A new study undermines Big Pharma's justification for charging high drug prices

• It's hard to get a clear estimate on how much it costs to develop a new medication from start to finish, with some estimating it costs more than $2 billion.
• But a new study, published Monday, found that the cost to develop a new cancer drug is closer to $648 million, a much lower figure.
• The number, coupled with the revenue the drugs made after approval, flies in the face of the argument that drug companies need to set high prices to recoup their investments.

How much does it cost to develop a new drug from start to finish? It's a key question for the pharma industry, and there are some staggering figures out there.

"Fifteen years, $2.5 billion, to come up with a product where there's not even a safety problem," President Donald Trump said in a January meeting with pharmaceutical executives. "It's crazy."

That widely cited $2 billion plus figure is from a 2014 Tufts Center for the Study of Drug Development report, accounting for opportunity costs - the amount of money that could have been made if invested elsewhere - as well as research and development costs.

That high price of development is often used to justify the cost of new drugs, which in the case of new cancer therapies can be more than $100,000 for a course of treatment. But the numbers behind the Tufts report come from private datasets, which has led researchers to look for alternative, more public ways to vet that justification.

In an analysis of 10 cancer drugs approved between 2006 and 2015 published Monday in JAMA Internal Medicine, researchers found that the median cost to develop a new cancer drug was $648 million ($757.4 million when factoring a 7% per year opportunity cost), and the median time it took to develop the new drugs was 7.3 years.

Crunching the numbers

Finding out how much money a drug company spends on developing a singular drug isn't easy: companies have to report their total research and development costs on a quarterly basis, but that number is rarely if ever broken down drug by drug. That means if a large pharmaceutical company has more than one drug it's managed to get approved, it's hard to get a sense of how much was spent getting to each individual approval.

To get around that, Sham Mailankody, a medical oncologist and hematologist at Memorial Sloan Kettering Cancer Center, decided to zoom in on just companies that had gotten only one drug approved. Specifically, Mailankody and his co-author Dr. Vinay Prasad, a hematologist-oncologist and professor of medicine at the Oregon Health and Science University, chose to look at companies that made cancer drugs, based on their background.

Using documents filed with the Securities and Exchange Commission, the two came up with a group of 10 cancer drugs that had been approved between 2006 and 2015, representing 15% of all cancer drug approvals over that period, Mailankody told Business Insider.

From there, Mailankody and Prasad tallied up the total R&D costs prior to the cancer drug's approval, which included the funds spent on other drugs the companies were developing at the time that hadn't been approved yet. The companies in the analysis were developing anywhere from two to 11 drugs while working to get their lead cancer drugs approved.

In the end, they found that the companies spent anywhere from $157.3 million to $1.95 billion working to get a cancer drug approved, with the median cost at $648 million.

When the researchers then looked at the revenues the drugs made after approval, they noticed that some drugs made 10 times more money so far than had been spent during R&D. All of the drugs in the analysis are still patent protected, with years left until they start to face competition from cheaper generic medications.

There are some things to keep in mind about what the study was able to find. Because of how the study was structured, it couldn't include major pharmaceutical companies, which could have much different R&D spending habits than smaller biotechs that only have a few drugs in development. The study also focused on cancer drugs, meaning the estimate could look different for other fields of medicine.

But for now, the data sets up a counterpoint to the argument that companies need to charge high prices to recoup investments and that putting a cap on drug prices could inhibit innovation by leaving fewer resources to develop new drugs.

"You can't hide behind your R&D number to justify costs anymore," Prasad said.

NOW WATCH: Pilots flew straight into Hurricane Harvey and caught this incredible first-hand footage