Understanding the True Cost of Pharma R&D

Pritpal S Tamber

March 30, 2021

As drugs and other therapies get more and more expensive, it’s time to take a closer look at the cost of research and development

I’m working with Knowledge Ecology International (KEI) on a project to better understand the research and development (R&D) costs of new therapeutic agents, such as drugs, cell therapies and gene therapies. The folks at KEI are the experts in the field; my role is to help them package their findings into a number of articles of different formats that might speak to a health policy audience. 

There is a general belief that the pharmaceutical industry invests heavily to find new therapies that save lives and improve the quality of lives. The figure that’s often used is US$2.6bn. That’s allegedly how much it costs to bring a new therapeutic agent to market, from the lab to approval by a government agency, such as the Food and Drug Administration (FDA) in the US. 

It may well be accurate but it’s debatable whether it’s accurate for all therapeutic agents, so KEI are doing an impressive amount of research to better understand the R&D costs of some that have been recently approved. From what I have seen so far, it’s not remotely easy. 

Ask the average person on the street what it takes to create a new therapeutic agent (although you’re more likely to use the term, ‘drug’) and they’ll think of clinical trials and perhaps some of the basic science that precedes them. I thought it’d be easy to understand the costs of clinical trials as most of them are funded by grants from funding bodies, such as the National Institutes of Health (NIH) in the US, who have a duty to declare publicly how their money is being used. 

It turns out it’s not as simple as that, partly because the publicly available documentation on grants isn’t always as clear as it could be and partly because some trials are conducted by (or for) private companies who do not have a duty to declare their activities. Understanding the costs of clinical trials, then, becomes a game of ‘best approximations’ based on what is publicly available.

Things get even more murky with the cost of basic science. It can be hard to tie a piece of lab research to a specific drug. Often, the findings of that research contribute to a broad understanding of that area of biology, rather than directly to a biological process that can become a drug target. Furthermore, it can take years, if not decades, for the knowledge from basic science to be of use in the development of a treatment. All in all, making the link from knowledge derived from basic science to a drug is hard, if not borderline impossible.

One way to handle this is to patent pieces of knowledge – the process of registering a discovery to a person or institution so that the owner becomes the only one that has the right to use it (for instance, commercially). Of course, the owner can then enable others to use the knowledge by giving them a license to it. This is often done in return for some kind of payment.

This is where things – to be frank – get a little odd. 

A lot of the basic and clinical research conducted around the world is funded through grants, whether from governments (i.e., from tax revenues) or charitable foundations. Despite the public or philanthropic nature of that money, the discoveries made can be patented by private entities, whether individuals or institutions. Sometimes the funders reserve the right to co-own any discoveries made with the help of their cash or reserve the right to a cut of the revenue from any licenses to use those discoveries but (as I’m learning right now) that process is either not routine or not as easy as it sounds. 

While we’re on the subject of grants, it’s worth noting that the calculation of the US$2.6bn mentioned above assumes that all of the preclinical and clinical research costs are borne by the pharmaceutical industry. But that’s just not true. Pharmaceutical companies tend to fund things once they look promising but much of that promise was created by research funded through grants. 

All in all, it’s tricky to demarcate the R&D specific to a new therapeutic agent.

A further complication arises from the business dynamics of the pharmaceutical industry. Increasingly, the patents to promising discoveries are licensed to start-up biotechnology companies that conduct research to turn those discoveries into therapies. The scientists that hold the patents to the discoveries are often recruited by those companies as advisors, whether as consultants or employees. Once a therapy looks promising or is approved, larger pharmaceutical companies seek to acquire it, whether by licensing the work of the start-up or buying the company outright. 

For the larger pharmaceutical company, this fee, whether for the license or for the entire company is, in effect, their R&D costs. The only problem is the cost of the license or the company does not have to be related to the cost of the R&D it has conducted. The price for the license or the company is whatever it’s worth to the large pharmaceutical company, a concept that could be – and probably is – largely uncoupled from the R&D costs of any therapy. Indeed, it’s likely to be more related to the wider commercial advantages that occur through the purchase. 

So, as you can see, what it takes to create a new therapeutic agent is a lot more complicated than the average person on the street thinks. The underlying ethos of KEI’s work is that even if it’s complicated it should not be opaque. Indeed, as therapeutic agents get more and more expensive – such that they become unaffordable or unavailable to the people who need them – the need for transparency becomes greater. 

KEI are looking into the R&D costs of a number of therapeutic agents and will probably publish in detail about five. They hope the stories of these five will illustrate the sheer complexity of the field, and perhaps some of the questionable practices within it. But they’re not doing this work to find demons. They just want to better understand what’s going on and encourage policy makers to ask questions that might nudge the industry towards practices that keep medicines affordable and available. 

I’ll be working with KEI through 2021 and will try to write updates on the work as time allows.

The image behind the title is by National Cancer Institute and was taken from Unsplash.

Pritpal S Tamber

I’m a doctor who trained as a medical editor and publisher and now researches and consults on the link between community power and health equity. My interest in community power started when I was the Physician Editor of TEDMED and is explained in My Perspective. I also work as a freelance medical editor and publisher for organisations that want to write high-quality articles and a strategy for their publishing and promotion. Find out more on my About page.

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