Pfizer (NYSE: PFE) Chief Financial Officer David Shedlarz recently remarked that the risk of the U.S. government imposing price controls on pharmaceuticals is rising. Meanwhile, Ernst & Young predicted that federal intervention may be inevitable unless drug makers rein in prices themselves.
A new report by the nonprofit research group Tufts Center for the Study of Drug Development, though, sheds some light on why pharmaceutical manufacturers may have trouble keeping medicine costs low. To keep prices down while maintaining margins, companies must slash expenses. But even if firms operate as efficiently as possible, there is no guarantee that costs will not rise in one area over which the industry has little control: regulatory requirements.
According to the Tufts study, the Food and Drug Administration requested post-marketing commitment (PMC) studies in 73% of approvals in recent years, a trend that suggests that PMCs are becoming an essential element in the drug-approval process. PMCs are conducted after drugs gain marketing clearance to gain further insight on, among other things, effectiveness and safety.
The average number of PMCs per new drug rose from 2.7 in the 1970s to 3 in the 1980s to 4.4 from 1998 to 2003. In addition, the mean size of these studies has increased dramatically, from 30 patients in the 1970s to 920 in the period from 1998 to 2003. The Tufts Center estimates that post-approval R&D, which includes PMCs, tacks on $95 million in expenses per new drug.
PMCs are not entirely a burden. In some cases, results help companies market drugs, and firms agreeing to conduct them may gain speedier approval for their candidates. In addition, the growth in the number and size of these investigations may be a boon to contract research companies, such as PPD (Nasdaq: PPDI), PAREXEL International (Nasdaq: PRXL), and ICON (Nasdaq: ICLR). But, ultimately, the cost of these trials flows to the consumer.
The Tufts Center's findings show that drug companies are not hiking prices simply to gouge consumers. In the end, the drug industry has to do its part to contain prices, but the government also has a role in relieving regulatory burdens. Ultimately, the best solution to rising costs is likely to come from this type of joint effort.
Fool contributor Brian Gorman
is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.
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