How Much Is A Life Worth? The Cost Of A Drug
40 CommentsBy Ed Silverman // December 3rd, 2008 // 8:48 am
When Bruce Hardy’s kidney cancer spread to his lung, his doctor recommended an expensive new pill from Pfizer. But Hardy is British, and UK health authorities refused to buy the drug. If the Hardys lived in the US or another European country, he would most likely get the drug, although he might have to pay part of the cost, The New York Times writes about the UK controversy over paying for meds.
A clinical trial showed the Pfizer pill, called Sutent, delays cancer progression for six months at an estimated treatment cost of $54,000. But at that price, Hardy’s life is not worth prolonging, according to the UK’s National Institute for Health and Clinical Excellence, which has decided that, except in rare cases, the government can only afford about $22,750 to save six months of a citizen’s life.
After substantial protest, UK authorities are reconsidering decisions on various drugs, after years of being almost alone in using evidence of cost-effectiveness (back story). But skyrocketing prices have led more countries to ask the hardest of questions: How much is life worth? For many, NICE has the answer. Top health officials in Austria, Brazil, Columbia and Thailand say NICE strongly influences their policies (click on the chart to enlarge).
“All the middle-income countries - in Eastern Europe, Central and South America, the Middle East and all over Asia - are aware of NICE and are thinking about setting up something similar,” Andreas Seiter, a senior health specialist at the World Bank, tells the Times.
In the US, rising costs have led some in Congress to propose an institute that would compare the effectiveness of new medical technologies, although the proposals so far would not allow for price considerations. At the present rate of growth, medical costs will increase to 25 percent of the nation’s gross domestic product in 2025 from 16 percent, with half of the increase coming from new drugs and devices, according to the Congressional Budget Office, the Times writes.
To arrest this trend, the US needs to adopt at least some of NICE’s methods, according to Mark McClellan and Sean Tunis, who served in the Bush administration as, respectively, administrator and chief medical officer of the Center for Medicare and Medicaid Services. Tunis says he spent a lot of time in government “learning about NICE and trying to adopt the processes and mechanisms they used, and we just couldn’t.” Why? Using price to determine Medicare or Medicaid payments provoked fierce protests. But McClellan says the US will soon have no choice.
Anne
The real question is why does Pfizer have to charge that much? If they’re really in the business of saving lives, which most of the pharma companies CLAIM to be, then why are they raking in billions of dollars a year with their overpriced drugs?
Michael
Why does Pfizer charge so much for its drugs? Why does Toyota charge so much for its Prius? Why did that guy on eBay charge so much for the Wii? One word. Demand. One of my favorite questions to ask business school students is, “If you owned the exclusive rights to a medicine that, if taken once, prevents all disease for fifty years, how much would you charge for it?” The _complicated_ correct answer is complicated and illustrative of economic principles over time (in reality, an actuarial question). The _simple_ correct answer is simply, “Whatever the customer is willing to pay.”
These companies are in the BUSINESS of saving lives. Pricing is a BUSINESS decision. Businesses set prices to maximize returns. Pfizer charges as much as it does because it thinks that, at that price, it will maximize returns.
The problem we have (from the company’s perspective, and from the perspective of the person who can’t afford the treatment) is that companies cannot reasonably charge each and every person the exact price they are willing and able to pay. The millionaire must pay the same $50K as the cafeteria worker (if paying out of pocket - which most aren’t). If the company could charge the millionaire $400,000 per year and the cafeteria worker $400 per year, it would surely do so. However, it can’t. Some people get a bargain (from their perspective), and some people cannot get the drug at all.
Now, I’m not advocating first line price discrimination as a good policy, but this illustrates a point. Companies do not set prices based on maximizing sales VOLUME (i.e. the number of patients receiving treatment), they set prices based on maximizing sales REVENUE.
The sad thing about this setup in the pharmaceutical industry is that, for the most part, the marginal costs of production are almost zero. It would cost almost nothing for the company to supply everyone in need with medicine. But how is a company to do that? The industry has made attempts through the use of drug assistance plans, but they have only been marginally successful. I have no bright ideas working within the current system (of course, if I had a completely free hand, I could come up with a way). Perhaps this can be part of the upcoming healthcare discussion in the US.
jim
Anne,
That is the most naive comment I have heard in a while. Pharmaceutical companies are for profit organizations and the cost of the drug development is added into the cost to the HMO. I think Michael does a good job of explaining the situation. These companies get NO funding from the government to develop drugs. There are hundreds of drugs out in Europe that could help Americans, but the FDA has not approved them.
Bimalendu
This is a good article.
harpy
As for-profit, publicly-traded companies their responsibility is to the shareholder, not the patient. Money first, patient second (if they even rate that high). All hail the business model.
Melody
Jim–
Is it really true that these companies get NO funding from the government? When universities do much of the ground work, and are then paid by pharma for the rights to the work–haven’t the taxpayers subsidized the initial research? That looks like ‘government’ funding to me. The only ‘drug’ with which I have familiarity was ‘discovered’ with significant taxpayer support. Genentech and Eli Lilly have benefited for decades; diabetic patients and the taxpayers who underwrote the discovery–not so much!
