The vast majority of all drugs (especially cancer drugs) that are developed fail before making it to market -- making drug development incredibly expensive. A recent study by the American Medical Association looked at exactly how expensive it is to get a cancer drug from development to the market.
In this clip from Industry Focus: Healthcare, host Kristine Harjes and Motley Fool contributor Todd Campbell go over the results of the study, explain why the high end and the low end of the ranges are so vastly different from each other, and dive into how much return on investment many of these drugs have ended up achieving.
A full transcript follows the video.
This video was recorded on Sept. 13, 2017.
Kristine Harjes: So, there's a reason that we're talking today about how expensive it is to develop a cancer drug, and that reason is that there is a recent study that was published in a very well-known journal that comes from the American Medical Association claiming that they had figured out how much it costs on average to make a cancer drug.
Todd Campbell: Right, numbers have been floating around for years, the back and forth of how much does it really cost to develop a drug. We'll get into a little more depth later on why those numbers are important to drugmakers. But, I think you basically have to be living under a rock not to realize that drug prices have become a major consideration, not just from an investment standpoint, what it might mean for the drug makers who are developing these drugs, but obviously for consumers, who in the end, either through higher health insurance premiums or directly, are paying the brunt of the cost of these more expensive medicines. We have these two researchers who went out and said, "Maybe we can actually put a specific figure to the sky-high cost of developing drugs. And we can figure out exactly how high sky-high really is." And that's what was published this past week in JAMA Internal Medicine, and I'm sure that if our listeners reached out to us, we can get them a copy, but you can also search for that online.
Harjes: Yeah, absolutely. This was specifically for cancer drugs. What they did was look at 10 cancer drugs from 10 different companies that had never gotten a previous FDA approval, and who did have their first drug approved between the years 2006 and 2015. They looked at the entire research and development expenses, all the way up through that approval. With that, it would also incorporate the cost of failed drugs that didn't actually get approved by the FDA, and they landed on a final number for how much these companies are spending. Todd, do you want to do the reveal?
Campbell: Do you want to do the drum roll, Kristine?
Harjes: I don't know how it's going to sound on the mic, but listeners, do it on your steering wheel or wherever you're listening.
Campbell: So, what's that cost, Kristine?
Harjes: They found that it costs a median of $757 million to create one of these drugs.
Campbell: It is absolutely amazing how much money we're talking about. With nine numbers, $757 million. That includes some opportunity cost, so, basically, what you could do with the money other than try to develop new drugs. If you X out that opportunity cost, you're still talking about $648 million in spending to get these drugs across the finish line. And I know we have listeners out there, statisticians, who are going, "Wait, what do you mean that they only looked at companies that were getting their first drug approved? Isn't that going to skew the numbers?"
Harjes: Well yes, absolutely. And they acknowledge that.
Campbell: And they did that for a reason, and the reason is that other studies that have been done in the past tend to look at large pharmaceutical companies that have been around a long time, and therefore might be a little bit bloated, so they have a little more in the selling, marketing, and general expenses that theoretically could skew the actual research and development costs of individual drugs. So, they said, let's just take it from scratch, from a company that's relatively new, it's developing some stuff in the pipeline, they spend a bunch of money over a period of time ahead of getting a drug approval, how much did they spend divided by that one drug that was approved? And that's the median number we came up with. There were a lot of interesting points that they raised in the study. It's a really interesting read.
Harjes: Yeah. One of the ones that stood out to me was how large the ranges of the spending figures were. They ranged from $157 million at the low end to $1.95 billion at the high end to get to that median of $757 million.
Campbell: Right, and listeners are probably like, wait, Kristine how is that even possible? How can one company be spending $200 million and another company spending a billion?
Harjes: Do you know the answer?
Campbell: I'm assuming it has something to do with the indication being studied, whether or not you had to go into phase 3, whether or not you had to conduct multiple phase 3 trials, and how many patients actually had to be studied in each of those.
Harjes: Yeah, there are going to be so many different factors that go into that, but of course, trial design is everything, really. And also how many different drugs you had to try before you hit the jackpot. If the first lottery ticket that you buy is the winner, then it's going to come in at a lower expense.
Campbell: Right. On average, these new, young companies have four different drugs that were in their pipeline. They were hoping that one of them would end up proving out, and sure enough one of them did end up proving out. The other thing that really struck me, Kristine, was the sheer numbers in revenue that these drugs have generated. We're talking about the expense, we're talking about huge numbers, how much it costs to develop these drugs. But then you find out, let's not cry too many tears for the drugmaker.
Harjes: Yeah. Reminder, the range of spending was $157 million to $1.95 billion. If you total that up, the 10 drug makers in aggregate spent $7.2 billion. If you look at what they made off of those drugs, they spent $7.2 billion, they made $67 billion in total. The median revenue for one of these drugmakers was $1.66 billion, and that was just within a median time frame of four years post-approval.
Campbell: David Gardner would call that a spiffy-pop.
Harjes: Yeah, that's an incredible ROI, return on investment.
Campbell: Yeah, and if you look at on a median perspective, each of those drugs, the median had been on the market now for four years, and the median number in revenue is $1.6 billion. So even if you look at the median, halfway in the middle, you're talking about a very nice return. Again, there was a very large range in revenue as well. But still, you're talking about nine of the 10 generating a profit that's greater than what they had to put out to be able to bring this drug to the market.
