Developing new drugs

All over the world, new pharmaceuticals are developed more or less the same way. Governments and foundations spend money on fundamental research on diseases, but once a specific molecule has been identified – and sometimes long before that – the focus shifts to the private sector.

A pharmaceutical company puts its own money first into animal trials, then into human safety studies, then into small-scale efficacy trials, and finally into the big, expensive “Phase III” trials required to obtain approval from FDA or its equivalents elsewhere. About 80-90% of the time, the compound turns out to be a loser.

In the minority of cases in which the drug actually gets approved, the average time-lag between starting work and getting it on the market is most of a decade. Since the pharma business is risky, the cost of capital is high. That’s the justification Big Pharma offers for the price-gouging that patent protection allows: if the payoff isn’t there, the R&D won’t get done.

If you’re going to risk millions of dollars that costs you 10% per year on a longshot, the payoff if it hits needs to be very large. So pharmaceutical companies focus on “blockbuster” drugs: those with potential revenues of more than $1B/yr. That means drugs that (1) have to be taken frequently – ideally, every day for a lifetime – and (2) deal with the diseases of people with good health insurance.

None of this makes anything but a twisted sort of sense. It leads to not enough new drugs and to excessive drug pricing. In particular, it leads to the absurd situation where there’s an obvious social need to develop a drug but no economic mechanism for doing so. Today’s big example is a Zika vaccine, but the same is true of antibiotics and of innovative pain-relief formulations (e.g., pain-appropriate dosages of buprenorphine, opiate-and-antagonist combinations) with less addiction risk.

There are lots of proposals for fixing the whole system: my personal favorite is to at least partially replace patent protection with large cash prizes as the incentive for bringing new drugs through the approval process. (Since the U.S. federal government winds up bearing much of the cost of pharmaceuticals anyway – through Medicare and Medicaid, through VA health, through health coverage for its own military and non-military employees and their dependents, and finally through the tax deduction for employee health benefits – it could write some very big checks and still come out ahead, if the result was marginal-cost pricing for the drugs themselves.)

But in the meantime, there’s something much simpler. If drug development were financed at Treasury rates rather than at the pharmaceutical-company cost of capital, lots of socially important projects that aren’t financially attractive now would become attractive. That could be done by creating a publicly-owned pharma R&D firm to get socially needed drugs through the FDA process and license the resulting patents to generic drug manufacturers, or by lending the money at concessionary rates to current phama outfits to develop drugs serving identified needs and then sell them at controlled prices.

Of course the details matter – the details always matter – but in this case almost any set of details would leave us much better off than we are now.


There’s a broader issue here: Right now, the whole world is eager to lend money to the U.S. Treasury, and as a result we can now borrow money for 30-year terms at 2.2% nominal. If our political system can just get out of its fixation on deficits and debt, we ought to be borrowing some of that money and investing it in things with good long-term returns: not just drug development, but R&D more generally (especially, I would say, basic science), infrastructure, and education.

One side effect would be to boost final demand, kicking the economy out of the slow growth that has been so marked since the beginning of the Great Recession.  There’s not much wrong with this country that ten years of tight labor markets couldn’t cure.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

13 thoughts on “Developing new drugs”

  1. Right now, the whole world is eager to lend money to the U.S. Treasury, and as a result we can now borrow money for 30-year terms at 2.2% nominal. If our political system can just get out of its fixation on deficits and debt, we ought to be borrowing some of that money and investing it in things with good long-term returns: not just drug development, but R&D more generally (especially, I would say, basic science), infrastructure, and education.

    You're quite the comedian, Mark. Of course this is absolutely true, but the idea that the government is going to do that is wildly far-fetched.

    The ironic thing is that this sort of "borrowing and spending" is precisely what many successful businesses do. Take advantage of low capital costs to make profitable (real) investments. So those who oppose it yet want "government run like a business" are doubly fools.

    1. There's a big, and rather important difference, between government and business incentives in spending borrowed money.

      A business must spend borrowed money on something which will return more money, or go out of business.

      A politician must spend borrowed money on something which will return votes, or lose their office.

