Want to get pharma companies up in arms? Tell them it doesn't cost that much to get a cancer drug to market.
A widely reported paper published Monday in the Journal of the American Medical Association did exactly that, claiming that the median cost of developing a cancer drug was $648 million for a set of 10 companies . A recent industry-sponsored study puts the number closer to $3 billion.
If the public comes to accept that much cheaper figure, then that is a problem for pharma, which likes to use R&D costs to justify six-figure prices for cancer medicines.
Some pushback to the paper is justified; the study is flawed. But even though this analysis isn't perfect, high R&D costs don't excuse pharma from the need to deal with its pricing problem. Until now, insurers and pharmacy benefit managers have not balked much at paying for high-priced cancer drugs. Drugmakers are on a path that could change that.
The JAMA study looks at a small and non-representative sample of companies and drugs. And in a move that seems almost designed to set veins pulsing in the pharma world, it doesn't account for the fact that the vast majority of drug research expensively fails. That's why the real development cost is almost certainly higher than the JAMA paper's estimates.
But whether the average cost of developing a cancer medicine is $500 million or $5 billion, the fundamental calculus is the same: Drug research is expensive and risky. And the rewards are exceptional and can dramatically exceed the cost of developing a medicine -- a needed incentive if companies are going to spend billions on projects that may amount to nothing.
But that incentive wouldn't collapse if prices were reduced. The average large pharma company spent 18.1 percent of its revenue on R&D in 2016 -- there's plenty of cushion for some price moderation.
Nevertheless, prices keep rising steadily, particularly in cancer. A Novartis AG therapy that modifies immune cells to hunt down blood cancer was recently approved by the FDA; it will cost nearly $500,000 for a single treatment. Multiple competitors hope to expand this technology's use to many other cancers.
And a new generation of so called immuno-oncology (IO) medicines that unleash the human immune system on cancers, led by drugs like Keytruda from Merck & Co., are bringing excellent results and a $156,000 annual price tag to more patients. Those costs will escalate as the cutting edge of care shifts from using just one of these drugs to several at the same time. Already, the state of the art for treating late-stage lung cancer combines Keytruda and Eli Lilly & Co's Alimta, at a likely annual cost of more than $200,000.
The U.S. health-care system may strain to pay $156,000 or more for cancer drugs. According to pharmacy benefit manager Express Scripts Holding Co., the median cost of a cancer prescription last year was $7,890 for commercially insured patients , about 60 percent of the monthly cost of one IO drug.
And yet many more such drugs are in the pipeline, with the number of trials testing IO drugs skyrocketing. More than 100,000 people are enrolled in trials testing this group of medicines, according to Bloomberg Intelligence. That's unprecedented for a single cancer drug type and only accounts for the top five drugs and trials listed on a U.S. government-run registry.
The explicit hope of these trials is to expand the use of IO drugs to many more patients. One such effort aims to treat patients with earlier-stage cancer, replacing or augmenting established -- and often cheaper -- treatments like surgery, traditional chemotherapy and radiation. Even if these trials produce a relatively low hit rate, the cost of treating cancer is set to explode.
The crowding in this market may lead to price competition some day, but it hasn't yet -- each of the five leading IO drugs is priced at about the same high level.
Many of those hundreds of clinical trials are designed to find isolated market niches or unique combinations in order to preserve pricing power to the greatest extent possible. The sort of competitively driven price drops that have been seen in Hepatitis C drugs are very much the exception in pharma, and have been noticeably absent for cancer drugs.
Insurers and payers have let cancer-drug prices skyrocket because they tend to be more concerned with the costs of drugs treating chronic conditions that affect more people. But at some point, price escalation will have a big enough impact that they'll be forced to get more aggressive.
There's also a societal impact to consider. Private insurance plans are shifting to require patients to shoulder more medical costs on their own, and Medicare includes substantial cost-sharing for drugs, as well. High out-of-pocket costs are already reportedly causing patients to delay treatments or face financial hardship. That will become more common as this new generation of high-cost therapies proliferates.
Drugmakers may believe their high prices are fully justified by development costs. But prices will reach a breaking point somewhere, and the industry should spend more time preparing for -- or trying to avoid -- that day.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
The authors also provided an estimate that includes cost of capital, which boosts the average cost up to about $750 million.
It's worth noting that many more expensive infused drugs are covered as a medical benefit rather under an insurance plan's pharmacy benefit, so this figure may underestimate the average cost.
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Mark Gongloff at firstname.lastname@example.org