Salmon
Micheal,
These companies are NOT “in the business of saving lives”, they are in the business of selling drugs. There is a difference.
Vioxx killed 60,000 people while selling approximately $10 Billion worth of drug to treat pain and inflammation. The deaths and cardiac toxicities were dismissed as long as possible in order to maximize sales, and this is common in the industry.
As for No money from the government to develop drugs that is not true either. There may not be direct payments but there are indirect payments for basic research, training of researchers, and even in FDA for going through old applications and developing computer models. These Drug Disease State Models help the big companies develop drugs in particular disease states more efficiently in the future and is being run by Bob Powell an old VP from Glaxo, Pharmacia, Pfizer, and Pharmsight. If the industry wanted to do that on its’ own they could, but to do it more swiftly they need to combine data and no one company trusts another with their data so they’re having FDA do it as a neutral party.
In at least one case Dr. Powell presented the information on drug disease modeling using software from his old company Pharsight for developing a cancer drug in a public forum. Pharsight photographed the slides and then turned around and used the FDA generated data and model to set up a canned program, which they then have turned around and been selling to smaller companies. (This was actually on Pharsight’s website). Plus Dr. Powell’s job at Pharsight was VP of strategic marketing where he was the one who sold this program to the FDA. He then got a severence package and joined FDA without even waiting the required 2 years. All of this is documentable from SEC filings and press releases. Although Dr. Powell was not directly involved the modleing during his first year or so at FDA, he was designing the program to do this at FDA and then later directing and supervising research using the software from Pharsight.
Pfizer also happened to be Pharsight’s biggest client accounting for approximately 50% of sales, and of course that began while Dr. Powell was in charge of this program at Pfizer.
It’s not only that this helps fund industry but there’s a lot of hanky panky you can do with modeling and simulation to show something works when it may not and to avoid clinical studies that might pick up toxicities, and it sure would help to have industry insiders at FDA setting up the program and saying it’s good.
rj
vioxx killed 60,000 people? please link me
Michael
Salmon-
You are absolutely right about what the business really is, but you have to understand that the people engaged in the business are motivated, in part, by the life saving aspects of it.
That aside, OF COURSE the government contributes money. I would’ve never said otherwise. However, the government’s contribution is intended to make the non-profitable profitable. Early research and expertise building would rarely occur in a single-play for-profit business model. There’s no way that investment dollars will ever see an adequate return. Therefore, the government steps in, ponies up some cash for the initial research, and when a technology becomes viable for further development, assigns the rights of that technology to the development company.
The government does retain, however, march in rights. For example, if the government needed to force a license for an antibiotic that used government funds in its development, it could do so if it proved that the license was necessary to preserve the public health (pending biological attack, etc.).
Nathan
Getting back to the topic at hand, the NY Times article is well worth reading. It seems that some sort of NICE approach is inevitable here in the US. As heartless as it seems, we MUST assign some sort of dollar value to human life. Otherwise our health care costs will eventually swamp us.
I think we’ve been able to get around this problem so far because the huge increases in health care spending have resulted in tangible benifits for our economy (fewer lost days at work, fewer people on disability, etc) But those days seem to be ending - particularly as the major cost of health care is associated with people (elderly) who are not contributing to the overall economic output no matter how healthy they are.
Salmon
Michael,
As for the motivation that is the motivation for many but not all. The fact tha many senior executives in the pharmaceutical industry are now coming from law or management backgrounds (sometimes with little or no pharmaceutical background) as compared to almost exclusively medical or pharmaceutical backgrounds in the past undercuts your argument to a degree.
Governmental spending goes well beyond what you suggest.
Here are 4 year old quotes from the NIMH on how they plan to help Pharma.
Wayne Fenton Deputy Director:
“We are looking for the field to bring agents that look promising. Out priorities over the next several years will be:
Develop new (non-DSM) clinical endpoints and efficient measurement tools
Human proof of concept trials for novel agents
Studies of the mechanisms of the therapeutics with established efficacy
Development of biomarkers for disease and treatment reponse”
Thomas Insel Director NIMH:
NIMH is hoping to reduse the public healt burden of mental health conditions and increase the public trust in NIH by priming the product pipeline. Dr. Insel said NIMH plans to do this by helping to develop novel clinical targets (e.g. cognition in schizophrenia). He said “We will be talking about new targets…I will be mostly thinking of new molecular targets…Currently we have fewer than 120 molecular targets and the top 100 selling drugs are based on 43 targets…Current psychiatrict drugs target fewer than 20 out of a potential of 300,000 targets. I suggest there are at least 5000-10,000 interesting targets that could turn out to be fart more important for drug development…The end game for us is personalized healthcare.”
While I agree with him scientifically. Currently FDA, NIH etc. is trying to identify these targets via pharmacogenomics and post marketing surveillence (who responds and who doesn’t respond (or gets worse), and although these pharmacogenetic tests could be licensed I can’t see that occuring for the drugs developed for the targets which is where the real money is. Plus the business model is to have 10,000 genetic variations on a single chip, license it out, do the analysis inhouse for $100, and just give a yes no answer so that the physician and patient has to come back over and over.
