A pair of recently-released studies shed new light on the staggering cost of developing new drugs—an expense that now exceeds $2 billion per therapy on average.
In one report, business services consultancy Deloitte details the growing research-and-development (R&D) expenses that biopharmas often blame for the sky-high list prices they charge for new treatments. Deloitte found that the average cost of developing a new drug among the top 20 global biopharmas it studied rose 15% ($298 million) last year, to approximately $2.3 billion.
That figure includes the average cost of developing a candidate from discovery through clinical trials to the market. Deloitte counted 278 late-stage assets last year, slightly above 273 in 2021 and the lowest year-over-year increase since 2018—with companies ranging for four to 35 late-stage assets—defined as both approved and terminated assets in Phase II with breakthrough therapy designation, in Phase III, or filed as of April 30 of each year.
R&D expense per asset remains slightly below the nearly $2.5 billion peak reported by Deloitte in 2019, before the onset of COVID-19. The pandemic led to lower R&D per-asset costs as developers brought their vaccines and drugs against the virus to market in just months. Total R&D spending by the top 20 biopharmas stayed relatively flat, dipping 1% from $141 billion to $139.2 billion—but still 63% above the $85.47 billion calculated in 2013.
Worse for drug developers, the return on investment reaped by biopharmas for new drugs and vaccines plunged last year by 82%, to 1.2%—the lowest percentage recorded in the 13 years Deloitte launched its annual reports on biopharma R&D—from 6.8% in 2021 and 10.1% in 2010, the first year studied by Deloitte.
Drug developers have long blamed rising R&D expenses for the escalating prices of new drugs. However, a study by British researchers published recently in the British Medical Journal (BMJ) takes issue with that premise, arguing that drug prices cannot be justified as the product of rising R&D spending.
Citing data collected from the world’s 15 largest biopharma giants from public filings between 1999 and 2018, the researchers found that the companies spent 57% more—$2.2 trillion—on selling, general and administrative (SG&A) expenses, compared with $1.4 trillion on R&D.
Both the Deloitte and British studies agree, however, that R&D expenses are growing and show no signs of slowing down soon.
Kevin Dondarski, Partner, Life Sciences Strategy with Deloitte Consulting, told GEN Edge the rise in R&D costs reflects increasing expenses aggravated by inflation, as well as diminishing returns as candidates advance from trials to market.
Peak sales forecast decline
According to Deloitte, the amount of money a pipeline drug is expected to generate annually, or average forecast peak sales per pipeline asset, fell 22% last year, to $389 million from $500 million in 2021.
Deloitte said the sales forecast declines reflected several new costly or “high-value” drugs advancing from pipeline to market over the past year. The firm did not name any examples, one of which was the controversial Biogen/Eisai co-developed Alzheimer’s disease drug Aduhelm® (aducanumab), approved in 2021. Aduhelm generated only $4.8 million last year; its sales were hobbled after the Centers for Medicare and Medicaid Services (CMS) limited coverage of that and other amyloid-beta targeting Alzheimer’s disease therapies receiving accelerated approval to those in FDA- of NIH-approved clinical trials.
Growing competition among drugs in relatively few therapeutic areas means lower sales per treatment and helps explain the drop, Dondarski said.
“There’s certainly more of a larger emphasis on therapeutic areas like oncology and orphan and rare diseases,” Dondarski said. He added that another trend in oncology but also more broadly, is “we continue to see a lot of assets where there’s multiple indications.”
Another factor, according to Dondarski, is the growing number of challenges faced by drug developers in expanding access to newer drugs by pursuing reimbursements—where they clash with insurers loathe to pay for costly treatments whose benefit to patients they deem marginal at best.
When COVID-19 drugs and vaccines granted emergency use approval (EUA) were excluded, the average peak sales forecasts fell 16% in 2022 to $284 million from $340 million a year earlier. While COVID-19 vaccines and drugs sped to market, those products took resources away from other candidates outside of those aimed at preventing or treating SARS-CoV-2.
“If we had to take away a positive from how R&D was impacted during COVID, it’s that it did force the adoption of some new capabilities and approaches that had been discussed in and explored throughout the industry for years—everything from remote trials to new ways of engaging patients and investigators, and so forth. That was a real positive,” Dondarski said.
“The big challenge for the industry now is to ensure that those types of things become, to use a cliche, the new normal and not really an exception,” he added. “Companies haven’t forgotten about those things. But the speed at which they’re scaling those across their holistic portfolios could probably be accelerated.”
Deloitte’s study—titled “Seize the digital momentum: Measuring the return from pharmaceutical innovation 2022“—is the latest in a series of annual reports focused on “Measuring the return from pharmaceutical innovation,” produced by the firm’s Deloitte Centre for Health Solutions.
11% Below all-time high
The $2.284 billion in average per-asset R&D cost reported by Deloitte is 11% below the all-time reported high for drug R&D costs.
A 2014 study by the Tufts Center for the Study of Drug Development (CSDD) found the cost of developing and winning marketing approvals for a new drug had more than doubled in a decade, rocketing to a record-high $2.558 billion in 2013 ($3.323 billion in today’s dollars). That cost had skyrocketed 145% since 2003, when a Tufts study pegged the cost at $802 million ($1.321 billion in 2023 dollars)—a figure memorialized by Modern Healthcare editor emeritus Merrill Goozner in his 2005 book The $800 Million Pill (University of California Press).
