The biopharmaceutical industry spends about $150 billion dollars on research and development every year, more than 15% of their annual revenue. Only a few high-tech companies put more money into research and development than the biopharmaceutical industry. This investment has resulted in an impressive number of new drugs approved in the last 10 years, including 53 approved in 2020.
Pharmaceutical manufacturers point to the high cost of research and development as one of the main drivers of prescription drug costs. When you look at the total cost of research and development over 10 years and you divide that by the number of products approved in 10 years, it probably costs about $5 billion dollars to bring one product to the market. That is because only about 1 in 20 molecules investigated makes it all the way from basic science to FDA approval. And human clinical trials have become increasingly expensive, even with the FDA fast-tracking some approvals.
But is biopharmaceutical research and development providing a good value? The cost of branded prescription drugs has risen dramatically in the last 10 years, driven by the cost of specialty drugs (see the article: Primer on Prescription Drug Costs). Research and development is increasingly directed to the development of specialty drugs, which include high-cost biologics. To be sure, there have been some significant breakthroughs in the treatment of rare and previously untreatable conditions. But with specialty drugs averaging about $100,000 a year, how many more can the healthcare system afford?
A more basic question is why does biopharmaceutical research and development cost so much? If we are going to accept the argument that pharmaceutical manufacturers have to price their drugs so that they can fund R&D, then we should consider why biopharmaceutical R&D is so expensive. Certainly, human clinical trials have become more expensive due to drug costs and the cost of increasingly complex clinical protocols. But if the human clinical development phase costs $200 – $400 million for a new drug, and the total R&D cost to bring a drug to the market is $5 billion, the clinical development phase is not where most of the money is spent. So where is the money going?
As noted above, only about 1 out of every 20 molecules studied makes it to the market through FDA approval. So, a lot of research and development money is spent on molecules that are abandoned in different phases of research, from basic science to clinical studies. If the big biopharmaceutical companies that bring most drugs to the market did their own preclinical research, this could explain the high cost of basic science work. But guess what? Big biopharmaceutical companies are no longer responsible for the majority of new drug innovation. In most cases, they are not even investigating the targets for new drug development. Of the $150 billion spent on research and development each year by the biopharmaceutical industry, only about 10% is spent on preclinical studies. Still wondering where the money is going?
For about 25 years, large biopharmaceutical companies have spent less and less identifying new molecules and instead have focused on clinical studies of existing molecules. Today well over 60% of the new molecules in clinical phases of development are identified through research at academic institutions or small biopharmaceutical companies. In fact, if you remove new molecules that are simply derivatives of old molecules from the calculation, almost 80% of true new molecular entities are found by academic institutions and small biopharmaceutical companies.
Academic institutions with government or institutional funding have always contributed a lot of the basic science research relating to drug targets and molecular development. In the past, academic scientists were commonly recruited to biopharmaceutical companies to turn their science into new medicines. Recognizing the brain drain, academic institutions have learned how to sell their knowledge, and sometimes molecules ready for development, to biopharmaceutical companies. Then the academic researchers can remain at their institution and move on to their next project with new funding. In many cases, academic institutions have developed partnership agreements with biopharmaceutical companies which help ensure a new product pipeline for the collaborative partner. In other cases, academic institutions have learned how to increase funding by selling their work (new molecules or new technology) to more than one biopharmaceutical company. This has resulted in multiple molecules developed for the same target, diluting the value of approved drugs in a competitive marketplace.
Independent biopharmaceutical startups are more likely to be biotech companies, focusing more on the development of technologies used in drug discovery and development. Some academic institutions have even spun off biotechnology companies. In recent years, a lot of research talent that used to be at the large biopharmaceutical companies has jumped to startup biotech companies. In some cases, the biopharmaceutical companies have joint ventures with startup biotech companies, again ensuring a drug development pipeline. But in most cases small biopharmaceutical companies are simply hoping to develop a new drug or technology, and then sell the asset or the whole company to big pharma.
There is nothing wrong with a model where academic institutions and biotech startups do most drug discovery, and then pass the molecules on to biopharmaceutical companies to complete the clinical research phases, manufacturing and marketing. Or is there? The problem is that all of the biopharmaceutical manufacturers seem to have the same strategy, and are competing for these molecules in the research and development market. In most cases, they are overpaying significantly to acquire these molecules. It does not help that startup biotechs (and even some academic institutions) are guided by venture capital sponsors. Venture capitalists generally know how to get the most return on their investment. The price paid commonly assumes that the new drug will make a return on investment after FDA approval. Then once they acquire these molecules, biopharmaceutical companies are so heavily invested that they resist making the decision to end development even when a drug is not meeting clinical expectations. More than half of drugs still fail in the clinical stages of development, whether acquired or developed in-house. And remember the increasingly high cost of human clinical research?
In the end, it is true that research and development costs are a driver of increasing prescription drug costs. But I would argue that the industry is wasting a lot of money on the acquisition of prospect molecules and technology. Then they have to price approved drugs high enough to recover these asset acquisition costs. In any case, as long as biopharmaceutical companies can name their price for new drugs, they will have little incentive to be more efficient with research and development.
Take a look at the article: A Proposal to Control Prescription Drug Costs.
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