Meg
Back in the eighties, when I was a hospital administrator, I remember reading a book about the British healthcare system. The focus was on the primary care physician who, if he felt nothing more could really be done, shared this news with a spouse or family member - and possibly saving four to six months of agony along with a lot of money.
These days, there are vicious emails on this and other locations furious at the FDA for its not approving a prostate cancer drug to prolong life for four-six months no matter what the cost.
Call it rationing, but get real. The FDA needs to focus on preventing the spread of so many drugs that themselves kill people. That is its real job IMO. It has forgotten “First, do no harm.”
Random Walk
All of this started when the government got involved in the healthcare business in the first place, although I understand many well-intentioned people think that the government can do more for the poor and elderly than private organizations, religious institutions, altruistic people, wealthy people, and families (caring for loved ones).
Given that government is a payer of drugs, unfortunately it has the power to decide which drugs to pay for on the basis of static cost-effective or cost-benefit analysis.
What’s worse, the high prices of drugs reflect the development costs, which are influenced by regulatory barriers to drug approvals, as well as litigation costs.
harry
I had dear friend who died a few months ago. She was advised to take one of these very expensive life prolonging cancer drugs. She did not want to experience invasive procedures once she was given 6 months. She did, because her doc persuaded her to take this drug. Sh suffered extreme side effects from the drug. It is not clear if the drug did prolong her life or prevent excrutiating pain, but then her pain was managed by pain meds. her doc was affiliated with the company who sells the drug. In the end it was her decision but companies cannot dangle this expensive heart wrenching decision in front of patients unless that have thoroughly investigated it. Otherwise it is the absolute WORST action they can take in their pursuit of money and power.
Henry
It’s even worse when they do it to the parents of little kids.
You wouldn’t believe the truly horrible deaths I’ve seen due to the drugs.
A six year old kid screaming at the top of their lungs hour after hour thinking that it must have been something they did screaming “Please stop, I’ll never do it again, I promise”.
Another kid dying the most excruciating long painful death you can imagine and it taking 6 weeks.
These kids could have lived several more months without the drugs, and what’s worse if they had done a simple couple of day experiment in rats or mice first they probably would have known.
Random,
The costs are not due to the regulatory burden or litigation. The numbers are there. Marketing and advertising alone are double the cost of R&D, and litigation expenses are much much less than this.
Pharma Newbie
Out of curiosity what is the acceptable profit margin for a Pharma company 10%, 20%? What do you feel is reasonable and then what do you expect your own investments to produce?
harry
Equating profits with human life is not the argument. pharmaceuticals are necessary, they push academia to produce results by injecting cash and a clincial goal. Marketing is the issue. The drug companies believe it their constitutional right to promote defective products. it is obvious they have political backing. patients depend on their docs, who sometimes act on the behalf of the drug company, and prescribe, even though they know the drug is not appropriate for the particular patient.
It is very simple, mass marketing had caused milllions of people to take drugs they should not have to take. If regulations take hold, MDs and the FDA become more patient friendly the demand for and # of drugs will decrease. …profits will decrease you would expect and you may not make as much money on your investments. on the other hand currently you are making money off a perhaps, how do I put it..an ethically challenged investment. This may challenge your values or not. people have different motives!
Salmon
Developing drugs is a high risk business and for that a good return is required. Having said that you shouldn’t expect a high return each and every single year you need to look at the average over time. So one year with 12% might be offset by another year with 3% growth.
Lilly for the first 100 years of their existence averaged 8% per year and was considered a stellar performer. Plus Lilly for the most part had a constant source of income and growth as the only insulin supplier in the US plus they produced capsules for others and were diversified into animal health care products. All of this was also without losses due to generics.
So personally I consider the double digit returns that we saw in the ’90’s and early part of this decade as simply unrealistic and not consistent with what the industry could or should have as a ROI.
Since Exxon and other oil companies have returns of a something like 3% doubling to tripling that as an average over time would seem reasonable to me. Although you could argue for slightly better than the dow average as it’s high risk, but then Pharma’s now a mature business and no longer in the growth phase. Plus you can’t expect every pharma company to beat the time averaged dow return year after year.
harry
I just realized I own stock in a pharma company that I worked for. Wow, I do not believe in the ethics of this company at the moment.. I did. So now I should sell my shares so I can support my above rant. yes I must I suppose. owning the stock supports their business, which I have serious reservations about, having worked with them, and then reading the subsequent media reports. shocking, never knew what was going on.
I hope the FDA, politicians, docs etc. get it together so I can have confidence again in this industry and make some profit. from real medical advances not phoney pseudo-scientific indications that are just absurd and are a public health hazard.
Salmon
Michael said “You are absolutely right about what the business really is, but you have to understand that the people engaged in the business are motivated, in part, by the life saving aspects of it.”
I agree that’s how I came to this business, having been in it for a while I realize most people aren’t as altruistic as I am but I’ve also come to realize that you need the profit motive. The question is what is the proper balance. The same goes to safety.
Personally, I think the pendulum has swung too far to profit and lack of safety and caring for the patient. I think however we’re potentially now at a point where we’re about to swing the other way. I do not want it to swing too far, although I doubt there’s any danger of that. We’re already seeing a slightly more contrite industry as they know what is the potential. In spite of this I think it’s too early to let up on pushing for safety and honesty as it’s going to be hard enough as it is to get to even close to a reasonable balance.
