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Economists discuss a recent article in Health Affairs, which argues that market demands, not R&D costs, determine drug prices.
Drug development times decreased between 1992 and 2002, according to a study of 168 drugs in the March/April issue of Health Affairs. The paper says that time spent on R&D cannot be used to explain increasing drug prices, which have generated so much criticism in recent years. But industry experts say declining development time does not mean development costs are also going down.
This analysis of public data from the Federal Register and FDA’s Web site indicates that the time spent on clinical trials for drugs approved between 1992 and 2002 did not increase. The time spent between filing a New Drug Application (NDA) and approval decreased, according to the paper.
When organized by the year these compounds were filed as Investigational New Drugs (IND), ranging from 1985 to 1995, the total development time declined.
This decrease in development time is consistent with data collected by the Tufts Center for the Study of Drug Development for this same period, Joseph DiMasi, the center’s director of economic analysis, said via email. But he added that data collected between 2002 and 2004 indicates that clinical development times have gotten longer in recent years. DiMasi wrote an electronic letter responding to this study on the Health Affairs Web site.
The practice of assigning certain drugs fast-track status, which began in 1998, is responsible for some of the decrease in development time, explained Salomeh Keyhani, lead author and assistant professor of health policy at Mount Sinai School of Medicine.
“However, in our analysis we noticed that non-fast-track drugs approved after 1998 were developed more quickly than non-fast-track drugs before 1998,” Keyhani said via email. “In other words, development time has also been decreasing in spite of fast track, as well.”
Almost every pharmaceutical company has worked to reduce development time in recent years, said Harold Glass, director of the University of the Sciences in Philadelphia’s MBA program in pharmaceutical business. Business reasons, such as maximizing the patent life of potential drugs, have driven this decline, he said.
Decreasing development times do not necessarily mean that the costs of development are also decreasing, DiMasi added. According to Glass, development costs are going up. He cited larger patient populations and increased geographic diversity for clinical trials as reasons. In addition, he said, science of drug development has become more complex, driving costs up.
According to Keyhani, the study shows that time spent in development does not determine drug pricing. The market sets prices for pharmaceuticals, she said. She believes that other explanations, such as development times or costs, are difficult to believe because the data supporting them is proprietary and not public.
“You can say whatever you want, when the data is not transparent,” she said.
Economists agree with her assessment that prices are set by how much people are willing to pay for them.
“Economic logic tells us that R&D cost does not determine price,” DiMasi said via email. “Rather, market forces and price regulation (abroad) determine price.”
The low-end of the price is determined by the amount of money the company needs to recover, according to Glass. The market sets the high-end of the price, he added.
But Margaret Kyle, an assistant professor of management at Duke University’s Fuqua School of Business, explained that development costs are already spent, or “sunk,” by the time the drug reaches the market. As a result they have no relation to pricing.
“Economic theory suggests that sunk costs should be irrelevant for pricing,” she said via email. “What matters are demand conditions and variable (production) costs.”
Kyle added that although development time and cost do not impact pricing in her view, they could impact a company’s expectation of future profits. Expected profits decrease if the demand for the drug stays stable, but costs go up. As a result, the company might decrease its investment in developing other new treatments to account for this anticipated profit loss.