In a follow-up 2015 study, drug developers told Tufts CSDD they would cut development costs by improving R&D management and operations. By then, pharma giants had begun reducing R&D spending; a GEN report calculated the combined R&D spending by the top 20 biopharmas as growing just 4% year-over-year, from $88.643 billion in 2013 to $92.264 billion in 2014.
“It’s no longer reasonable for large pharma companies to try to maintain the capabilities to bring compounds from the laboratory bench all the way to the marketplace. It’s too expensive. It’s too difficult to justify the upfront cost, and it’s just not a formula for success,” Kenneth I Kaitin, PhD, who retired in December 2020 as director of Tufts CSDD, told GEN in 2015.
From blockbusters to “Nichebusters”
In the British report, Aris Angelis, PhD, assistant professor in health economics with the department of health services research and policy at the London School of Hygiene and Tropical Medicine (LSHTM), and colleagues shared one cause of rising drug prices—an industry shift away from blockbuster drugs targeting chronic diseases and sold in high volumes globally, to “nichebuster” drugs targeting rare diseases or narrow indications for which higher prices can be charged.
In their study, “High drug prices are not justified by industry’s spending on research and development,” the researchers cited a June 2022 study published in the Journal of the American Medical Association or JAMA, which showed the net price of newly launched prescription drugs rocketing from a median price of about $1,400 a year in 2008 to more than $150,000 a year in 2021.
However, in January, Reuters found an even higher median annual price of $193,900 for 17 novel drugs the FDA has approved since July 2022, paced by the $3.5 million list price of CSL’s Hemgenix®, the first and only FDA-approved gene therapy for hemophilia B and the most expensive drug ever sold (to date).
But Reuters acknowledged the median had fallen from $257,000 in the first half of 2022, thanks to five drugs marketed with five-figure list prices, the lowest being Spectrum Pharmaceuticals’ Rolvedon™, an infection-fighting drug in adults with non-myeloid malignancies, whose price the news agency pegged at $27,000 based on wholesaler information.
Drug pricing also drew public attention earlier this year when Vertex Pharmaceuticals slashed its annual copay assistance for its cystic fibrosis treatments—which in the case of Orkambi® (lumacaftor/ivacaftor) was lowered 80%, from approximately $100,000 a year to $20,000. Orkambi is list priced at $286,000. Vertex is at odds with health insurers and pharmacy benefits managers, which are limiting the amount of copay assistance patients can apply through “accumulator” tools. Vertex has attacked the accumulators as predatory, while a national insurer group America’s Health Insurance Plans (AHIP) has denounced copay programs as “just one more Big Pharma scheme to price gouge patients.”
As bad as the pricing of new drugs, the researchers concluded, most new drugs entering the market have provided little or no added clinical value—a conclusion they based on analyses of drug evaluation reports by health technology assessment bodies in France and Germany in the 2010s.
Pursuing policy changes
To address these issues, according to Angelis and colleagues, governments need to press biopharmas into redeploying existing resources to generate more new and innovative treatments.
“There should be no need to pass research and development costs on to patients and
healthcare systems through ever higher and increasingly unaffordable prices,” the researchers asserted, before adding: “This is unlikely to happen, however, without government intervention or regulation along the lifecycle of new medicines.”
At least one industry group also sees government intervention as an answer to rising drug prices, but in a different way. Pharmaceutical Research and Manufacturers of America (PhRMA) last year restated its long-standing call for policymakers to instead lower patient costs by curbing the pricing power of insurers and pharmacy benefit managers (PBMs).
Through their industry group Pharmaceutical Care Management Association (PCMA), the PBMs in turn have long blamed drug developers for rising prices of therapies. Earlier this year, PCMA endorsed the Affordable Prescriptions for Patients Act of 2023 (S. 150), introduced January 30 by U.S. Sens. Richard Blumenthal (D-CT) and John Cornyn (R-TX). The measure would ban biopharmas from blocking generic and biosimilar versions of prescription drugs through patent law, by limiting the number of patents a manufacturer can contest to prevent “patent thickets,” and ending the right of drug developers from shifting or “hopping” patents from older to newer versions of products.
Angelis and colleagues also shared findings of a study last year by the U.S. House Committee on Oversight and Reform which found that 14 of the largest biopharmas spent 11% more on stock buybacks and dividends ($577 billion) than R&D ($521 billion) from 2016-2020.
The stock buybacks were not counted within SG&A, which includes rent and utilities, marketing and advertising, sales and accounting, management and administrative salaries. Between 1999-2018, SG&A expenses for the top 15 biopharmas as a share of revenue dropped from 35% to 27%, while R&D spending rose from 16% to 21%.
“Given the amount spent on non-research and development activities and that most new drugs add little or no therapeutic value, in theory the biopharmaceutical industry could generate more medically valuable innovation with its existing resources,” Angelis and colleagues concluded. “We need to foster the development of therapeutically superior drugs that can enhance patient outcomes. This may require a shift of more resources from selling, general, and administrative activities to R&D activities and companies to prioritize disease areas with clinical unmet needs.”
“Governments, policy makers, drug regulators, health technology assessment bodies, and payers need to re-think the incentives for valuable biopharmaceutical innovation, creating policy and regulatory environments that will meet public health objectives,” Angelis and colleagues added. “The world needs a truly value based health-industrial ecosystem focused on incentivizing and rewarding improvements in health outcomes and population health throughout the lifecycle of new medicines.”