As for the money aspect I actually feel for the workers and the investors who’ve been sold a load. I’m just afraid that the politics are such that it’s too easy to make the industry out as having been price gouging so there’s potential to have some real damage there. In contrast I have no sympathy for Pharma over the safety coverups and really think they should be penalized over that. I think overall Pharma has shot itself in the foot and I just don’t feel like fighting the battle over maintaining a fair ROI on their behalf. Although I’m sure they don’t need my help.
harry
I have yet to read the article, but in my opinion the new york times is slightly biased to-wards Pfizer. this article may change my mind about my biased opinion.
Michael
A few things:
Pharma Newbie- You have to look at it from two perspectives, project financing and corporate financing. A single Big Pharma company has many projects. To invest in a single project, the company incurs substantial risk. Each project must have a VERY high profit potential (2x-10x ROI). This is because so many projects fail. Companies, on the other hand, investing in many of these projects must have around a >12% margin (VERY generally) to attract investment capital. The business risk, though mitigated by diversification in a number of different projects, is still high. This ignores a) investment activities other than in drug discovery and development, b) the internal rate of return requirements, and c) a thousand other factors. Some bringing the number down, some up.
Salmon- That’s exactly why I came into this business as well. It was the science . . . it was the ability to do good. From what I see, that’s what motivates most of the people I come in contact with. Even the lawyers and the management bred people (I’m talking about you, Kindler) seem to consider saving lives and promoting health as the industry’s core mission. Though financing drug discovery can get in the way of the core mission, preventing financing issues and monetary diversion away from the core mission and toward ancillary low risk, high reward investment options is the job of congress and the FDA. You can’t expect corporations to act against their financial best interests. As I mentioned earlier, these are for profit companies. Investors expect them to act that way.
Bob
I think it is important for all to understand the pricing models. Yes, R&D is expensive, the cost of FDA compliance, clinical studies, etc. In today’s environment the rebates, chargebacks,and discounts that pharma companies are required to provide to HMOs, PBMs, Medicare, and Medicaid necessitate charing higher prices to allow for each of these leaching components to take a share. The net result is overall higher prices for consumers. Remove much of these and you get back to a nominal cost structure.
Just A Thought
“Even the lawyers and the management bred people (I’m talking about you, Kindler) seem to consider saving lives and promoting health as the industry’s core mission.”
Didn’t Kindler peddle fat and cholesterol before he started pushing Lipitor?
Haha
Salmon
Michael,
The 2-10 X is interesting as from what I see industry seems to be arguing closer to the 10X.
Antidepressants are about the most expensive drugs to develop at around $100 million and many other classes of drugs are much less. Yet from what I’ve seen the big players in industry seem to say that they’ll drop any drug that won’t bring in $400 - $500 million. Although smaller companies sure seem OK with a drug that will bring in much much less than this.
As for the >12%, yes I’ve heard that figure too, but it depends upon what the other available returns are. >12% may have been needed in the ’90’s and early part of this decade to attract capital when internet and software companies, hedge funds, and real estate had very very high returns, but now I don’t see the numbers being so high anymore. I pointed out before that Lilly used to brag about its rate of return over its first century. I want to point out that I made a mistake in my percentages before. Lilly claimed that they doubled in size every 7 years I think that means that they had a 10% average rate of return. So looking toward the future I think that we will be looking at much less than 12% for big pharma. Smaller companies with a few drugs can grow at much higher rates with even a single blockbuster and so the expected ROI will be different for different size companies.
Pfizer had $50+ billion in sales a few years ago, they lose 10% to generics each year and need 10% growth. That’s 20% real growth each year or $10 Billion in new sales (which will only increase over time). That’s 10 $1 Billion blockbusters per year. The entire industry is only getting about 18 new compounds (NMEs) approved a year and that includes me toos. It’s simply not possible to have the kind of continued growth the industry is suggesting. Something that can’t continue forever simply won’t.
When you look at the numbers it becomes obvious why the industry has been saying FDA is too safety concious. They simply can’t afford not to have any drugs not approved and the more desparate they become the more dangerous the drug the executives are willing to tolerate, and to maximize sales you need to minimize the information about side effects and maximize the market. But then you’ve got problems with people getting hurt and lawsuits. So you need preemption.
I think Pharma is a mature business now and they need to get used to it and learn to live with what is realistic.
Salmon
Michael
Salmon:
Interesting discussion here. Personally, I think you’re right on the money with your analysis. Big Pharma is in Big Trouble when it comes to future financing. Pfizer is a prime example because of the pending LOE on Lipitor. Though the industry requires around a 12% margin to be self sustaining, it’s not going to receive that. Some argue that Big Pharma has become too bloated and inefficient. Some argue that the FDA has become too safety conscious. The fact of the matter is, however, that something is going to have to give. In the aftermath of Vioxx et. al., I doubt that the weaker element is going to be safety considerations at the FDA.
