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The $2.5-billion mistake: A gullible Trump bought into Big Pharma's inflated claim about drug R&D costs

President Trump’s meeting Tuesday with pharmaceutical executives was a theatrical display of chumminess in which all the parties seemed to share deep regret over high and soaring drug prices.

It also was a one-stop shop of misconceptions and misinformation about the causes of high drug prices, and therefore a mishmash of solutions, most of which are a lot more complicated than Trump thinks, some of which won’t work, and some of which are disguised handouts to the drug industry. 

We’ve addressed some of these complexities here, here and here. But let’s focus for the moment on one of the most glaring misconceptions about the cause of high drug prices, which is the cost of pharmaceutical research and development. With the press watching before the meeting formally began, Trump addressed the cost of bringing a new drug to market thusly:

“I read where it costs sometimes $2.5 billion — on average, actually — to come up with a new product.… Fifteen years, $2.5 billion to come up with a product where there’s not even a safety problem. So it’s crazy.”

Leaving aside the fact that a major part of R&D is aimed at determining whether there’s a safety problem, Trump didn’t say where he got that figure. But we know: He got it from the pharmaceutical industry, via the Tufts University Center for the Study of Drug Development, which is heavily funded by the industry itself

A series of studies led by Joseph A. DiMasi, the center’s director of economic analysis, has tracked Big Pharma’s purported R&D going back to the 1990s. The latest version, published last year, put the figure of $2.5 billion — actually $2.556 billion in 2013 dollars — on the cost of bringing a drug to market.

But there are several issues with these studies that have been raised by critics of the industry. One is that the raw data are confidential. The latest study is based on the R&D costs of 106 drugs made by 10 multinational companies but, in common with the previous studies, neither the drugs whose costs are analyzed nor the companies in the sample are revealed. The paper says only that five were among the top 10 in global sales, seven are in the top 25 and three are outside the top 25.

Obviously, this makes any assessment of the accuracy of the Tufts estimate impossible. A study that doesn't reveal what it measured or provide a way for outsiders to reproduce its findings is hopelessly flawed, and must be judged useless as the basis for any policymaking. When I queried DiMasi about this in 2011, he assured me that the drugs he examined were representative of the industry in terms of the risk and expense of their R&D. He also asserted that his findings had been validated by a 2006 Federal Trade Commission study using a separate, public drug database.

But the authors of that study, who were researchers at the Federal Trade Commission, stated in their paper that they couldn't really be sure that their data were comparable. In any event, we have to take Tufts’ word for the accuracy of its findings, and why should we? “Because we cannot know which compounds were studied, it is hard to evaluate the key assumption that more than 80% of new compounds are abandoned at some point during their development,” wrote Jerry Avorn of Harvard Medical School. That’s important because the high rate of failure is “a key driver of the findings,” he observed.

Another commonly cited flaw is that the Tufts papers include in their cost estimates the “opportunity cost” of R&D over the years during which a drug is being developed. In fact, this cost, which includes the cost of capital, accounts for nearly half of the total $2.6 billion. 

Marcia Angell, former editor-in-chief of the New England Journal of Medicine and a critic of the industry, considers the inclusion of this cost to be absurd. It’s one thing for outside investors to think about Big Pharma’s capital costs when deciding whether to put their money there or somewhere else; but quite another for the industry to tack it on to its own accounting, as if Merck or Pfizer can just decide to convert themselves into smartphone manufacturers or mutual funds. They “have no choice but to spend money on R&D if they wish to be in the pharmaceutical business,” she wrote in her 2004 book “The Truth About the Drug Companies.” 

Nor is there any accounting in the Tufts papers for the subsidies the drug companies get from taxpayers. Avorn and two colleagues observed in a 2015 paper that research at nonprofit, publicly funded universities gave rise to “more than half of the most transformative drugs developed in recent decades.”

The pharmaceutical industry’s poormouthing and whining about its drug development costs should be taken with heaps of salt, given that it still ranks among the most profitable industries in the world, with profit margins consistently in the mid- to high-20% range. Research and development is seldom the biggest cost item for major drug companies — it’s often outpaced by marketing. Merck, for instance, spent $6.7 billion on R&D in 2015, about 17% of its $39.5 billion in revenues. But it spent $10.3 billion on marketing and administrative overhead.

How much of the cost of drug R&D results from regulations, of the type Trump could theoretically affect by ordering the Food and Drug Administration to loosen its rules on testing and safety? Not as much as he’d like to think. The FTC researchers found that for one large firm in their sample the cost of developing a new drug penciled out at $521 million, but for another it was $2.1 billion. That suggested that at least some of the cost was the product of the companies’ own “strategic decisions.” 

And how much do we want drug testing rules liberalized, anyway? The annals of drug research are punctuated by compounds that got approved too hastily— thalidomide and Vioxx come instantly to mind — and were taken off the market only after they were found to cause horrible birth defects, death or other problems. Thalidomide was widely prescribed as a morning sickness drug in Europe but blocked in the U.S. — by the same FDA that now gets pilloried in Washington for being too strict. Sometimes, the cost of regulation is worth it.

Keep up to date with Michael Hiltzik. Follow @hiltzikm on Twitter, see his Facebook page, or email michael.hiltzik@latimes.com.

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