Making cancer drugs is way cheaper than industry claims, study says

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a certified personal finance counselor and former senior reporter at Policygenius, where he covered insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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High drug prices have provoked a backlash of late, with the cost of pills reaching six figures in some cases.

While pharmaceutical companies argue the price of of drugs reflects what they spend researching and developing new treatments, a study published Monday in JAMA Internal Medicine says the cost of developing a cancer drug is much lower than previously estimated.

The authors found the median cost of developing a single cancer drug was $648 million. That's plenty, but it's well below the industry's frequently cited estimate of $2.7 billion per drug. It's also above another estimate of $320 million per drug arrived at by the group Public Citizen.

The study got its result by looking at Securities and Exchange Commission filings for 10 companies and their respective cancer drugs. The authors, Vinay Prasad of Oregon Health and Science University, and Sham Mailankody, of Memorial Sloan Kettering Cancer Center, also looked at the revenue reported for each drug.

While the companies spent $9 billion developing the drugs, they have made $67 billion in revenue so far, a more than seven-fold return. the study found. Each company took an average of seven years to develop a drug.

So why do cancer drugs cost so much for patients?

The study contradicts an analysis by the Tufts Center for the Study of Drug Development, which estimates it costs $2.7 billion to bring a drug to market in the U.S. The Tufts study looked at all drugs, not just cancer drugs. (Got questions about your prescription drug coverage? Get some answers here.)

Prasad and Mailankody said the Tufts study was "opaque" because it didn't include the specific drugs investigated.

In an editorial that accompanies the study in JAMA, Merrill Goozner, editor emeritus at Modern Healthcare magazine, said the study showed the prices of cancer drugs for patients seemed to be unrelated to the cost of research and development.

"Policymakers can safely take steps to rein in drug prices without fear of jeopardizing innovation," he wrote.

The study has its limitations: It only covers about 15% of the cancer drug market. It focused on only 10 companies with one cancer drug approved by the Food and Drug Adminstration to get the cost of developing a single product.

Joseph DiMasi, director of economic analysis for the Tufts Center for the Study of Drug Development, wrote a critical review of the Prasad-Mailankody study calling it "irretrievably flawed." The study only included companies that had a drug successfully approved, while the excluding the costs of companies that had one or more failures.

There's been pushback from the pharmaceutical industry as well. Holly Campbell, a spokeswoman for PhRMA, an industry group, said the study "significantly understates" what the companies invest in new cancer treatments.

"Ignoring the R&D costs from the many companies that have not received a U.S. Food and Drug Administration approval indicates a lack of understanding of the risk companies’ face at the outset of an uncertain project and the role of economic incentives in ensuring investment despite steep odds," she said in a statement.

But anger at high drug prices isn't going away. Lawmakers in Congress this year have debated whether to allow Americans to import cheaper drugs from Canada and other countries. This study should only add fuel to those talks.

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