[Ip-health] How to get to $2.6 billion in 2014 , comment on the Tufts cost study

joan joan at vyhcontexto.org
Tue Dec 2 11:10:04 PST 2014

I have a couple of questions, sorry if they are too naive or have already
been answered:

I keep hearing from industry and some economists that R&D investment is a
high risk activity, a fact that will justified the 11% (plus inflation)
capital/time/opportunity cost. But if the entire cost of all failed projects
can be included in the final cost of the successful product and hence
reflected in the selling price, should not we on the contrary consider R&D a
rather conservative investment? At the end of the day, except for small
biotechs perhaps, investors in big companies will always eventually recover
their money plus their claimed cost, at least. 

The second question: if R&D investments are indeed of a conservative type,
wouldn't be more reasonable to grant them a capital cost rate equal to a
similar product, like public debt bonds of the country where the company
headquarters are located? 

Thanks for your opinions

Joan Tallada
Barcelona, Spain

-----Mensaje original-----
De: Ip-health [mailto:ip-health-bounces at lists.keionline.org] En nombre de
Jamie Love
Enviado el: martes, 18 de noviembre de 2014 20:46
Para: Ip-health
Asunto: [Ip-health] How to get to $2.6 billion in 2014 , comment on the
Tufts cost study

>From :  http://keionline.org/node/2127


DiMasi estimates an "Average out-of-pocket cost of $1,395 million" but what
this figure represents is an estimate of the risk adjusted outlays on drug
development, including the actual out of pocket costs claimed for his secret
sample of drugs, adjusted for risk, then automatically adding 44.5 percent
of the risk adjusted number of pre-clinical expenses. To this he adds "time
costs (expected returns that investors forego while a drug is in
development) of $1,163 million".

The words "average out-of-pocket" are misleading, for the following reason.
They give the impression that a company actually spent $1.4 billion on some
drug, and it was risky. But no company spent $1.4 billion a drug. The number
is a combination of what they spent on the drug that was approved, and money
spent on projects that failed, at least in theory. Here is my guess for what
the elements of the $1.4 billion look like, based upon the slides that
DiMasi presented today. I believe a reported outlay of $1 on clinical
testing was adjusted for risk, so it is now counted as $3.5. To this, DiMasi
adds and automatic 44.5 percent more, or $1.57, for pre-clinical spending.
Now the $1 in clinical testing is counted as $5.06, to reflect the risk
adjusted outlays on both clinical and pre-clinical testing. So, the $1.395
billion in "out-of-pocket" expenses probably looks something like $276
million for clinical trial expenses, $690 million is risk adjustments for
the clinical investment, bring the total to $966 million. Add in 44.5
percent, or $430 million for pre-clinical expenses, which may or may not
have been incurred, and you have $276+$690+$430 =
$1.395 billion (rounding suppressed)

So which number sounds more impressive? "$276 million, plus adjustments for
risk?" Or $1,395 billion in "average out of pocket" expenses? This is one
way that the study was designed to confuse people who do not have the
capacity or time to unpack the numbers.
Then there is the issue of the cost per patient. If the average number of
patients in trials is 5,000, the average cost pre-patient will be $55,200
per patient, a number that is not credible as an average, based upon data
from third party sources but now I'm guessing. Joe

DiMasi knows what these numbers actually are. Eventually, we will see them,
after the $2.6 billion number is burned into our brains. Tufts says the full
study will be available, but not until some time next year.

But what else can I say about $276 million as an average for clinical
testing? The entire IRS outlay for the orphan drug tax credit was less than
$650 million in 2010, and that year the FDA gave 195 Orphan designations and
14 marketing approvals. If clinical testing outlays were really as high as
DiMasi says, the IRS outlays, while growing, would have been nearly an order
of magnitude larger.

And finally, there is the final boost in the numbers from the "time costs."
This is $1.163 out of 2.558 billion. How does the cost estimate now look?
You $1 in clinical testing costs (at some huge per-patient costs that are
secret for now) becoming $3.5, after adjustments for risk. Then you add in
the 41.57 for automatically assumed pre-clinical costs (44.5 percent of the
$1.57), which adds to $5.06. Then you add in $4.22, for finance charges
(long estimated development times, financed at inflation PLUS 10.5 percent),
and you get $9.28. That how you get to $2.6 billion, in 2014.

James Love.  Knowledge Ecology International
KEI DC tel: +1.202.332.2670, US Mobile: +1.202.361.3040, Geneva Mobile:
+41.76.413.6584, twitter.com/jamie_love
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