Also, the $100 million (costs for drug development) you cited is a dramatic underestimation as compared to several consensus estimates. DiMasi’s work pointed to around $800 million, but it only included Big Pharma in house development. However, case in point is that torcetrapib’s total costs were over $800 million - and the drug was never submitted as an NDA. Speaking with many smaller bio/pharma companies will give you totals far shy of $800 million . . . but how many small bio/pharma companies bring a product all the way through phase III into NDA?
Regarding projected sales forecasts and go/no-go decisions . . . it’s hard to tell where the real cutoff is. There are so many factors that influence the ultimate peak annual sales of a drug that I find real options analysis particularly difficult (when based solely on projected sales forecasts). Pedro Cuatrecasas (Volume 116 of the Journal of Clinical Investigation, p. 2837) makes a good case for NOT relying on pure marketing analysis to make go/no-go decisions in drug development. His main reason–most of the profitable drugs out today would’ve been abandoned if projected sales forecasts were considered law (as they often are today).
We need a complete rethinking of the drug discovery and development paradigm currently favored. Otherwise, the Big Pharma model will surely fail.
Salmon
Michael,
I’m a little suspect of $800 million. Like I said antidepressants are about the most expensive drugs to develop there are and you can do the calcs for how much a single efficacy/safety study should cost.
Ex. Prozac 13 studies 500 subjects per study at assuming $10,000 per subject is $ 65 million add another $10 million for preclinical and and $30 million for phase I studies . (Now I don’t know the costs per patient for a phase III so this is a guess assuming the doc and patient gets $5000 and there are $5000 in lab tests.
I’d like to point out that my estimate of $100 million or less was only for the actual development of a drug that does make it to market and does not include the costs of all the other drugs that didn’t make it.
My understanding is that the $800 million also included costs of other drugs that don’t make it past phase I or phase II and those that don’t make it out of preclinical plus it includes a lot of marketing expenses thrown in under R&D and estimates of lost economic opportunities if you invested elsewhere.
The truth is only the financial people in the companies know the truth and they aren’t talking. Plus they have a motive to inflate the figures.
Overall I suspect the real cost to bring a single drug to market assuming all the failures is not nearly as high as $800 million. Otherwise the companies that bring drugs to market that are $100 - $200 million in sales per year simply would never make a profit and would actually be losing money.
The big companies also have more overhead with sales forces etc.. What I see is they they will work on drugs and try to bring them to market if sales are $400 million range, (at least this is what I saw a couple of years agot).
I think this gives a truer picture of what they need to cover their investments and turn a profit. Above that it’s really to maintain nice +ive % growth to add to current sales and keep the stock prices up.
Now I’m simply a scientist and don’t really know too much about the finances and legal stuff. I’m just trying to apply some common sense of what I know vs. what the companies are claiming.
Getting back to the original gist of the story, if you can’t come up with enough new drugs then charge the moon for the ones you do come up with and for which you think you can get away with it. This means squeeze people who are dying because they’ll pay anything (or at least they’ll pressure the politicians and insurance companies to).
Michael
Salmon:
Out of pocket costs are much different than real costs considering the cost of money. Also, the cost of bringing a single drug to market (only looking at that drug) will be much less than the costs of bringing A drug to market (including all the failures along the way). Believe it or not, the $800 million figure is becoming CONSERVATIVE. Some estimates are upwards of $1.5 billion. I don’t believe those estimates, but someone out there does.
An added problem is that most drugs are NOT profitable. Companies do their best to weed out the non-profitable drugs, but their efforts are often unsuccessful. Of course, if you realize (as is often the case) that a drug will not be profitable only after you spend $100 million in development costs, with only $10 million in costs to go before you file your NDA, companies will still file the NDA . . . the $100 million are sunk costs. You can’t consider sunk costs when you are evaluating whether or not to abandon a project. So we get a slew of drugs that will never recoup investment costs.
Salmon
Possibly, but I don’t believe it. I would think that you would tend to know whether a drug is likely to be profitable long before you sink more like in the $20 - $30 million range.
Let’s say early preclinical for a drug is $1 M (and this includes the screening and testing for a bunch of different compounds. Then you go into animals (pre phase I it’s a few 10’s - 100’s x $1000 for the drug) so add up them all up and it’s maybe $10 Million for preclinical. Phase I another $10 million and 10% go on. So mayber $100 - 150 million for everything. Add a couple of million for a proof of concept phase IIa, then go into phase IIb/III where total costs are $20 - 100 million, where 50% are actually submitted to FDA. Assuming the companies aren’t simply submitting to prove to others look it’s not us it’s the FDA. Assume 2/3’s are approved.
No I still like my figures of around $400 million, but as I said before I’m not a financial person. I’m a scientist who’s looking at what the costs of various studies and stages of development are and simply adding things up. Now I have made some assumptions but I try to account for them and include extra for fudge.
I see drugs from smaller companies that are making them profits and they’re only selling a couple of hundred million worth.
It’s pretty easy to see how much drugs are bringing in. Just google Drug.Topics Top 200 add together the hospital and retail sales and even though these are retail dollars the amount of the mark up is around 50% but then half of sales are ex-US so it about washes.
What you’re telling me is that new drugs are like generics in that most are lost leaders (or in the case of big pharma) and it’s better to make 80% back and let another drug make the profit.
