High price of failure drives drug development costs into the stratosphere

The debate over the true cost of developing new drugs has created a virtual cottage industry of analysis in recent years. Critics maintain that the pharma industry has wildly overblown costs to justify the often extraordinary price it can place on a new product. Industry officials countered by citing Tufts' figure of more than a billion dollars per new treatment, by way of illustrating that there are some very rigorous analysts out there who can vouch for the mountainous expense.

Bernard Munos at InnoThink--who we picked as one of this year's most influential players in the industry--has triggered some considerable thinking, though, about whether Tufts' numbers are far too conservative. His number: $4 billion, when you account for the extraordinarily high failure rate that has afflicted Big Pharma over the past decade. And now Forbes' Matthew Herper has gone one step further, looking back over the past 15 years and breaking out the average cost of new drug development based on inflation-adjusted budgets.

For some, like Amgen ($AMGN), the average cost was a relatively reasonable $3.7 billion. That's the kind of money that can be dwarfed by a blockbuster approval. But when you switch to a company like AstraZeneca ($AZN), which has been plagued by clinical trial failures, the rate soars to $12 billion per product. Eli Lilly ($LLY), which has an R&D budget comparable to AZ's, has a higher rate of approvals, so its average is $4.5 billion.

As Herper notes, "the main expense is failure. AstraZeneca does badly by this measure because it has had so few new drugs hit the market."

Of course, a pharma company can't easily counter consumer advocates by saying it's being forced to cover a legacy of mistakes with high prices on the rare success story. But the new analysis does help illustrate the multibillion-dollar investments being made to bring new products to the marketplace. How sustainable that may be in an era where personalized drugs replace mass-marketed blockbusters, though, will occupy the industry for some time.

- here's the story from Forbes

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