Drug makers can expect to spend more than $2.5 billion during more than a decade before winning approval to sell a new prescription medicine, according to an estimate released Tuesday by the Tufts Center for the Study of Drug Development.
The center’s projected cost of $2.558 billion dwarfs the $802 million figure in its last major study, done in 2003 — the equivalent of $1.04 billion in 2013 dollars. That number has been widely cited at industry forums as evidence of the financial hurdles drug makers face.
Development costs have more than doubled over the past decade partly because scientists are tackling more complex diseases, resulting in more failures of experimental therapies, according to the center, which is affiliated with Tufts University.
Critics, however, said the new estimate ignores the role of public incentives and could be used by companies to justify higher prices.
The new estimate “is a very high number,” said Kenneth I. Kaitin, director of the Tufts center, a research group funded by corporations, foundations, and nongovernmental organizations. “I don’t think that anybody in the industry or at the Food and Drug Administration wouldn’t say drug development costs have gone up at a much greater rate than inflation and a much greater rate than we’ve seen in the past.”
Among other findings, the center also released data on Tuesday showing that only 11.8 percent of drug compounds entering clinical testing are eventually approved. Companies seek to recoup their investments not only in approved drugs but also in those that fail.
Development costs are one factor companies use in determining how much they will charge for newly approved prescription drugs. But they also weigh demand, the competitive market in their therapeutic areas, and the value they believe a treatment can provide to patients.
At a time of surging drug prices, the Tufts estimate is likely to generate more interest and debate than its past cost projections.
Lora Pellegrini, president of the Massachusetts Association of Health Plans, a Boston-based health insurance trade group, said her organization will look carefully at the study. The insurance group is considering proposing legislation that would require drug makers to detail their research and development, marketing, and administrative outlays, she said.
“Drug costs are becoming a major cost driver for the health plans,” Pellegrini said. “While we’re seeing some incredible life-sustaining drugs come to market, the costs are going to be unsustainable in the long term.”
In Massachusetts, the portion of insurance premiums spent on prescription drugs ranged from 13 to 17 percent last year among health insurers surveyed by Pellegrini’s group, up from 10 to 15 percent in 2010. More recently, the January rollout of Gilead Science’s hepatitis C drug Sovaldi — it costs $1,000 a pill, or $84,000 for a full treatment regimen — has swamped the state’s Medicaid managed care plans with expensive claims.
The Tufts analysis does not explicitly address prices, only development costs. But a leading industry group released a statement Tuesday saying the study underscores the growing risks taken on by drug makers.
“This study confirms what we have known for years,” said James Greenwood, president of the Biotechnology Industry Organization. “Drug development remains an extremely expensive, complex, and risky endeavor, and grows more so each year. Despite these hurdles, biotechnology companies are committed to continue the search for new cures and therapies for patients in need. In fact, US spending on research and development by public biotechnology companies climbed 20 percent last year.”
Essentially, the Tufts study divides a company’s aggregate research and development costs by the number of its drugs approved over a certain period. The data on which it is based cover 106 experimental drugs shepherded through the development pipelines of 10 of the world’s top 50 pharmaceutical firms between 1997 and 2007.
Joseph A. DiMasi, director of economic analysis for the Tufts center and principal investigator for the study, said the two main components of the $2.558 billion cost per approved drug are average out-of-pocket outlays of $1.395 billion and “time costs” of $1.163 billion, reflecting returns investors forgo while a drug is in development.
Another reason for surging development costs is that scientists are seeking to develop medicines for more complex and difficult-to-treat diseases, ranging from Alzheimer’s to brain and pancreatic cancers, Tufts officials said.
Other factors they cited include regulatory requirements mandating clinical trials with more patients and longer time frames, and the expense of studies to demonstrate the cost-effectiveness of new drugs.
Tufts researchers also factored in the rising costs of those drug candidates that prove unsuccessful in the laboratory or do not win regulatory approval, DiMasi said. They account for the vast majority of experimental treatments.
“That plays an important role in our overall cost estimate because it includes the cost of failure,” DiMasi said.
James Packard Love, director of the nongovernmental organization Knowledge Ecology International in Washington — and a critic of higher drug prices — said it was hard to evaluate the Tufts data because researchers did not specify the number of patients enrolled in clinical trials for the medicines they studied or the cost per patient in the trials.
Love said the study doesn’t reflect the impact of so-called orphan drug tax credits, in which the US government bankrolls half the cost of clinical trials that qualify, nor does it address research grants from the National Institutes of Health. The NIH funds early-stage research into drug compounds that are eventually sold.
“This estimate is not credible,” Love said. “The only justification for the high cost of new drugs is research and development, and this will be used by the drug companies to get people to accept higher prices.”
Kaitin said corporate grants to fund the Tufts center’s research are unrestricted, meaning the sponsors can’t dictate research findings. The development cost estimates give drug companies a benchmark for assessing research costs and allocating resources, he said, but also can help payers set reimbursement policies and allow lawmakers to craft incentives for innovation.
“In Massachusetts, this is a critical figure,” he said. “We are sitting in a life-sciences supercluster here. And it’s important to understand what it takes to enhance investment in innovation.”