The first step was to inflate the basic figure by over 100 percent. Now, most people believe that an expense is incurred when you actually spend money. Not so in the Never-Never Land of “Big Pharma” accounting. Over half of the $802 million ($403 million) is the so-called “opportunity cost” referred to above. So the actual amount of cash that’s involved is really $399 million.
Arriving at an opportunity cost of that magnitude means that the researcher estimated the company could earn between 9 percent and 15 percent (net) by investing in, say, corporate bonds. The only trouble is that corporate bond rates are under 7 percent and other investment current opportunities have similarly anemic returns.
But that’s not the end of the story. The Tuft’s analysis fails to take into account the benefits of research and development tax credits and deductions. Tax deductions reduce the NET cost by at least 34 percent, and if the Orphan Drug tax credit is applied (as it often is) that reduces the cost by half. Using the more conservative 34 percent allowance for tax benefits, the adjusted cost of new drug development is $240 million, not $802 million!
That’s still a pretty big number, but it still doesn’t tell the whole story.
In creating the base figure, the Tufts researcher estimated that clinical trials would constitute the largest portion of R&D costs. That’s fair enough. However, the figure used as a cost for clinical trials was $282 million. An estimate by the Congressional Research Service (CRS) placed the cost of clinical trials required to bring a drug to market at $75 million, or roughly a quarter the Tufts estimate. Moreover, the CRS estimated was based on actual data from NCI cooperative research trials – real world numbers, not some Never-Never Land fabrications.
And even that isn’t the end of the story.
The CRS estimate assumes that one entity pays all of the costs associated with bringing a drug to market. As the statistics on government involvement in cancer drug development indicate, however, that circumstance rarely exists. Rather, much of the research, especially the early, high-risk Phase I and Phase II clinical trials are most often conducted under government sponsorship. It is only after it has been established that a drug is safe and to some degree effective that “Big Pharma” enters the picture. This means that the degree of risk in completing the research has been greatly if not entirely reduced.
Remember blockbuster drugs from AZT to Zantac to Prozac all began with government research – research that lined the pockets of “Big Pharma” at taxpayer expense.
And what return has the taxpayer realized for the billions of dollars spent each year on medical research? Last year a total of $27 million in royalties were paid to NIH – from all sources, not just drug patents.
The question is, can this hemorrhage of taxpayer dollars be stopped? If the recent experience at the Department of Energy is any example, the answer is an emphatic yes!
THE DEPARTMENT OF ENERGY’S RESEARCH POLICY
It has often been argued that the federal government is the only entity capable of taking on the often high-risk basic science research that leads to real breakthroughs. This argument is not without merit. Many types of basic research are costly and lack immediate commercial potential.
The Department of Energy (DOE) along with its predecessors going back to the Manhattan Project has had long experience in dealing with this dilemma. It often funds projects aimed at providing the basic research for new energy technologies, and once that research is completed turns over the results to private firms for commercialization. In so doing, however, DOE has a long-standing policy of requiring companies that avail themselves of DOE-developed technologies to pay a substantial royalty on any commercial products that result. These royalties reimburse the taxpayer for their investment. There is no reason why pharmaceutical firms could not follow the same model.
In the case of pharmaceutical research, the monies could even be earmarked to a fund that would be used to conduct further basic research, taking the burden off the back of the taxpayer.
Although this idea has frequently been raised in Congress, it has always failed to win approval – in no small degree because “Big Pharma” maintains an army of lobbyists in Washington. In fact there are nearly two Drug Lobbyists for every Member of Congress.
Perhaps the only way it will ever change is for average citizens to speak out and call for an end to “Big Pharma’s” raid on the treasury. Until they do, the multi-national drug companies will continue to follow Gordon Gekko’s precept: “Greed is Good.”