Market Spiral Pricing of Cancer Drugs - Donald W. Light

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http://www.pharmamyths.net/_market_spiral_pricing_of_cancer_drugs__120860.htm


ABSTRACT: (teaser paragraph)

Market Spiral Pricing of Cancer Drugs

Donald W . Light, PhD 1 ; and Hagop Kantarjian, MD 2

Every patient with cancer or another life-threatening disease wants the most effective treatment, but drug prices have
become staggering. Twelve of the 13 new cancer drugs approved last year were priced above $100,000 annually (Table 1),
and a 20% copayment makes them unaffordable, even for well-insured patients. 1

What determines the escalating prices of cancer drugs? Pharmaceutical experts often cite the high research costs and
the benefit or added value of the new cancer drug. We believe that neither argument is well-founded and that pharmaceu-
tical companies may be using a third strategy: constantly raising prices on last year’s drugs and then pricing new ones above
the new market price level; this is known as the Market Spiral Pricing Strategy.

The industry-sponsored estimate of average research costs to get a drug to market is $1.3 billion, including the cost
of failures. 2,3 Such estimates may be significantly inflated: 4

First, half of this industry estimate is not research costs, but a high estimate of profits that companies would have made
if they had not invested in research in the first place. There are good reasons for subtracting these “profits foregone” as
not real research costs, which brings the average down from $1.3 billion to $650 million.

Second, taxpayers subsidize about half of company research through various credits and deductions (though companies make
sure no one can get an accurate figure). This brings the average cost down to $325 million.

Third, this industry estimate was made on the most costly fifth of new drugs and then mis-attributed to all drugs. Correcting
for this brings the average down by 30%, to $230 million.

Fourth, a few costly projects always distort the average cost; therefore one should use the median, which is 26% less than
the average. The average is now down to $170 million.

Fifth, there is no accurate estimate of basic research to discover new drugs because it varies so much; so an unverifiable
high estimate was added that made up at least a third of the total. More than 84% of all basic research for discovering
new drugs comes from the public, who also bear all the high risk. 5 After deducting taxpayer subsidies, companies spend
only about 1.3% of revenues on basic research and the rest on developing minor variations or testing. 6 Removing that
basic-research inflator brings the net median corporate research costs down to just $125 million (plus the variable costs
of basic research).


Although such calculations are subject to unknown variables or factors that could alter the final estimates, the statement
that “it costs $1 billion to develop a drug to market,” which has been repeated so often that it is accepted as a solid truth, is
in fact a significant overestimate. Andrew Witty, chief executive officer of GlaxoSmithKline, stated in a recent health care
conference in London (March 2013) that the $1 billion cost to develop a drug is “one of the great myths of the industry.” 7
In the case of cancer drugs, most of the basic research and many clinical trials are paid by the National Cancer Insti-
tute and foundations, all free to companies. Further, clinical trials in cancer are smaller and shorter than trials for other dis-
eases, so trial costs should be smaller too. 8 In sum, there is no credible evidence that the net costs of the major companies
for cancer research are not lower than research costs for other drugs. Consequently, cancer drugs should be priced lower .
The added-value argument for unaffordable prices is not supported by objective data. Most new cancer drugs pro-
vide few or no clinical advantages over existing ones. Only one of the 12 new anticancer drugs approved in 2012 provides
survival gains that last more than 2 months (Table 1)

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