November 19, 2014
Joe DiMasi, a professor at Tufts University, presented the findings of a study updating his prior work on the cost of developing new drugs. He reported that the study estimated the average cost at $2.6 billion. It is worth noting that this figure only applies to a small fraction of drugs. DiMasi looked at drugs based on new chemical entities, which are less then 20 percent of all new drug approvals. He also is looking at drugs for which the drug companies paid for all the research (as opposed to the National Institutes of Health [NIH] or other funders), which further reduces the size of the group of drugs in question.
The $2.6 billion figure is a dramatic increase from DiMasi’s last estimate of $802 million in 2001. (Both numbers are in current dollars — the 2001 number would be roughly $1,040 million in 2014 dollars.) While many people raised questions about DiMasi’s methodology, it’s worth stepping back for a moment and asking about the implications of Dimasi’s number. (The study itself is not yet available, he only released slides yesterday. It is worth noting that this study, like earlier versions, relies on funding and proprietary data provided by the pharmaceutical industry.)
While this study is almost certainly going to be used to justify charging high drug prices, rapid increases in costs is exactly what we would expect to see in a protected industry. When an industry is shielded from normal market competition, as the drug industry is with patent monopolies, it doesn’t have the same incentive to minimize costs as other industries. As an analogy, consider the cost of military contractors working on cost-plus contracts. These contractors have no incentive to limit salaries and reduce waste, since higher costs mean higher profit.
It is likely that we are seeing a similar story in the pharmaceutical industry. While DiMasi’s numbers may well be gross exaggerations of the true cost to the industry, it would not be surprising if drug companies that can charge $84,000 for a drug like Sovaldi, when the generic version would sell for less than $1,000, waste vast amounts of resources (for example, on financing studies showing that it is expensive to develop drugs). Of course they are able to charge $84,000 because the government will arrest anyone who produces the drug without the patent holder’s permission.
So DiMasi’s big numbers can really be seen as an indictment of the drug industry rather than an argument for higher drug prices. The bigger the number he comes up with, the better the argument for considering alternatives to patent supported research. If the money for research was paid up upfront, through mechanisms like NIH funding, then we would have the advantage that all research findings would be fully open so that other researchers, physicians, and the general public would have access. We also would be able to have all drugs available at generic prices, so we wouldn’t have absurd moral dilemmas about whether we should pay $84,000 to treat every person suffering from Hepatitis C. And we wouldn’t be giving drug companies enormous incentives to mislead the public about the safety and effectiveness of their drugs.
But of course this would require that we can consider alternatives to the patent system for developing drugs and that would require some new thinking from our policy wonks and the media. And that may be a serious long shot given the group of people we are talking about.
Comments