What is driving up the cost of drug development?

Prescription drug prices continue to go up, especially as new brand drugs come into the market and the changing landscape in generics weakens competitive pricing. While editorial pages talk about the notion of “greedy pharma” that hikes up drug prices simply because it can, the truth about what contributes to drug pricing is more complex. And the cure to keeping drug prices in check, much less to reduce costs, is much more challenging to diagnose.

Curbing drug prices should be a team effort that multiple stakeholders — businesses, government, healthcare organizations and consumers among them – understand, support, monitor and work towards resolution.

Big pharma is delivering new live-saving drugs and innovative therapies today that didn’t exist 20, 10, even five years ago, and people are alive because of them or experiencing a significantly improved quality of life. These new drugs are driven by incredible research and development, and innovation comes at a price. A study from the Tufts Center for the Study of Drug Development predicted that average research and development costs per drug will soar past $2.6 billion, up from $802 million according to an earlier Tufts study from 2003. And the R&D costs don’t end with FDA approval: manufacturers must commit to fund studies to monitor safety and long-term side effects as well as test new indications, new formulations, new dosage strengths and regimens —adding an estimated $312 million to the full product lifecycle cost per approved drug.

Research and development of approved drugs can now take more than a decade, with considerable risks and with significant government regulation. A company could test as many as 20 compounds for the one active ingredient that will work well in the drugs for clinical trials. As many as eight in nine drugs in the pipeline fail in clinical trials, where the safety and efficacy of drugs are put to the test. Clinical trials are an absolute necessity but they cost millions of dollars, can involve thousands of people, and stretch out over many years. The one successful drug that makes it through trials and gets approved by the FDA ends up bearing all the costs not only of its own R&D but also for the R&D of all the failures.

Increase regulations on the R&D side would not help with the cost equation. It could, in fact, stifle innovation and discovery. The FDA already partners with pharmaceutical companies from the early stages to advise them on quality and safety, and that helps to expedite approvals later on based on well-documented clinical trial data. Telling pharmaceutical companies how to run their research efforts could prevent companies from following the science and instead researching towards the regulations.

For big pharma, manufacturing costs are just pennies a pill and only account for about one to two percent of the total cost of a drug. Additionally, many pharmaceutical companies already outsource manufacturing to reduce the cost of production. Manufacturing costs are a minor contributing factor to the overall cost of a brand drug, so increased regulations wouldn’t have real impact here either.

While it might seem obvious to have the government involved in price setting, as is the case in many other parts of the world, it would be difficult for our government to take an enforceable role as a price-setter. The government is a partner, customer and regulatory enforcer in the pharmaceutical industry, blurring the lines of where one position begins and another ends. Additionally, having the government involved in cost-setting could dampen innovation and advancement, which could over the long term harm patients.

On the other hand, marketing and advertising costs, like R&D, are major expense items. According to a report in Fierce Pharma, big pharma companies often spend more on advertising and marketing than they do on R&D. Marketing direct to consumers as well as to healthcare professionals, lobbying and other marketing initiatives require lots of people, resources and funding for media buys, promotions, design, and so on. While the FDA monitors what can be said, especially about health claims, there does seem to be room to cut back on marketing; those cost savings could be passed along to patients.

Where else might money be saved? Once a drug gets commercialized, big pharma sets a price it thinks the market can bear and recoups its investments. Patent protection means that there is little or no competition for several years, from others in big pharma or in the generics business. There is ample opportunity then to set a profitable price that is balanced against how many lives could be saved if the drug costs were in reach of most of the targeted population, not just the wealthy few.

We have been talking about brand name drugs so far, but there is a different story to tell for generics. The industry has seen a number of acquisitions and consolidations in recent years, translating into fewer suppliers in this market. Fewer suppliers translates into fewer price competitors, and prices for generics have been creeping upwards. According to a recent article in Forbes, pricing for more than 222 generic groups increased by 100 percent in 2013 – 2014 alone.

The manufacturing costs of generic drugs can be upwards of 30 percent. Good regulations are already in effect to ensure the quality and delivery of these drugs, from speedy but stringent approval processes to inspections at national and international manufacturing facilities to ensure consistent quality. But these government regulations do put a burden on small and virtual pharma companies, who see cost-effective raw ingredients and limited but tightly focused regulations as key to their profitability.

An increase in regulations in generics can price some suppliers out of the market. The companies that have been producing generic drugs for years may reach a point where they don’t deem it worth the ongoing investment – and that could lead to few choices when it comes to prescribing medication and higher prices. While other pharmaceutical companies could then step in and take their place, there is a strong chance that drug shortages could happen. The last time I checked, about 66 drugs were on the FDA’s drug shortage list – not good news for patients needing those medicines.

I have highlighted just a few factors that contribute to the high cost of prescription drugs in today’s market. There is no easy fix; it will take the continuous and concerted efforts of the pharmaceutical industry, the government, healthcare organizations and other stakeholders to individually and collectively team together to make lowering drug costs a reality.