Again I have to say I really don’t know I’m just trying to use some sense. What I do know is safety and that definitely needs to be fixed.
I think the drop off in sales due to generics is a big problem for companies, longer patent life will work for a while but only for as long as you initially extend it.
I’ve thought that possibly some sort of agreement with large payers with a slow ramping down of prices over a prolonged period. I don’t know what the math works out to and it may not be any better. In my mind I just don’t think the big companies have a sustainable model. In fact what I see is that many of the startups for orphan indications are actually are based on knowledge gleaned from drugs we have and if you look at who’s on the boards and who’s investing it’s the top execs from some of the big pharma companies. Now if these products make it I’m sure the big pharma companies may buy them up at a premium. It makes me wonder if the execs at some of these companies are actually selling out their own shareholders.
Take a look at Prestwick Pharmaceticals (ex-CEO of Glaxo) as an example took an old drug tetrabenazine for chorea and developed it for Huntington’s Chorea (1 in 25,000). Now it’ll be used off label and in a few years they’ll get an approval for tardive dyskinesia. With all the kids on antipsychotics and even new ones causing Tardive at 10% (probably higher in kids because they’re overdosed) that’s min 0.1% of all kids or 50,000 /year in the US plus adults so let’s say 100,000 at $2500 per year or $250 Million and say $3 Billion in market cap. Pretty nice return on investment for a few people who may have sunk $10 - $20 million in for an orphan indication.
Salmon
Michael
On a drug for drug basis (i.e. counting a drug as either profitable or not profitable, and not counting the total sales figures for each drug), orphan drugs have been considerably more profitable than non-orphan drugs in the last 10 years or so. Why? Low costs, guaranteed exclusivity, low incentive for patent challenges, etc. Your example tends to prove a point I’m making elsewhere, but I’ll state it plainly here: Drug developers (innovator companies) require guaranteed exclusivity for successful and clinically beneficial products. That’s what the orphan drug act guarantees–and it’s why the act has been so successful. But I digress . . .
You don’t have to take my word for it when it comes to drug costs and drug profitability. I’ll point you in the direction of a few scholars who make the point quite clearly:
1. Dimasi et. al., Journal of Health Economics, Volume 22 (2003) - the source for the $803 million figure.
2. Grabowski & Vernon, Pharmacoeconomics, Volume 18 (2000) - describes the distribution of sales revenue over tiered categories of drugs - generally, tiers 6-10 make up only 8% of all drug revenue - and the median drug makes $50 million peak annual sales.
3. Cutler, New England Journal of Medicine, Volume 356 (2007) - describes the need for blockbuster drugs in the current drug financing system.
4. Dimasi & Grabowski, Journal of Clinical Oncology, Volume 25 (2007) - describing the economics of oncology drug development and the use and proliferation of the orphan drugs.
These people lay out the pieces to the puzzle quite nicely. And you’re right. The model isn’t working. It hasn’t been working for at least 15 years. Take a look at the GAO report from 2006 and you can get a clear picture of the problem - drug discovery isn’t being run properly. People are making bad decisions because they pay off in the short run. I’d get into this more, but, unfortunately, I can’t at this moment.
Salmon
Michael,
I’m not in drug discovery but I sure wouldn’t want to be. It’s got to be the toughest area of all.
It’s easy for business people, even scientists farther down the line, and even patients who complain about me toos to complain about discovery. If discovery doesn’t listen to people further along I would assign blame to discovery but most of the people who complain that companies aren’t coming up with new drugs simply don’t know what’s the real basis for the difficulties in doing so are.
Everybody likes to blame someone and it’s easy to blame someone who can’t come up with something new because the biology, chemistry, or physics simply prevents it or they like to blame the person who points out real safety issues.
It’s a tough business and sometimes it’s just not possible to get something to work no matter how much money you throw at it.
I and many others hope that we will see a turnaround in discovery when there are lots more targets to go after due to better understanding of genetics and post gene modifications.
Pharma says that will happen in the next 4 years. Maybe but from publications I would think it’s going to be more like 10 years.
Salmon
PS
I have heard/read some of those articles but haven’t looked in a long time. Plus it’s not my area of expertise. I had thought that ref 1 had been severely criticized.
Salmon
The 60,000 number is what I heard David Graham say on one occassion. I believe that the same number is on his slides from an FDA Advisory Committee meeting that are available by google search.
55,000 was an earlier number that was reported in an article on CNNMoney.com on Feb 9, 2006.
Salmon
Michael,
I found the GAO report and yes I’ve read it before. The figures are somewhat misleading and don’t even match FDA’s own numbers on their web site.
http://www.gao.gov/new.items/d0749.pdf
http://www.fda.gov/cder/rdmt/cyactind.htm
For example commercial INDs have were flat from 1993 to 2000 then have risen by 68% from 2000 2006, and there is a lag from the time you put money into discovery until an IND is filed. However according to the GAO report the increase is 38% in INDs from 1993 to 2000 and R&D spending is a 147% increase. So there is a disconnect but not as quite as bad as the GAO report makes out.
