The economics of drug development
August 2013 Vol 6, No 6 Special Issue - Health Economics
Caroline Helwick

Chicago, IL—The rapid advances in cancer treatment, especially in personalized medicine, are occurring at an enormous financial cost to the healthcare system. “If we really want to make progress in an economically viable way, we must spend as much time on the economics of drug development as on the basic science,” said Kevin A. Schulman, MD, MBA, Director, Center for Clinical and Genetic Economics, and Director, Health Sector Management Program of the Fuqua School of Business, Duke University, Durham, NC, who spoke about the cost of oncology drugs at an educational session at ASCO 2013.

“There is no quick fix. We must rethink the entire pharmaceutical development process,” said Dr Schulman.

Growth in healthcare spending has slowed; for the first time ever, the spending on pharmaceuticals has declined. But money spent on drugs is shifting from blockbuster products to targeted biologics; within the specialty pharmacy category, spending on drugs actually increased by 18% in 2012, he reported.

The current business model for drug development is unsustainable. The traditional business model is based on manufacturers producing a few high-profit blockbuster drugs that are marketed broadly, but this does not translate to the era of personalized medicine, which requires novel drugs targeted to a vastly smaller population of patients with specific molecular profiles. Spread across a much smaller market, the cost per patient is enormous.

“Of $250 billion spent on prescription drugs, $100 billion is spent on biologics,” Dr Schulman said. “The idea that one such pharmaceutical product will cost $100,000 per patient is bad enough, but many patients receive a whole inventory of novel agents in multiple combinations. How many dollars’ worth of expensive therapies does 1 colorectal patient, for example, use in just 1 course of treatment? And look at chronic myelogenous leukemia, where there are different products for different genetic mutations and resistance patterns.”

This raises the question, Dr Schulman asked, “How will we bring multiple new products forward for smaller and smaller cohorts? What we are seeing are products with tremendously high prices, available to a restricted number of patients.”

Economic Reforms to Lower Drug Costs
Society cannot label new oncology drugs as too expensive without first understanding why the costs are so high, Dr Schulman suggested.
Out-of-pocket costs to the manufacturer can be hundreds of millions of dollars, with no guarantee that a new compound will prove effective. Approximately 80% of molecules fail to make it to market—and the figure is closer to 90% in oncology. The probability of market entry for a cancer drug, in fact, has been calculated at 7.2%.

“The cost of these failures is borne by the rest of the molecules that do make it to market. If a compound fails early, the cost is fairly modest. But if a biologic fails on a 1000-person phase 3 trial, it’s incredibly expensive,” he said, noting that an experimental cholesterol-lowering drug that failed to win approval after phase 3 testing cost Pfizer $800 million.

Financial returns are critical to pharmaceutical companies, which promise a cash flow to Wall Street and a return to their shareholders. The more difficult it is to bring a new compound to market, the higher the price required to meet the needs of investors will be. Increasing the size of a company’s portfolio would allow manufacturers to spread revenue over multiple products and reduce the pressure on individual products to bear the entirety of the company’s returns, Dr Schulman maintained.

“We should think of a way for manufacturers to get access to capital but restrict the returns to innovators—[that is,] firms that use this capital as a way of lowering cost of drugs that get to market,” he suggested. “By reducing the cost of drug development, we would reduce the barrier to entry for new and competitive firms. This could ignite price competition, and that would help us out.”

Transforming Clinical Research in Drug Development
Transformation of the clinical development enterprise can begin by “reimagining” the roles and the responsibilities of patients and clinicians in the realm of clinical research, as well as the roles of institutions and principal investigators, Dr Schulman further suggested.

Data collection in clinical trials must become more compatible with the way that technology is being used in medicine. “We have gone from paper-based systems to electronic medical records to smartphones and tablets. Why are we not using this to change how we conduct research?” he asked.  Optimal application of technology could certainly shorten the decades-long clinical trial process, Dr Schulman suggested.

Patients should also become empowered to better navigate the clinical trials system themselves, to share in decision-making, and to reduce the clinical burden of collecting the information needed for enrollment.

Finally, it would help to better understand the demand for new drugs by patients, that is, the “behavioral economics,” Dr Schulman said. “Why do patients believe that 1 week of life is worth extraordinary amounts of money? It is critical to understand the disconnect between the public anger over high prices for products with modest benefits and the demand that our patients have for hope.”

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Last modified: August 22, 2013
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