Around and Around We Go: The Drug Development Debate

By Joseph Allen
November 30, 2014

Every once and a while we get a clear example of the gulf between those battling over important public policy issues and can understand why the public and policy makers are confused by resulting charges and counter charges. Last week was a good illustration.

The Washington Post reviewed a study by the Tufts Center for the Study of Drug Development in its story titled Does it really cost $2.6 billion to develop a new drug? As the title implies the claims of huge costs and risks undertaken by drug developers are summarily dismissed by their critics. The story fairly presents both sides of a debate with vastly different worldviews.

The Tuft’s study estimates that the costs of drug development have doubled from $802 million in their 2001 study to $2.6 billion today. The causes include:

  • A 145% increase in costs (adjusted for inflation) over the past decade;
  • The overwhelming number of drugs that fail in clinical trials; and
  • An average $312M in additional R&D that must be spent even after the drug is approved.

After summarizing the Tuft’s findings, the Post invited longtime critic Jamie Love to comment. Love, who unsuccessfully petitioned the National Institutes of Health to regulate prices for any drug developed from federal funding (see NIH Gets It Right: Bayh-Dole is Not for Price Controls) said: “First impression: the study, which is part of a public relations campaign by the drug companies to justify high prices, is long on propaganda, and short of details.”

Doctors Without Borders was even more scathing: “[I]f you believe [the Tufts analysis], you probably also believe the earth is flat,” said policy director Rohit Malpani in a statement.”

The Washington Post quoted another critic towards the end of the article:

Merrill Goozner, in his book “The $800 Million Pill: The Truth Behind the Cost of New Drugs” writes that the actual development cost was about one-fifth of the last Tufts estimate, contending that most of the drug development relies on taxpayer-funded research.

Since I haven’t read The $800 Million Pill this review from The New England Journal of Medicine was very illuminating:

On one hand, this book gives the reader lots of interesting and useful background about the people and organizations involved in expanding medical knowledge and in developing drugs. On the other hand, it falls short of what I expected from the title. It is not a detailed forensic accounting of the true cost of developing individual drugs as compared with industry claims. Indeed, the only real discussion of the $800 million pill (the alleged average cost of developing a new drug in the United States) comes in a brief review of a study by the Tufts University Center for the Study of Drug Development that was first published in 1991 and then updated in 2001. There is a brief rebuttal from other organizations in the penultimate chapter of the book, but for a reader looking for definitive “proof” or data, this book falls short. Written in the typical style of investigative journalism, the book comes across as an author’s attempt to prove a point, rather than an impartial scientist’s effort to answer a question.

(emphasis added)

Love and Goozner are among those alleging that because many new drugs derive from NIH funded R&D that the American public is “paying twice for drugs” — once when their tax dollars support NIH and again when they buy the product. We’ve addressed the fallacy of this premise before: NIH focuses on fundamental research — not product development — whose considerable risk and expense is borne by the private sector. See Jeopardizing U.S. Drug Development.

At the same time as The Washington Post story another perspective appeared in The Harvard Business Review titled The Real Cost of ‘High-Priced’ Drugs by Michael Rosenblatt, Chief Medical Officer at Merck. Of course, the critics insist that we immediately reject any viewpoint from drug companies but just for fun let’s consider Dr. Rosenblatt’s points:

  • “Much of the debate on the cost of medicines focuses on the initial U.S. price” which normally lowers over time as patents expire, new treatments come on line, etc. “So what is the true cost of a medicine: the initial price or the average price over the course of decades? No other health care expense (hospital charges, physician fees, and so on) undergoes so dramatic a decline in price. Given the prices after patents expire, innovative drugs essentially become ongoing “gifts” to society.”
  • “Focusing only on the cost of a medicine — without considering its health-improving or life-saving benefits, or consequent reductions in other health care expenses — ignores its real value. While the cost is immediate, the benefits often don’t accrue for years. I co-led a team that brought alendronate from the laboratory to worldwide use. The incidence of osteoporosis-related hip fractures in women declined by 40% since the mid-1990s, when alendronate and (subsequently) similar drugs were introduced in the United States. Preventing such fractures avoids suffering for individuals and saves thousands of lives. It also lowers the costs of caring for people who would otherwise have endured a fracture.”
  • “Medicines and vaccines … are necessary inventions. Consider the economic burden of Alzheimer’s disease: The current U.S. annual expenditure of $200 billion will balloon to $1.2 trillion (in current dollars) by 2050. Does anyone seriously believe that more efficient hospital, nursing home, and home care will avert the crisis? I can imagine only one solution: new drugs that arrest, delay, or prevent Alzheimer’s. Yet only 7% of Alzheimer-drug trials are NIH-funded, despite a failure rate of 99% among the 400+ clinical trials of 33 agents in the past decade. What company will gamble on agent #34 without adequate incentives?”
  • “Very few organizations can undertake the arduous, risky, expensive process of drug R&D. There is a common misconception that NIH research is responsible for most drug breakthroughs. In reality, the pharmaceutical industry’s investment in R&D (more than $50 billion in 2012) far exceeds the NIH’s total budget (about $30 billion in 2012). NIH-funded basic research is foundational. However, although the NIH work sometimes generates drug “leads,” industry’s enormous investment is what translates those basic advances into actual treatments for patients.
  • “Explaining the investment and persistence needed for successful R&D is challenging. The path is long, not linear, and littered with failures. Only 20% of approved medicines generate revenues that exceed average R&D investment. Consider this comparison: In 2013, Apple spent $4.5 billion on R&D, or 2.6% of net sales. Merck spent nearly twice that amount, $7.5 billion, representing 17% of net sales. Furthermore, it takes about five times longer (10 to 15 years) to develop a medicine than a smartphone.”
  • “In many other countries, health authorities set prices below market levels using criteria unrelated to the value of the drug to patients and society. As a result, the U.S. shoulders a substantial portion of the cost of inventing new medicines.”

