How much does the production of a medicine account for the high cost?

July 24, 2011 8:21 AM

When it comes to very expensive medicines, how much of the cost is due to just the production of the drugs and how much is because of other factors?

I was having a discussion about healthcare the other night with some friends, and the topic of very expensive medication came up, and I used the argument that the reason some drugs are so ridiculously expensive is not that they cost really all that much to produce, but because of other factors. The R&D needed to develop the medicine (including all the testing), the fact that new drugs are patented, that almost no one pays the cost out-of-pocket which hides the cost from the consumer and the company can basically charge anything they want, and, obviously, that people will pay absolutely anything humanly possible for life-saving or life-altering medications.

I realized afterwards, though, that I didn't actually know if this is true. I've always sort-of assumed it, but I hadn't actually checked it out. It's a big [citation needed] in my brain. So is it true? And if it is, of the total cost of a drug, what percentage is due to production? Surely there are studies on this?

Just as an example: I have a family member who was recently (about a year and a half ago) diagnosed with MS, and she now has to take extremely expensive medicine for the rest of her life. I've been told that if she were to pay out of pocket, the cost would be something like 15-20,000 dollars every year (I don't know what specific medicines or the exact figure, but it's somewhere around there). I don't know, maybe synthesizing extremely advanced modern drugs to treat neurological disorders is stupid hard to do and the production cost really is significant? Or is it just because there's only one company making these drugs and there aren't any generics available?

I should also add finally that I'm not American, so this has nothing to do with the American health-care debate. I'm just curious about this as a general matter.

posted by gkhan to science & nature (15 answers total)

R&D costs are incredibly expensive, especially when factoring in all the drugs that don't make it to market. Patent exclusivity means that some normal market forces aren't in play because there's no competition, but others are, such as wanting to make as much money as possible by charging as much as possible. Insurance further incentivizes jacking up the price, because consumers can afford what they can't afford.

I don't have a citation, but I'm pretty sure that costs of manufacturing a drug have nothing to do with the price of that drug before a generic is available. When a generic is available, that drug's price (for the pharmacy, not the consumer) should relate to the production costs, although it should be higher because they still need to make a profit.
posted by J. Wilson at 8:38 AM on July 24, 2011

Every drug I take that's name-brand is outrageously expensive (my birth control pills, for instance, have a monthly cost of $100 before insurance.) Meanwhile, as soon as they become generic, all the drugs I take drop in price to about the cost of store-brand ibuprofen. This has been consistent for all the different drugs I've taken.

One thing you should understand is the concept of sunk cost. A company that does R&D for drug X, the Awesome Life Saving Drug of the Year Which Millions of People Will Buy, also did R&D for drugs A through W, which were Lame Fail Drugs No One Will Buy But Were Still Really Expensive to Study, and drugs Y and Z, which are Drugs We Spent a Fortune Developing But Are Now Available in Generic Formulations. You spend most of the money on a drug before you've made a penny; generic manufacturers are only ever making successful drugs they already know how to make, so their total cost is the cost of production and distribution. The profit margin can be pretty freaking low, given the kind of volume you're looking at. And it has to be, because everyone else knows how to make those same successful drugs.

There are also costs associated with marketing and other activities that generic manufacturers don't bother with, the cost of defending lawsuits, etc.

Oh, and the "people will pay anything" argument specifically is weak. Insulin is life-saving and absolutely, continuously necessary; moreover, the market demand is, if anything, increasing dramatically on an ongoing basis. The argument that people will pay anything because they're desperate suggests it should therefore cost an absolute fortune. It doesn't cost a fortune because a) we all know how to make it, and b) lots of people see that market and say "hey, let's go sell to it." The "people will pay anything" principle really only applies when it's a very, very small market - like the number of people who need to live in plastic bubbles or need iron lungs - or there's a monopoly in effect (which is what a drug patent does: award a temporary monopoly to encourage people to take the enormous risks associated with coming up with new drugs.)
posted by SMPA at 8:43 AM on July 24, 2011 [1 favorite]

It costs more than a billion dollars to bring a drug to market. Approximately $300 million of the cost is the actual cost of finding/testing/developing a compound. The largest portion is clinical trials - which can cost upwards of $20,000 per patient or more. The other $700 million is what's called opportunity cost - in other words, the cost of all the compounds being tested and failing because they aren't effective, turn out to be harmful, etc. The vast majority of compounds looked at fail and if one is lucky they fail early enough in the process to have not cost a ton and even more importantly not harmed anyone.

