11 November 2022

Justifying Drug Prices

Pharmaceutical companies and their trade groups have opposed numerous proposals aimed at lowering drug prices. They argue that high drug prices are needed to recover research and development investments. This blog post reviews a study that essentially refutes that argument. Before you read the post and possibly become irate, realize the study has significant limitations.

Welcome back. In case you haven’t heard, the USA wins the prize for the world’s highest prices for new medicines. What’s more, the prices of many therapeutic agents have increased at rates far exceeding the rate of inflation.

The Inflation Reduction Act that President Biden signed into law in August includes provisions to reduce prescription drug costs. Not to complain, but the law only covers those on Medicare and certain prescription drugs. And it doesn’t kickoff until 2026.

In a recent study, researchers with the London School of Economics and Political Science, University of Pittsburgh and University of California, San Diego set out to determine if there is an association between how much drug companies spend on research and development (R&D) of new drugs and how much they charge for those drugs. They reasoned that there should be some positive association if high drug prices are truly justified by high R&D costs.

Drug companies blame high drug prices on the cost of research and development (graphic from multiple websites and from earlier blog post, Drug Safety).

Relating Drug Prices to R&D Costs
The analysis focused on 60 drugs approved by the Food and Drug Administration from 2009 to 2018. Data on R&D investments and list or net prices for these drugs were available from the SSR Health database.

Drug Companies' Investments  The amount spent to bring each drug to market followed investor reports. Phase-specific clinical trial success rates were used to estimate the amount spent on failed trials for other drug candidates, with a capital rate cost of 10.5% per year. The estimates thus accounted for the amount spent to develop the products in question as well as for the probability of failure in the drug industry and costs associated with acquiring funds from investors. Product list and net prices were from SSR Health.

The five critical steps in drug development (from www.nebiolab.com/drug-discovery-and-development-process/).
Consumer Costs  Calculating the number of units needed for treatment assumed a standard dose according to the package label of each drug, grouped into acute, chronic and cyclical treatment categories. Total costs were estimated separately using list and, if available, net prices obtained from SSR Health at the time of launch and in 2021.

Analyzing the Association  To test the association between R&D investments and treatment costs, correlation coefficients were estimated and linear regression models were fitted that controlled for other factors associated with treatment costs. Two models were used: one that adjusted for all variables associated with treatment costs and a second which excluded highly correlated variables.

Results  Neither correlations nor regression models showed any association between estimated R&D investments and treatment costs based on list prices at launch or net prices one year after launch. This result held when 2021 prices were used to estimate treatment costs.

Wrap Up
Among the key limitations reported by the researchers were the small number of drugs (only 60) due primarily to the lack of publicly available data, the difficulty of tracking all preclinical company investments, and the difficulty of isolating R&D costs for any one product given possible spillover in knowledge and resources from other efforts.

The researchers note that the lack of association between R&D investments and drug prices was not unexpected, since pharmaceutical firms aim to maximize profits based on consumers’ willingness to pay. They conclude that, if drug companies continue to justify high drug prices with the R&D investments, they should supply additional data to support the claim. Do you think they will? 

Top 10 global pharmaceutical companies by revenue, 2021 (from pharmaboardroom.com/articles/top-10-global-pharma-companies-2021/).
 Thanks for stopping by.

Prescription Drug Provisions in the Inflation Reduction Act: www.kff.org/medicare/issue-brief/explaining-the-prescription-drug-provisions-in-the-inflation-reduction-act/
Study of associating new drug investment with treatment costs in JAMA Network Open: jamanetwork.com/journals/jamanetworkopen/fullarticle/2796669
Article on study on EurekAlert! website: www.eurekalert.org/news-releases/965981
SSR Health: www.ssrhealth.com/

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