Sunday, February 10, 2013

IBD Drug Costs


Are pharmaceutical companies evil?


A dose of Humira can cost as much as $750 without insurance.  The yearly cost of drugs like Humira, Cimzia, and Remicade are approximately $20,000 per person without aid.  This cost is staggering – how can a drug company justify charging so much money for a necessary drug?  The short, simplistic answer is that drug companies are for-profit entities.  They are beholden to shareholders to make money, and they need to continue making money to survive.  Like all business entities, pharmaceutical companies are bureaucracies and are not necessarily models of efficiency.  Some of the money goes to waste in the system, and some does go to line the pockets of executives.  Like all things in life, however, the reality isn’t that simple. (1)

The Cost of a New Drug


The cost to develop a new drug ranges anywhere from $4 billion to $12 billion US dollars. (2)  This number represents not only the raw research that goes into a particular drug, but all of the dead-end pathways followed by scientists on their path to development.  Basic testing is performed using computer models and then animal models.  Very few actual drugs make it to the clinical trial phase.  Clinical trials are broken up into three areas:

Phase 1 Trials.  These are small scale trials on healthy individuals to determine the safety of a drug.
Phase 2 Trials.  The second phase of trials are to determine the efficacy of a drug and to further evaluate the safety.  They are generally done on a medium scale of several hundred people.
Phase 3 Trials.  The final phase of trials are on several thousand individuals and further evaluate safety and efficacy, in addition to dosing and side effect confirmation.

Despite spending billions to get to clinical trials, the failure rate on them is very high.  94% of all drugs that reach clinical trials fail before coming to market – this includes 82% of phase 2 trials and 50% of phase 3 trials.  The 94% number also excludes drugs taken off the market post-trial.  This failure rate is also why we should be skeptical of promising results in animal studies (or pre-animal studies) ever reaching the market.

A second cost factor is the life of the drug.  The pharmaceutical company that developed a drug generally has 20 year of patent protection on exclusivity for making that drug.  In realistic terms, that is down to approximately 12 years from the time to drug is available on the market, leaving just that long to recoup R&D expenditures.(4)  Once a drug goes off-patent, generic manufacturers generally undercut the price (they don’t have to do the R&D or marketing, and their costs are limited to manufacturing costs) and it loses its profitability.

The third cost is direct cost of drug production.  This is paying for all of the raw materials, putting them together, transporting them to the drug store, and the associated sales and marketing budgets.  The costs are exacerbated by regulatory agencies around the world that impose strict controls and oversight overhead on manufacturing.

The drug companies use their highly successful drugs to support other orphan drugs that are not profitable and cannot be due to high manufacturing costs or a limited market.  If a drug company develops a drug to treat a rare disease -- let’s say Berdon Syndrome, a disease where microcolon is one of the symptoms.  Since there are only 230 known cases, each would have to theoretically share the R&D costs for the drug, resulting in a $52 million per person drug charge.  Drug companies subsidize drugs and research on these conditions through profits on more prevalent conditions.  Unfortunately, very rare conditions rarely have any R&D dollars put against them by drug companies due to the low upside profit potential.

Outside the direct development costs, drug development has many hidden costs.  The first and largest hidden cost is piracy.  Several large nations with poor intellectual property protection have been known to state-subsidize drug production and ignore patents, in gross violation of international treaties.  While good for their citizens (and the political contributors that run the state-sponsored companies), the rest of the world must shoulder an even greater share of the cost of drug development in increases costs. 

Another hidden cost (at least to US consumers) is socialized medicine elsewhere in the world.   Countries with state-run healthcare systems can dictate rates to the drug companies, who are stuck making a decision of whether to do business with that country and lose money on a particular drug (which requires further price increases for US consumers) or forego doing business there.  The business is generally not restricted to one drug – a company may be forced to discount a new drug to be permitted to sell a more prevalent and popular drug within that country.

How do we apply these numbers to Crohn’s and Ulcerative Colitis?  Let’s go back to the prevalence numbers:
·         5 out of every 1,000 people in the US have IBD.  This amounts to approximately 1.5 million cases.  Worldwide, this would be approximately 35 million cases. *
·         For a given drug, let’s say Humira or Remicade, there may be 10% of affected individuals that qualify for (medically) and take that drug, so we are down to approximately 3.5 million potential users.  Of these, approximately 50% will be living in countries that either never approved the drug or have a high enough piracy rate to make selling the drug not worthwhile, bringing the number to 1.75 million.
·         The 1.75 million individuals may take the drug for 12 years before generics come into play.  Realistically, the time is more likely to be 6 years if you include the time to get patients to adopt a new drug, then the drop-off when competitors come on the market with similar but more effective drugs.  At 6 years, this is 72 doses for a product like Humira.
·         1.75 million people x 72 doses = 126 million doses of the drug sold.  This doesn’t include losses due to bad batches, theft, or spoilage.
·         Due to international bargaining, only half of those doses are sold at a reasonable cost – the rest are provided at a greatly reduced cost closer to the actual per-dose manufacturing cost.
·         $12 billion / 63 million lifetime doses sold = 190 dollars per dose to recoup R&D costs.

The numbers above are very rough example of drug costing.  For Remicade, even if it were free to manufacture and deliver (it’s not – it’s actually very expensive), it would need to cost $190 per dose above those numbers just to recoup R&D costs.

The description above is a gross oversimplification of the system.  There are other factors at play – drug manufacturers find new indications for a drug to combat multiple conditions, or off-label uses increase prescriptions.  Drug companies spend money wining and dining doctors to encourage prescriptions, and recently in the US have jumped on the direct-to-consumer marketing bandwagon.  On the other hand, the big drug companies all offer discount programs on the most expensive drugs, and insurance companies and big pharmacies (like Walmart) collectively bargain for good prices.  Drug companies are made up of doctors who are trying to help people by doing breakthrough research, but also of business people who need to maintain an ongoing concern to be able to develop future drugs. 

There is certainly unethical behavior that goes on in the pharma industry – check out the class action suits regarding skewed trials and coverups on safety issues to see the dark underbelly.  That said, even with the profiteering and corruption, there is still a high baseline cost to delivering novel new drugs, a cost that unfortunately the patients must bear.

Bottom Line


·         Developing new pharmaceutical is an expensive proposition.  The more limited the market, the more the cost per-dosage to recoup R&D spend.

* NOTE:  The prevalence worldwide is not equal to the US prevalence, and many places don’t have access to modern medical treatments.  This number is not meant to handle those issues, just to provide a conservative basis for calculating ROI.
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