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Consumer Group Says Drug Manufacturers Exaggerate R & D Expenses

Kate Traynor

The consumer advocacy group Public Citizen issued a report in late July questioning the pharmaceutical industry’s claim that it costs about a half billion dollars to bring each new drug product to market.

Public Citizen reconfigured and recalculated the $500-million cost estimate, which had been cited in March by the Pharmaceutical Research and Manufacturers of America (PhRMA). According to Public Citizen’s report Rx R&D Myths: The Case Against The Drug Industry’s R&D "Scare Card," a more realistic after-tax cost of producing a new drug—including spending on failed products—is about $110 million in year 2000 dollars.

The report is part of an effort by Public Citizen to dispel PhRMA’s contention that high drug prices are needed to balance the research and development costs incurred by drug manufacturers.

To derive its lower drug-cost estimate, Public Citizen removed from the original calculation the "opportunity of cost capital" estimate. This estimate represents investment income that might have been earned by the drug companies had they not spent money on product development. According to Public Citizen, half of the original expense data used to calculate the $500-million figure had been classified as opportunity-of-cost capital.

And because the $500-million figure cited by PhRMA did not take into account the tax benefits associated with drug-product development, Public Citizen reduced its version of the cost estimate by 34%, the current corporate marginal tax rate. After converting its estimate into year 2000 dollars, Public Citizen arrived at the $110 million figure.

The group pointed out that the $110-million-per-drug estimate applies only to new chemical entities, which were the subject of the analysis cited by PhRMA in March.

Public Citizen also attempted to estimate total research and development spending—on both new molecular entities and already approved drugs. Using figures cited last year by PhRMA, Public Citizen calculated that after-tax spending on all drugs is $57 million to $71 million per drug, including failed products.

The group made prominent mention of a National Institutes of Health (NIH) document claiming that publicly funded research contributed greatly to the discovery and production of the five top-selling drugs in 1995. According to a Public Citizen analysis, 55% of the publicly funded research projects mentioned in the NIH document contributed to the introduction of drugs to the market. The purpose of the NIH document was to highlight the importance of publicly funded research, a fact not mentioned in Public Citizen’s report.

PhRMA issued a brief statement about drug costs soon after Public Citizen released its report. According to the statement, the $500-billion-per-drug estimate is "conservative." Drug products in the beginning stages of development this year will have average development costs of $590 million to $880 million, PhRMA said.