“The Truly Staggering Cost Of Inventing New Drugs”

Another provocative piece in Forbes  that implies the cost of developing a new drug could be as high as $12B!!  This approach has a number of flaws (as does: “Best Drug Companies.. “)  All produce (provoke?) some interesting insights from commenters.    Funny how some other provocative media posit that it costs 1/200th of that – only $55M!  Quite a range.

Some of the underlying problems with these approaches are things we have noted elsewhere here like offsetting the R&D investment by five years or so.  This is because the median (maximum) R&D spend averages about five years ahead of launch.  Cause and effect should have a rational link to one another.  Also, the $12B in spend does not parse out tax or marketing effort spending that “hides” in many cash flow statements.   There are many other insights one need to really unravel and understand the value and success-drivers in Pharma R&D.  Some additional related discussions are here in Derek Lowe’s blog, where again, additional comments are again rich in insights.  http://bit.ly/xdVYdX 

My thoughts:  The span of comments following both articles reflects this topics’ complexity and some of its confounding issues. Some missed points:

  1. Understanding and managing performance should not begin by comparing apples to acorns. NME approvals are not dollars and it can be misleading to represent it as the key metric.  A better (best?) way is to measure the net present value (NPV) of the approved drugs’ revenues against the NPV of aggregate R&D spending.
  2. Some swag estimates can be applied to remove the tax avoidance and “what portion is for marketing of Phase IV” confounders, etc. However each firm has very different situations and reasons for such allocations. Therefore, these approaches may be useful for overall industry measures but fail when trying to compare firms to one another (unless you have that internal data across all.)
  3. So, there are plenty of statistics and analytics we can apply (and we keep trying (- myself included.)  But we end up misleading ourselves to at least some degree.

Beyond understanding these issues, what is our PURPOSE? To improve the performance of R&D and to what ends?  To uncover those (past or future) winners and losers?  To lambaste management or justify our POV?  Or just to learn and from that, do better?

One useful perspective is to just look at what the industry has done overall in terms of surviving or growing.  If it serves society well, society rewards it.  The fact is that returns on the industry were in the high teens in the 1980s and 1990s (and maybe earlier.)  The past decade has seen industry ROI drop in half.  Maybe stabilized and maybe reversing that trend.  The key is, what are we doing to change that decline? Can we do more of them or additional things (and they need to be new, not just six-sigma)? What firms are winning comparatively and can others follow suit?  Exploring some of those actions and their apparent results are the focus of this blog.


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