The last point raises an interesting question that’s rarely discussed. In looking at drugs approved from 1998- 2007, Derek Lowe noted the following in Where Drugs Come From: By Country:

  • Out of 252 new drugs, the U.S. discovered 118, Japan, the UK and Germany were each in the low 20’s, Switzerland- 13, France-12, Canada and Australia – 7 and “the entire rest of the world (including China and India)” created about 6.5. (emphasis in original)
  • “… almost all the major drug-discovering countries in the world were tilted towards less innovative medicines. The only exceptions are Switzerland, Canada and Australia, and (very much so) the US. The UK comes close, running nearly 50/50. Germany and Japan, though, especially stand out as the kings of follow-ons and me-toos, and the combined rest-of-Europe category is nearly as unbalanced.”
  • “What about that unmet-medical-need categorization? Looking at which drugs were submitted here in the US for priority review by the FDA (the proxy used across this whole analysis), again, the US-based drugs are outliers, with more priority reviews than not.
  • ‘And here’s the last outlier that appears to tie all these together: in almost every country that discovered new drugs during that ten-year period, the great majority came from pharma companies. The only exception is the US: 60% of our drugs have the fingerprints of biotech companies on them, either alone or from university-derived drug candidates. In very few other countries do biotech-derived drugs make much of a showing at all.”
  • “And the contributions of universities – especially those in the US – has been strong, too. While university-derived drugs are a minority, they tend to be more innovative, probably because of their origins in basic research. ”

Mr. Lowe concludes: “But whatever you might think about the idea of American exceptionalism, it’s alive in drug discovery.” We can only hope we’ll still be able to say that in the years to come as the debate over drug development goes on and on and on.

The Author

Joseph Allen

Joseph Allen is a Featured Contributor on, and a 30-year veteran of national efforts to foster public/private sector commercialization partnerships, and author of numerous articles on technology management for national publications.

Joe served as a Professional Staff Member on the U.S. Senate Judiciary Committee with former Senator Birch Bayh (D-IN), and was instrumental in working behind the scenes to ensure passage of the historic Bayh-Dole Act. He is our resident Bayh-Dole expert, and will write frequently about Bayh-Dole and issues surrounding the commercialization of university research.

In 2008, Joe founded Allen & Associates, through which he offers consulting services assisting clients in technology transfer issues, including developing effective communication strategies with national policy makers.

Warning & Disclaimer: The pages, articles and comments on do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of Read more.

Discuss this

There are currently 4 Comments comments.

  1. Merrill Goozner December 1, 2014 12:09 pm

    I actually devoted a full chapter in “The $800 Million Pill” to debunking the original Tufts study. I wrote my editorial in this week’s Modern Healthcare magazine, which I edit, to address Dr. DiMasi’s latest $2.6 billion claim. See:

    And in case your readers are interested in the full NEJM review, Dr. Allan Detsky (whom I do not know) ended his favorable review by stating “that I am not one who enjoys reading books slowly. I often skim. In order to read a book from cover to cover, I have to find it truly interesting. I can tell you that I read every word of this book.”

  2. Joe Allen December 1, 2014 1:41 pm

    Thanks, as indicated in the article the review of your book
    was as it currently appears on

  3. Gene Quinn December 1, 2014 3:01 pm


    In your editorial you criticize the Tufts study for adjusting for the time value of money and say that this “ignores the fact that R&D is a current expense, not a capital investment.” Is your entire argument based on the way R&D is captured on the books? Whether R&D is or is not characterized as a current expense or capital investment, you don’t seem to quibble with the fact that the money was actually spent.

    Your editorial also says that when you factor in tax credits the $2.6 billion number is reduced to $1.4 billion. But earlier you say that the #2.6 billion estimate overestimates by a factor of 3, and then later in the article you say that drug development can cost as little as “a few hundred million dollars…” These numbers don’t seem to correctly fit together to paint a clear picture of what it is that you are trying to say.

    Reading between the lines it seems that your gripe is with the way that pharmaceutical research takes place. The conclusion in the editorial argues for more investment in basic science and concludes: “When that basic knowledge is in hand, the development process needn’t be exorbitantly expensive.”

    It strikes me that you really aren’t arguing that the Tufts study is wrong, or that pharmaceutical companies don’t spend the money that they say they spend, but rather that you think there is a less expensive way to proceed. Whether there is a less expensive way to proceed doesn’t change the fact that it costs at a minimum many hundreds of millions of dollars to take a drug to market. Whether that is $2.6 billion, $1.4 billion, 867 million (which is 1/3 of $2.6 billion) or the $4 to $11 billion that Forbes estimates, this is real money that needs to be recouped at a sufficient rate to make such speculative activity worth undertaking.

    For the Forbes article see:


  4. Anon2 December 3, 2014 9:45 am

    I wonder how much of the $2.6 billion is the FDA price tag.