En español l Every patient with cancer wants the most effective treatment, but drug prices have become staggering. Eleven of the 12 new cancer drugs approved in 2012 were priced above $100,000 annually, and a 20 to 30 percent copayment can make them unaffordable even for well-insured patients.
Why are companies charging so much? In one breath they say high prices reflect high research costs, and in the next they say prices reflect the precious added benefits of curing or controlling cancer. We find neither explanation plausible.
The argument that companies are offering improved drugs for these higher prices is not true. Oncologists find that most new cancer drugs provide few clinical advantages over existing ones. Only one of the 12 new cancer drugs approved in 2012 helps patients survive more than two months longer.
The industry argument that high prices reflect huge research and development costs also does not hold up, at least given the few facts that companies make public to back it up. Indeed, the actual dollars that companies have put into research from 1995 to 2010 have generated six times more revenue — a sign that they are charging too much for little patient benefit.
The most famous industry-sponsored estimate claims that it costs on average $1.3 billion to develop a new drug and get it approved. This includes the cost of failures. Half that estimate, however, is not research cost at all, but rather a high figure for profits that companies would have made if they had invested their research money in stocks and bonds instead. Profits forgone is a common way of estimating whether it's worthwhile to undertake a new project. But it is not a real cost that must be recouped from customers. Eliminating it brings the actual research costs down from $1.3 billion to $650 million.
In addition, taxpayers subsidize about half of company research costs through credits and deductions granted to drug companies. This brings companies' real research costs down to $325 million.
Moreover, the industry's $1.3 billion is based on a sample of the most costly fifth of new drugs, not the average for all drugs. Correcting this distortion brings company research costs down by 30 percent, to $230 million. Also, a few expensive projects always inflate the overall average, so it's more accurate to use the median cost — the point at which half of the research projects cost more and half less. This brings company research costs down to $170 million. Further, clinical trials in cancer are smaller and shorter than trials for other diseases, so trial costs should be smaller, too.
A final way in which research costs are inflated is by backing in a large estimate for the cost of basic research to discover new drugs. In fact, no accurate estimate exists because the costs of discovery vary so much, from an inexpensive lucky break to a costly 30-year search before a new drug is discovered. Removing that inflated estimate for basic research costs brings the net, median corporate research costs down to just $125 million for developing drugs.
Next page: The price push. »