Also if you actually go and plot the numbers from FDA from much farther back it’s really a linear increase overall since the 1960’s. By choosing to start at 1993 you actually are seeing the effect of the increased rapidity of approvals and the hurry up and submit a lot of stuff right away because of PDUFA that occurred in 94 an 95 and that resulted in a whole bunch of drugs being withdrawn from ‘95 to ‘97.
It also talks about Pharma tackling more complex diseases where the cost of development is higher (Cancer they mention and Psych which I mention) both of which are where we see the greatest numbers of INDs and NMEs.
Regulatory uncertainty, well part of this is we’re trying to hide something and we’re not sure if we’ll get caught or not which will make us go back and do more work.
Business decisions they mention but don’t really explain.
My favorite about not knowing how to develop drugs is:
“the inability of drug sponsors to effectively utilize new technologies and a shortage of highly trained researchers who possess the ability to effectively translate basic discoveries into new drugs, were seen as factors that further contribute to the increased clinical failures and costs.”
“translational researchers—who possess both medical and research degrees and thus the expertise needed to translate discovery-stage research into safe and effective drugs—was seen by panelists and other experts as a fundamental barrier to increasing the productivity of drug development.”
I agree wholeheartedly with this but then that’s what I do and people refuse to listen to me on the drugs I work on. Maybe if they did they might get more drugs approved, because I usually turn out to be right about what’s going to kill the drug and I often have ways around it. The problem is that my suggestions might limit sales and some people can’t live with that.
I say it’s better to have 50% of something than 100% of nothing.
Michael
It truly seems that people at the intersection of things (science and medicine, law and science, business and medicine, etc.) are in high demand, can help devise solutions to complicated problems, and can generally explain things to both sides. The problem is (and I’ve experienced this many times) that the people on either side don’t really want to listen. The medicine people and the science people are polarized in their views, just like the business people and the science people are polarized in their views. In my experience, the business people refuse to allocate mental and fiscal resources to serendipity, and the science people tend to fight for their own ideas, no matter how unlikely the projected outcome. I somehow doubt this problem is isolated to drug discovery. It seems more central to human interactions.
Though the GAO numbers (and at this point, I’m not sure how they included/excluded raw data in their analysis) are different from the FDAs numbers (raw, I believe), the current status of the pipeline of almost every major drug company demonstrates, at least in part, the inefficiency built into the system. I personally believe that the inefficiency results in LARGE part from the one factor mentioned in the GAO report that wasn’t discussed in great detail — bad management decisions. This factor is influenced by the other factors mentioned, but it is the most proximal cause of the problems we currently see.
So it is discovery — but it’s not the people in discovery who fail to accomplish the goals of discovery. It’s the people who direct discovery. Direction has been so limited due to financial constraints that the kind of innovation seen in decades past hasn’t been seen recently. For example, it was reported here that Pfizer, one of the biggest players in the cardiovascular market, is GETTING OUT of the cardiovascular market. Have we solved heart disease . . . or is it just no longer a low hanging fruit (from a financial perspective). I think Pedro Cuatrecasas is absolutely right. Risk aversion WITHIN Pharma is inhibiting those trying to engage in drug discovery–to the detriment of the entire industry.
Michael
Oh, and Vioxx and the 60K people — this is a rough estimate used when extrapolating the percentage increase in risk over other therapies and counting the number of people at risk (users). It fails to consider how many fewer people bled out.
And are you sure that Graham was talking about deaths caused by Vioxx, or was he talking about MIs? In the studies, there was an increase in MI risk, but a less substantial increase in risk of death due to MI.
BioJobBlogger
The solution to the problem is for the US government to set pricing limits on prescription drugs. The US is one of the only countries in the world that doesn’t have price controls on pharmaceuticals and medical devices. Profit margins are large and justified by the cost of developing new drugs. Most of drug development costs are spent on promotion, sales and marketing. Maybe if the US set pricing limits on their drugs people in the rest of the world would gain access to them. Pharma companies will have to innovate regardless of price to stay in biz.
Salmon
Michael,
You raise several points. As for being in high demand that’s not what I’ve found. You’re only in high demand if you toe the party line. If you speak truth to power, that power will try to utterly and completely destroy you. Look what happened to Senator Grassley’s aid during Vioxx someone stepped out the bushes when she got home beat her up with a baseball bat and put her in the ICU. If someone will do that to someone who’s so high profile and has connections then what about the rest of us.
As for bad management decisions, yes I agree there are many bad management decisions such as preemption, trying to completely take over the FDA, attacking anyone who tries to raise a safety issue, paying off KOL’s, etc.. However this does not get around the underlying problem and that is that the rate of growth people wanted was simply unsustainable (PERIOD). I think that perhaps an agreement of some sort to maintain exclusivity with negotiations for lower prices and with a slower decrease in price over time to maintain current levels of income without a patent cliff and then adding new drugs for the growth would have been a better strategy. However these problems go back to the 1960’s and even Senator Keafauer back then said that companies were gouging due to their exclusivity and this resulted in the move to generics by the late 1970’s.
