The wildly outrageous costs of pharmaceutical drug production

Drug companies – “Big Pharma,” as they are called – are targets in America. Especially with Mylan’s recent EpiPen pricing issue and earlier when Turing’s odious CEO Martin Shkreli raised the price of Daraprim by more than 55 times, from $13.50 per pill to $750 per, and his smug reaction to criticism over that questionable move. There are bad guys in all areas of life, of course, and pharmaceutical companies are no exception. Perhaps these two examples are evidence of bad players at work.

Without getting into the minutiae of either of these situations – and certainly not defending either Mylan or Turing – here is some badly needed and eye-opening information about the business of producing pharmaceuticals.

Making drugs is a business, and like other manufacturers drug producers find something people need or want and produce it. Life-saving drugs, or drugs that improve our health are valuable and needed. Drug companies spend billions of dollars over many years to develop useful, needed pharmaceutical products, improve them so that they will meet or surpass the FDA’s strict standards, and once approved market them.

In June of this year, the American Action Forum released research addressing the process of producing new drugs. The process “is extraordinarily expensive and time consuming,” the article stated. “A Tufts University study found that the average cost to bring just one drug to the market is about $2.6 billion. It takes an average of 15 years from the time a drug developer first begins testing a new formula until it is approved by the FDA. Only 1 in 1,000 drug formulas will ever enter pre-clinical testing, and of those, roughly 8 percent will ultimately receive FDA approval.”

Let’s say PharmX creates 100,000 drug formulas, but only one in a thousand, or 100 of them, gets to pre-clinical testing and only eight will receive FDA approval. PharmX will have invested on average $2.6 billion in each one of the eight. The company has to sell enough of each of those eight drugs to pay for its development, and to have enough left over to finance new research and development, and some profit.

Like other inventors, drug companies patent their products, or receive an exclusivity period. A patent is issued for 20 years from the date of filing, and drug makers usually file early in the development stage to prevent other companies from moving in on their idea. If it takes an average of 15 years to get a drug through approval and to market, the pharmaceutical company has on average only five years to sell enough of the drug to recoup the $2.6 billion in development, approval and marketing costs. At the end of the patent period and/or the exclusivity period, another drug maker might make a generic form of the drug, and sell it for a lot less.

So, when you do the math for a drug with development costs of $2.6 billion, you find that if PharmX charges a dollar a dose, it will have to sell 2.6 billion doses in five years just to break even. If PharmX charges $100 a dose, it will have to sell 26 million doses in five years, just to break even. John LaMattina, senior partner at PureTech venture capital, noted that drug development “is a high-risk, expensive, and long-term endeavor.” Classic understatement.

Another aspect of this issue is when drugs made by US companies cost more at home than they do in other countries, such as Canada. It doesn’t seem right that Canadians can buy American drugs cheaper than Americans can. But what is the drug company supposed to do when the Canadian government, or another government, wants to buy millions of dollars of its product at lower than market price when it is trying to recoup billions in costs? There are likely other drugs made by other companies that treat the same disease that these governments could buy instead, so should the drug company pass up that opportunity, leave the millions of dollars on the table, and perhaps suffer financially as a result, while a competitor sells millions of dollars of its product to these countries at a below-market price?

Another obstacle to manufacturers’ ability to recoup the cost of bringing a new drug to market is that regulations imposed by other countries, perhaps to protect one of their own companies, makes the potential market for sales smaller.

And, despite the rigorous development and testing process required to gain the FDA’s approval that the drug is safe for public use, the required warnings about potential side effects and such that go on product sheets, and the fact that drugs are prescribed by patient’s doctors, drug manufacturers still get sued by patients.

Doing business in the U.S. is a real challenge, with often burdensome and unreasonable regulations and other hurdles that must be negotiated that make producing needed and wanted products and services difficult and expensive.

The more expensive drug production is, the greater the need for high prices. While we would all like lower prices for drugs and healthcare in general, we also want to continue to have companies developing new and better drugs and medical devices.