The Calculus of Cures

By Robert Kocher, M.D., and Bryan Roberts, Ph.D.
The New England Journal of Medicine, February 26, 2014

Bringing a drug from bench to bedside is a risky and expensive proposition. The development of a new drug is estimated to cost many hundreds of millions of dollars; as a result, decisions about funding a drug-development program are based as much on economics as on science and medicine. Decisions to invest and reinvest at all stages of development are driven by the imperative to generate an attractive return on the capital invested, whether by venture-capital and public investors or by pharmaceutical companies.

It is not mysterious why projects get funded. As venture-capital investors, we evaluate projects along four primary dimensions: development costs, selling costs, differentiation of the drug relative to current treatments, and incidence and prevalence of the targeted disease.

Fortunately, much can be done to bring more drugs and a more diverse set of drugs to market. The two economic dimensions — development costs and selling costs — can be most easily improved. The most expensive step in creating a new drug is conducting clinical trials. Conducting a trial costs $25,000 or more per patient studied, and phase 3 trial programs consume more than 40% of a sponsoring company’s expenditures. Unfortunately, every patient is not equally valuable when it comes to clinical trials, and many clinical development programs are economically inefficient in that they are excessively large relative to the amount of information they yield, especially in light of the information-technology breakthroughs that have lowered the cost of data acquisition and analysis over the past 20 years.

High-frequency, material information about clinical efficacy and safety comes from the first few hundred patients studied in a trial. Unfortunately, most clinical development programs go far past the point of diminishing returns for frequent safety events, but they do not go far enough to permit detection of rare events. Statistically, it is only in the long tail of patient data that reliable signals of rare adverse effects can emerge and comprehensive safety can be established. Safety is critical, but studying the long tail of adverse events is not feasible from either a time or a capital perspective until after a new drug enters the market, especially if the drug is for a chronic condition.

Redesigning trials to include fewer patients, providing conditional approval of drugs, and requiring postmarketing surveillance could have a profound effect, allowing smaller development programs to achieve greater success. We estimate that development costs for drugs could be reduced by as much as 90%, and the time required by 50%, if the threshold for initial approval were defined in terms of efficacy and fundamental safety. Cutting costs and time, while requiring high-quality and transparent patient registries for independent safety monitoring, would be a more informative and cost-effective approach. With the widespread adoption of electronic health records and the introduction of many low-cost data-analysis tools, it is now feasible to develop mandatory postmarketing surveillance programs that make thousand-patient trials obsolete.

This approach to reducing drug-development costs would have the greatest effect on drugs for chronic conditions such as cardiovascular disease and type 2 diabetes, since such drugs currently require the largest trials. Moreover, our ability to identify rare side effects and take action to protect patients would be substantially improved when many more patients are being followed, albeit in the absence of a control group. We believe this approach would have no adverse effect on the trend in the development of drugs for orphan diseases and cancers, since those drugs will continue to have low development and selling costs and substantial differentiation from existing treatments. Yet, this approach would make it attractive to pursue drug candidates for many more disease conditions and would lower the threshold for financing a drug’s development so that more drugs would be brought forward.

Another major factor is selling costs. It is far more cost-effective to sell a drug when it is either prescribed by specialty physicians or commonly used in hospitals, both of which effectively aggregate patients. Moreover, it is easier to predict the level of adoption by these customers on the basis of the drug’s clinical differentiation and pharmacoeconomics. Sales of drugs prescribed by primary care doctors depend on a mixture of expensive sales representatives and advertising and can cost hundreds of millions of dollars annually.

While scientists work hard to increase the rate of scientific discovery, the rest of us should do our part to improve the other variables that figure into the calculus of which cures are brought to market. Such improvement would be good for patients and would represent good economic policy, since drug prices could be lowered even as investors generated the returns necessary to finance more discoveries.


PNHP Data Update

September 29, 2000

The new editor of the New England Journal of Medicine, Jeffrey Drazen, M.D. was cited by the FDA last year for making “false and misleading” statements about the asthma drug, levalbuterol. Drazen received $7,000 from the drug’s maker, and has ties to another 20 drug firms (USA Today, 5/31/00). “Academic researchers should be able to own substantial stock in a company or accept sizeable consultant fees and still accept research support,” according to Drazen. (California Healthline, 5/26/00).

(Note: Though this was written in 2000, Jeffrey Drazen is still the editor of NEJM.)

One of the most serious defects of the U.S. health care system is that we not only allow but we encourage the participation of passive investors. For those who believe that the free market is what makes America so great, the opportunity to glom onto some of the $3 trillion that we spend each year on health care cannot pass the attention of the entrepreneurial mind. Venture capitalists in the pharmaceutical industry are a case in point.

The venture capitalists who authored this article in The New England Journal of Medicine have diagnosed a major problem with the U.S. pharmaceutical industry and are providing a solution – a solution for investors that is.

They have decided that clinical trials of new drugs are too expensive. They note that you can determine clinical efficacy from the first few hundred patients in the study and that adding many more patients goes far past the point of diminishing returns. As far as determining drug safety, we can use the computerization of health records to detect adverse events, taking advantage of the very large number of patients receiving the drug after it has been released for marketing. By reducing these research costs, and by moving products to the market earlier so they can begin providing returns, the venture capitalists then would have more funds to invest in even more new products. See, the market really works.

We have seen the tragedies of products rushed to the market, with the inadequacies of post-marketing surveillance, resulting in great harm to patients, even death, while the pharmaceutical industry pays massive fines that they pass off as simply a cost of business. When passive investors are involved, the investors must be taken care of first, certainly before the patients, and these guys writing this article want a greater piece of the action.

Why would one of the world’s most prestigious medical journals publish an article promoting the interests of venture capitalists in the pharmaceutical industry? The answer might be found in the views of the editor of NEJM, Jeffrey Drazen, MD, who in the past expressed the opinion, “Academic researchers should be able to own substantial stock in a company or accept sizeable consultant fees and still accept research support.”

It is sad when the pursuit of money contaminates even the paragons of health care, and yet those involved seem to be totally insensitive to the fact that there is even an issue here.

What does this have to do with single payer? When our own public purchasers of health care products and services enter the marketplace on our behalf to negotiate the acquisition of our health care, they can refuse to pay the money lenders who personally provide no value to our health care. If research funds are needed we can provide them ourselves though our own National Institutes of Health. Such an investment would have the goal of determining efficacy and safety – benefitting patients – and not on how fast you can turn a buck.