Research and Development Costs and Drug Pricing: Link Tenuous at Best

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Are research and development costs responsible for the high cost of drugs in the American health care system? According to this study appearing in JAMA Internal Medicine, exorbitant R&D costs are almost immaterial when it comes to drug pricing.

Research and Development Spending to Bring a Single Cancer Drug to Market and Revenues After Approval

Figuring out what it costs to bring a new drug to market is surprisingly difficult. How do you account for the costs of all the potential failed drugs that needed to be tested in order to get that one successful drug to patients? To answer this question, the team led by Sham Mailankody did something clever. They identified pharmaceutical companies that only had one drug on the market. They then determined when the company first started working on that molecule and added up the companies R&D costs (as reported on their tax returns) for every year from that point until FDA approval.

Now, this total cost would include R&D costs for drugs the company was working on that never made it to market, but that’s OK. The question is how much money it takes to get that one successful drug. If 100 drugs had to fail, this includes the cost of those failures as well.

Pretty nice building, if you ask me.

I think an example would help here. I want to look at eculizumab, created by Alexion pharmaceuticals. This one is close to my heart because, well, their building is on my walk to work.

Alexion started formally working on eculizumab back in January of 2002. It was FDA approved in March of 2007. Total R&D costs over that time? 817 million dollars. A staggering amount.

But how has eculizumab done since FDA approval? Well, in the decade since approval, eculizumab has brought in 13 Billion dollars to Alexion – a 15-fold return on investment. And this is not because eculizumab has a huge market – it’s only approved for paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic syndrome. It’s generated 13 billion dollars because the drug costs more than $400,000 per year per patient. It’s still doing well. Sales of eculizumab in the first quarter of 2017 exceeded the total R&D costs for the drug.

Not every drug examined in the study had such dramatic performance.

This chart shows the R&D costs for a given drug in dark blue, and the revenue since approval in light blue. So far, on average, these companies have seen a 15-fold return on R&D costs.

Now there are some caveats here. Some of these drugs, like eculizumab, are difficult to manufacture, so we’re not talking pure profit after you finish with R&D.

I reached out to Alexion for comment on this data. A spokesman pointed out that R&D costs really don't capture all the expenses in bringing a drug to market, stating

"Significant investments in fundamental complement biology research soon after the launch of Alexion in 1992 and during the 90’s preceded the formal R&D investment later on."

Further, he pointed out that

"Revenues today enable us to find answers tomorrow for some of the most complicated genetic and medical challenges in other rare- and ultra-rare diseases that others deem impossible".

According to Zacks, Alexion's last quarterly profit margin was 18.1%.