As for other bad management decisions. I’m not sure you really get what the problems are in coming up with new drugs. (You talk about discovery but you include what I would consider development). The sr execs (even the business people) they see the problems from a range of different drugs and the same problems occur over and over again and so it becomes readily apparent that this is a much more basic issue of fundamental biology. So you can either deal with it honestly and either kill drugs and/or let people know so they can decide for themselves is it worth the risk or you can cover them up and kill people to maintain profits. But if you do the latter you won’t be able to maintain the ROI.
As for Vioxx I understand that these are extrapolations, but these are the numbers for deaths. As to MI’s and other serious cardiovascular events the numbers as I recall are in the 150,000 - 200,000 range. As for how many fewer people bled out, Merck did those studies using endoscopy. In fact that’s why they weren’t first to market, and you know what, they couldn’t find any decrease in bleeding out.
All this talk about risk aversion etc. I don’t buy it. FDA has been saying our job is to promote the public health by making drugs available. Who pushed that line? That doesn’t sound like risk aversion to me. Pharma says kill early or don’t kill at all. But what’s kill early and based on what? Instead it’s been let’s pull phase IV into the regulatory process. That’s simply another way of saying if we suspect a problem and then we see it in people well if we see some efficacy we’ve already put in too much money with so many drugs that don’t show efficacy so let’s get it onto the market anyway and we’ll worry about covering up later. Another way of saying this is that kill early might imply to some people that it’s let’s not kill things in phase III, but in my experience it’s gotten so that really nasty things are showing up early in Phase I and companies are simply going ahead anyway no matter what.
Just look at the FDA Amendments Act of 2007 it mandates looking at class effects and keeping a drug on the market because someone may benefit. In the past we’ve seen what Pharma does delay, delay, delay. At the same time Pharma has been pushing preemption.
Let Pharma put all the cards on the table as to the real risks (i.e. actually give the information to FDA like they’re supposed to, have real public hearings, allow publcation of the FDA submitted data along with honest analyses by both Pharma and the FDA) and then let the public (patients and unbought physicians and academicians) weigh in and decide for themselves. Finally let the courts decide if Pharma was really forthcoming with the risks or not. I’ve said it before I don’t want to kill Pharma, but we’ve got to have some measure of honesty with people.
This is a highly regulated industry for a reason. Instead Pharma has acted to completely takeover the FDA and remove all regulation except what they believe they want to live with and will help them competitively.
Lastly we need to put people in jail. In particular those in the FDA who have violated the law. Because if we don’t have some level of confidence in the FDA which Pharma has currently nearly completely taken over then no one is going to or should trust anything Pharma says.
Michael
Regarding bad management decisions - I was talking about the decisions made to kill drugs not for efficacy or safety reasons, but for economic reasons (this is the #1 reason that drugs in clinical trials are killed). Unwillingness to take risks on drugs that don’t _seem_ to have a profitable market will undoubtedly produce false negatives . . . killing drugs that would have been very profitable although current projections might not lead to that conclusion.
And you’re right - THAT is a development problem, not a discovery problem. However, though I have no hard evidence to back up this statement, I believe that most companies use the same kind of thought process demonstrated above in determining which discovery programs are “worthy” of funding. Marketing and finance have convinced many decision makers that they, using monte carlo simulations, have Delphic abilities and can predict future sales more than 10 years out. When Pfizer sent out its press release regarding DISCOVERY areas it’s abandoning, I couldn’t come up with any other explanation.
Re: Pharma and extreme measures - I didn’t know that the attack on Grassley’s aid was ever linked to any work activities. I don’t doubt that some rogues are capable of such things, but I couldn’t believe that the attack was in any way officially sanctioned (or even discussed). I’m pretty sure that these kinds of tactics are used by corporations overseas (in countries with lax criminal enforcement), but if anyone ever linked the two here, any corporate entity would surely go under and the people in charge would be spending substantial time in jail. Executives are often passionate about their jobs . . . but not that passionate.
Salmon
Michael,
I agree with just about everything you said in the last post. As for abandoning areas I’m not sure it’s totally due to M&S projections. I think at some companies some is due to look at how much we’ve put in over the past X years and do we see anything possible on the horizon. If not let’s focus elsewhere.
I agree with what you say in the last post about Sen Grassley’s aid. As I recall the news articles at the time said they had no known motivation. Personally when I’ve been out shopping and told clerks where I worked I literally became afraid because they took a header on the company’s stock when a drug didn’t pan out.
On the other hand nothing should be considered off the table especially when it’s clear that certain activities have foreseen consequences.
Violence like this is typically not done by companies. Why should they they have very effective tried and true ways of dealing with troublemakers. Why according to Peter Rost 10% of whistleblowers commit suicide. So it shouldn’t come as a surprise to top psychiatrists that if they are personally involved in activities to cause severe psychological stress to someone that they know has the propensity for mental illness that suicide has a much, MUCH higher probability. Plus we know that violence is really rare even in such situations, and when violence does occur it is typically turned inwards to self (suicide) or results in secondary violence to the person’s family. It rarely results in ‘going postal’ against the employer or coworkers. It fact it’s so rare that it typically makes the national and international news. Yet we simply don’t even hear about all the cases of suicide, and when we do we typically hear things in the press about, well he was under investigation… or that he was having problems (which might have been intentionally induces) but all of which implies that where there’s smoke there’s fire.