JAMA Study Misses the Mark on Cancer R&D Costs & Profitability

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This article was originally posted on BIOtechNow by BIO President and CEO, James Greenwood

Yesterday, JAMA Internal Medicine published a new paper purporting to estimate the R&D expense associated with developing and bringing to market a new cancer treatment. Unfortunately, the study suffers from a number of methodological flaws and ultimately paints an inaccurate picture of the ecosystem for cancer drug development.

The study takes aim at one commonly cited estimate for the cost to develop a new drug, published by the Tufts Center for the Study of Drug Development. The Tufts estimate pegs the price tag for developing a new drug, including failures, at $1.4 billion in direct costs, before accounting for the cost of capital (and about $2.7 billion when accounting for such costs). The JAMA paper estimates the direct cost to bring a new cancer medicine to market at $648 million – a substantially lower figure. It also claimed that the median revenue following approval for the drugs it examined was $1.66 billion, and $67 billion in aggregate.

In evaluation of the paper, several facts ought to be born in mind.

First, the study only looked at companies which successfully secured FDA approval for a drug, while leaving unexamined R&D spending at companies which didn’t secure an approval. The vast majority – 95 percent – of potential new cancer drug programs that enter clinical trials end up failing. By only looking at the “winners” of biotech companies developing cancer drugs, the study ignores the great risk and uncertainty that investors face in funding such research, who don’t have the benefit of knowing in advance which companies will eventually obtain an FDA approval. Many small companies that work in oncology never obtain FDA approval, but the billions they spend on R&D provides valuable input to the development programs of other companies that eventually make it.

The paper’s method for calculating revenue for new cancer drugs is also flawed. Over half of the $67 billion in revenue the authors attribute to the ten drugs it examined was the acquisition price paid for the company in a merger (the acquisitions of Medivation and Pharmacyclics, for $14 billion and $21 billion, respectively, in two of the largest ever emerging biotech merger deals), rather than actual sales of the drugs to treat patients. In so doing, the paper wildly skews upward the financial return from cancer drug R&D.

Even among the ten successful drugs the paper examines, it’s unclear whether all of the R&D spending is accounted for. Of the ten drugs, three of them were the result of collaborations between an emerging biotechnology company and a large, established pharmaceutical company. Such collaborations – in which a large pharmaceutical company agrees to fund and conduct late-stage clinical trials, which can cost hundreds of millions of dollars – are common. By only examining the SEC filings of the small biotech company to determine R&D costs for a given drug, the authors ignore the (likely substantial) outlay of R&D funds by the collaborator necessary to prove that a given drug is safe and effective.

What’s more, two of the ten drugs examined were repurposed older drugs which had already been approved for another indication. When the paper looks at novel drugs only, it found the R&D cost to be about $900 million… not nearly as far off from the $1.4 billion in direct costs estimated by Tufts as many headlines are suggesting.

Value in the drug discovery business cannot be created or predicted from some calculated amount of R&D spending. This industry, unlike any other industry, has tremendous uncertainty surrounding future reward from ongoing R&D. Failures are the norm in biotech. Due to this simple fact, investors will not invest in R&D companies if there is no compensating upside for the few wins achieved across their portfolio.

The conclusion one must draw is that the paper’s authors are merely seeking to grind an ideological axe, rather than providing a fair and objective look at the barriers facing innovative companies seeking to develop new cures and treatments for cancer patients. Such patients will ultimately be left with fewer options and worse treatment outcomes if policies that reduce the economic viability of cancer drug R&D are enacted.

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