Pharma Industry

Exploding a myth

Print edition : May 17, 2013

In a pharmaceutical research laboratory in North Carolina, U.S. Nobody knows the real costs of drug research and development as no direct figures are available from the industry. Photo: Gerry Broome/Bloomberg News

At a pharmaceutical company's manufacturing facility. Photo: Jonathan Drake/BLOOMBERG NEWS

The claims pharmaceutical multinationals make about high R&D costs are invariably false.

THE recent Supreme Court decision in the Novartis case has been rightly described as one that will make important drugs available, affordable and accessible through generic production as incremental innovations will not be allowed to be patented. However, multinational pharmaceutical companies (pharma MNCs) have retorted that the judgment will undermine innovation. According to them, innovation requires billions of dollars.

Swiss-type accounts

The problem is that no direct figures are available from the industry about the cost of innovation as they are not open to public scrutiny. Also, the money of pharma MNCs is held in Swiss-type secret accounts. If you thought that Swiss bank accounts were the only secret accounts, think again. Delaware in the United States is the premier region where secret accounts are maintained by a host of entities who do not want the public to know what they are up to. Not surprisingly, the largest pharma MNCs, including those in Europe, maintain their key accounts in Delaware banks.

What one does have access to are studies on the issue funded by pharma MNCs themselves. The main study, largely funded by pharma MNCs, was undertaken in 1999 by Joseph DiMasi and others on behalf of the Tufts Institute in the U.S. In that study, research and development (R&D) costs were obtained by randomly selecting 93 new chemical entities (NCEs) from 12 U.S.-owned phrama MNCs. The costs of abandoned NCEs were added to the costs of the NCEs that obtained marketing approval. This was used to obtain the pre-tax average, which worked out, according to them, to $231 million (in 1987 U.S. dollar terms). DiMasi and others did a similar study in 2003, again for the Tufts Institute, this time with 68 drugs and 10 pharma MNCs, and arrived at the figure of $800 million (in U.S. dollars of 2000). These are the main studies available that indicate the costs of drug discovery and development.

The problem with studies undertaken on behalf of the industry is that nobody knows the real costs of drug research and development, and the DiMasi study relies only on industry inputs, with no real scrutiny of the same.

The drug companies submitted the data confidentially to the authors. There was no way to verify the quality of the information, nor was there any accounting for potential intra-company corporate mispricing. The names of the companies, the names of the drugs and their stage of development were not mentioned. Nor was it mentioned whether the drug was a new form of a known substance.

In fact, for most NCEs, drug discovery is largely funded by public-funded programmes in the U.S. Thus, the funding for the development of the Novartis blockbuster drug Glivec, the subject matter of the Supreme Court judgment, was largely done with public funds. Pharma MNCs mainly engage in drug development, that is, clinical trials, etc. However, they do not disclose what is added under this head. Marketing costs form a large part of this. It is estimated that over half the costs claimed by industry to be R&D costs are in fact not R&D costs at all. Even the huge fees of lawyers to obtain a patent are included in R&D costs.

Moreover, pharma MNCs make over a billion dollars a year on blockbuster drugs that are not NCEs but are the subject matter of incremental innovation. Industry studies ignore this. This is because of the skewed patent system in the developed world. Under Section 3(d) of the Indian Patents Act, new forms of known substances are not allowed to be patented unless they are significantly efficacious over the known substance. This is what the Supreme Court was dealing with in the Novartis case, and the court kept the provision intact despite Novartis’ attempts to dilute it. In the developed world, any new form of a known substance is allowed to be patented, provided it satisfies the traditional patentable criteria of novelty, inventive step and industrial application even though it does not improve therapeutic efficacy. In fact, in the U.S. and Europe, these types of patents constitute over 75 per cent of the drugs marketed. Industry studies such as DiMasi’s do not take these drugs into account. If they were added to the denominator, the costs of R&D would come down.

Moreover, under U.S. law there are various tax benefits, which are also ignored by industry studies. Researching new drugs gives one tax breaks to the extent of 50 per cent. Similarly, if one researches and markets an orphan drug in the U.S., that is, a drug that has a market of less than 200,000 patients in the U.S., again, tax breaks are available to the tune of half the expenditure.

Taking all this into account, other reviewers have looked at the Tufts studies and estimated that the figure of $800 million is not accurate, and a more accurate estimation would be between $100 million and $200 million. The latest study by Donald Light and Rebecca Wharton puts the estimate of the median, net corporate cost to develop a new drug at $56 million in 2011. This is close to what the pharma companies reported in audited tax returns for clinical trials per drug: as being $22.4 million (not $224 million).

Inflating the figures

The whole purpose of inflating the figures of the cost of R&D is to justify the high prices of drugs. But even there, the justification of pharma MNCs is wanting. Even if one takes the highest figure of $800 million for the Novartis drug Glivec and ignores the fact that drug development was paid for by public funds, allowing for the orphan drug tax breaks available to Novartis, the figure comes to $400 million. In the first year alone, Novartis’ turnover for Glivec was over a billion dollars. After that it has been pure profits, which were increasing all the time.

No sector of industry gives these rates of profit. But we have to thank the astute skills of pharma MNCs’ public relations departments for that. If Joseph Goebbels, the Nazi propaganda master, were alive today, he could have learnt a thing or two from pharma companies about how to sell half lies.

Anand Grover is a Senior Advocate, the director of Lawyers Collective, and the lawyer for Cancer Patients Aid Association in the Novartis case.

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