      The correlation between spending that returns votes, and spending that returns money, is kind of imperfect…

      1. We certainly wouldn't want politicians to respond to the will of their constituents, no would we?

        1. There's no strong reason to expect government investments to have good long term returns

          That is, if you don't count history as a reason.

          1. I have heard of diminishing marginal returns, and it's clear from your comment that you don't understand it at all.

            You only get to build interstate highways once? How often do you get to build the Internet? The land-grant university system? Put up satellites? Build the Erie Canal? Subsidize railroad construction? Create the TVA? Do all the work NSF and other research agencies funded?

  2. I'd rather underwrite the costs of clinical trials with public funding in exchange for price controls on what pharma firms can sell the drugs for. Prize systems have their share of problems – there's reasons why they were on the outs in favor of patents in the 18th century onwards. Moreover, they have the problem of trying to pick winners depending on whatever is politically popular at the moment, whereas the existing system favors any potential drug as long as the company developing it can make a profit after going through the FDA (meaning you can have happy accidents where something turns out to be good at something else).

    Also, I'm pretty sure pharma firms find a lot (possibly most) of the target molecules as well.

  3. Ironically, one of the reasons that trials for "blockbuster" drugs cost so much is that many of them offer only minor improvements over current best-available therapies. So you need huge enrollments for long periods to have enough statistical power to show an effect. (And until the rules against cherry-picking, you needed even more money to support the multiple studies required for insurance that at least one of them would look good.) Molecules that quite clearly save lives cost a lot less in large-scale tests. Albeit many more candidates fail at the earlier stages.

    But I'm not sure the original premise about risk and capital costs necessarily holds. Pfizer, for example, has a bunch of debt out there with face values under 2%.

    1. The truth of the matter is that medically oriented biology is at an awkward phase.

      You start out, medicine is cheap, because there really isn't anything to spend the money on, you're just screwed if you get sick.

      You end with medicine being cheap, because you know enough that people don't get sick in the first place, so there's not really anything to spend the money on.

      In between? It can get very expensive, because you've got lots of things to spend the money on, and they sort of work, but not very well. Like the chemo that cured my lymphoma a few years ago, but cost as much as a house and gave me cataracts.

      Unfortunately, the only way from point A to point C is through point B, where we are, and point B is inherently expensive.

      1. But there are two kinds of "expensive" for point B. One is the fancy chemo, which requires lots of monitoring and lots of labor to administer, and lots of people screening possible compounds. But the other is, say, a weekly formulation of an established antidepressant, which might take tens of thousands of patients over 3-5 year to tease out that 3-percent difference in reported success rates — and then yield a billion or two in profits during the rest of its patent life.

        1. The sad thing is cases like SAMe, which in most instances will be just as effective as that prescription antidepressant, but because it can't be patented, nobody can afford to put it through that fantastically expensive trial system, and get it approved as a "medication".

          Maybe we should be talking about subsidized trials for compounds that can't be patented, but show a lot of promise.

  4. How much faster and cheaper could drugs be developed without regulations? You can say that people may die if we do that, but how many people die because it takes ten years to get through the regulatory morass (about which I know plenty) and how many because of the cost to society of the regulation? I guess it is ok for millions to die in the name of drug safety and efficacy, but not hundreds when someone is profiting. Evolution has given us humans some notions of fairness and empathy that may be quite out of line with reason.

    1. How much faster and cheaper could drugs be developed without regulations?

      Well, I guess anyone could develop some in their garage. But I assume you mean with fewer or more sensible regulations rather than none at all.

      I don't know. I certainly can believe the regulatory system could be streamlined somewhat. But the devil is in the details, and the trade-offs.

  5. I like the publicly-owned pharma R&D firm idea. Could we just virtually create one out of willing university scientists? Or even the unemployed/ unaffiliated ones? I don't know much about science funding… but the little I do know is pretty interesting. It appears to be a series of fiefdoms? With interesting social problems that grow. As a reward for being smart and hardworking, you get handed a very uncertain career path? How does this make sense?

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