For example, when many antibiotics are available, people get lazier about hygiene and sanitation and public health take a financial hit. For society at large, it would probably be very wise to invest heavily in sanitation and public health, because the ROI is higher. It's always better to prevent disease than to bankrupt everyone to pay for meds. Yes, I know what the current political climate is. The government contribution to drug development somehow didn't get factored in to this, did it? Too bad.

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25. Kelvin on August 12, 2013 6:28 PM writes...

Once again, great article and discussion: How to improve pharma innovation and R&D productivity?

For those interested in this topic/question, please feel free to visit or join our LinkedIn group, Big Ideas in Pharma R&D Productivity and PPM:

http://www.linkedin.com/groups/Big-Ideas-in-Pharma-R-4322249

We discuss everything from R&D strategy, culture, leadership and entrepreneurial mindset, to organizational structure, processes, metrics, portfolio management, governance, value, risk, and anything else you can think of...

Thanks,
Kelvin

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26. kemist on August 12, 2013 8:58 PM writes...

Its a good thing, there is nothing left to do but MORE CHEMISTRY. What else will the rich invest in, nanotech, alt energy, batteries, social media????!!!!. PLEASE. Nothing is better than a little pill worth billions a year. Hey rich Guy, management never really had the patience for us to work on anything very difficult or time consuming anyway, come back.

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27. Wait, what? on August 12, 2013 10:22 PM writes...

Personally, I'm gobsmacked that 68 companies managed only a single drug in a decade. I know it takes ages to make drugs and all that, but it seems you'd need to perform more than once a decade in order to call yourself a "drug company".

Or were some of those 68 drug divisions of other conglomerates?

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28. Sideline Chemist on August 12, 2013 11:29 PM writes...

I'm wondering if the numbers are a little skewed due to the money that big pharma spent on development and clinical trials for the drugs that they partnered with from small companies. That $350 million/drug from the small biotechs sounds great until you consider the $500 million (pulling a number out of thin air here) that their big pharma partners spent in taking it from preclinical to approval.

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29. Hibob on August 13, 2013 12:38 AM writes...

@17 Jim: I think it would be difficult to break the cost down by category. The successful drugs are easy to identify, but big companies won't be forthcoming on how much they spent on their failures in each type of disease or molecular weight bracket.

What I think someone should do is try to work out numbers for how much was spent on R&D by companies that have only worked on one target/drug and have had 0 or 1 drugs approved for their efforts - including all the companies that have closed up shop. That would let us compare startup-biotech costs to big pharma costs since it would include the cost of failure. Forbes just tells us how much the lucky tickets in the biotech lottery cost, not how many tickets you should expect to buy before you get a winning one.

Bonus: that analysis could be broken down by therapeutic area, small molecule/biological, etc, since these companies haven't split their R&D spend across different fields.

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30. schinderhannes on August 13, 2013 2:35 AM writes...

I think there is one important point that is often overlooked: what is the endpoint in discovering a drug. R&D costs are not only the cost to bring a drug to marked but to maximize its impact (for patients and revenues alike)!
For many biotechs it is getting it to marked then partner, or being happy with a nice niche indication.
Big pharma very often develops a drug in an initial indication where studies are kinda smallish to get a NCE to the marked. If we´d stop counting here cost wouldn´t be this high. But then the really expensive stuff gets going like one phase III after the other for every kind of cancer where a drug has potential. This is where a lot of the cost are. If you already know your drug is working you are a lot more willing to spend billions on it to bring it to full potential.
(Unfortunately I don´t knwo how to smartly seperate out these cost in the calculation.)

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31. Anonymous on August 13, 2013 5:50 AM writes...

@4: The main reason why the FDA is "moving the goalposts" is simply because the current standard of care is continuously improving with new innovations.

If they didn't move the goalposts then more drugs would fail later on in the market (with huge potential lawsuits on top of development costs) rather than in development. They are actually doing the industry a favour by making sure any new drugs can compete with existing drugs because they have been shown to be better for patients.

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32. Orphan on August 13, 2013 7:18 PM writes...

Are orphan drugs relatively cheaper to bring to market? Do smaller companies tend to bring forth more orphan drugs than big companies?

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33. nadia on September 5, 2013 2:32 PM writes...

Drug companies are similar to other companies in that they manufacture products must be sold in order to the company to survive and grow,but there are some differences from some companies in case that the drug business is very risky.
For example, only one out of every 10,000 case of discovered compounds actually becomes an approved drug to sale.
The most important reason to expense is incurred in the early phases of development of compounds that will not become approved drugs. In addition, it takes about 7 to 10 years and an average cost of 500 million dollars to develop each new drug. This money is spent before the FDA approves the drug, and if the drug is not approved, the company loses the money. These expenses must be covered by the revenue from compounds that successfully become approved drugs.
so the price paid by a patient for a medication must cover the costs of developing new compounds that become approved drugs and compounds that fail to become drugs, as well as marketing, post-marketing studies, and a profit.

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