To bring a drug to market one looks at possible compounds, does non-human testing, then Phase I, II and III trials. Phase I trials are small and are aimed at determining safety - at least as much as one can with a small number of patients. Phase II trials are larger and look at both safety and efficacy. In developing a cancer drug for example the numbers of participants are small - Phase I maybe 20 patients, Phase II 50-100 and Phase III 200-300 patients in a trial. For something like a new painkiller those numbers are much larger so Phase I might be 100 and Phase III would be thousands of participants. Now consider that cost of up to $20,000 per patient and you see where the numbers come from.

We haven't even touched on patent costs or marketing and the latter is of course crazy expensive. Production costs can be significant - a new plant has to go through an entirely new FDA approval even if the production facility will be identical to an existing plant because these processes are complex and can produce surprisingly differing results. Drug development is changing too - a lot more of the initial development is happening at small companies. The big pharmas are expert at marketing and manufacturing but are frequently looking to acquire compounds and or their makers from smaller, more entrepreneurial companies which have done the higher risk development.

[I don't work in this field but my partner does. This is my understanding based on years of conversations with him and his co-workers]
posted by leslies at 9:03 AM on July 24, 2011 [1 favorite]

There's also shady business practices at work occasionally. Colchicine, one of if not the most-prescribed medication for gout (which has been around for decades at least) and which is taken daily, used to cost around 10 cents a pill. But someone cornered the market on the raw materials needed to make it and renamed it Colchrys - at $5 a pill. And the government didn't stop them, despite the clear monopoly. This also happened with a common hormone treatment used to prevent premature births - some company trademarked the drug and now it's almost $1500 a dose - up from $15. So it's not all recouping losses. Some companies are just venal. Link
posted by Mchelly at 9:04 AM on July 24, 2011

Also, many other countries have price caps on their prescription drugs. In order to make up the difference, pharma companies charge U.S. (where there are no price caps) consumers higher prices. American consumers are paying higher prices so that their European counterparts don't have to.
posted by Oriole Adams at 9:48 AM on July 24, 2011

This paper seems to have a good overview and has separate categories for generics and biotech as well (biotech drugs are usually much more expensive to manufacture)
posted by atrazine at 10:10 AM on July 24, 2011

Agreed that it's the R&D costs and the Getting It Approved cost and Protecting Against Lawsuit costs that make drugs so expensive when they first come out.

My favorite example is thalidomide: which has been around since the 1950's. It is not some new- DNA- developed- recently- invented-wonder-drug. It just doesn't cost that much to make. Doctors were prescribing it for nausea control back then. But, because of its inherent toxicities and the previous birth defects debacle, it cost hundreds of dollars a month when it came back onto the market as a very effective anti-cancer drug 12-13 years ago.
posted by SLC Mom at 12:19 PM on July 24, 2011

The old saying about this is "the second Viagra which came off the assembly line cost a dollar. But the first one cost a hundred million.".
posted by AmbroseChapel at 5:48 PM on July 24, 2011 [1 favorite]

The Make-Believe Billion
How drug companies exaggerate research costs to justify absurd profits
posted by fief at 6:04 PM on July 24, 2011

The actual cost of production of the chemical compounds that form the drug is nominal when made in production quantities.

Most of the $$$ that form the retail price are the return of development costs and, oh yeah, PROFITS. Lots and lots of profits.

If you look at the financial filings of Big Pharma you will realize that it is among the most profitable industries in the world.
posted by mygoditsbob at 7:23 PM on July 24, 2011

Regarding the MS drugs in particular, the actual cost to manufacture them is quite high. Most of the disease-modifying MS drugs are genetically engineered analogs of human interferon beta. The active component of the drug is produced by genetically altered cells from the ovaries of chinese hamsters, and this is then put into plasma from donated human blood, then measured into prefilled syringes and delivered monthly to patients in refrigerated overnight shippers from a specialty pharmacy. Others have mentioned that the cost of research, development, testing, and marketing a new drug are huge. That remains true for MS drugs, but the per-dose cost to manufacture and deliver them is also a lot higher than for a shelf-stable pill that is produced by mixing a few chemicals in a vat. MS drug companies also spend money providing support hotlines and educational materials for patients, even monthly phone calls from a nurse to help manage side effects. These kinds of services aren't typically offered for, say, cholesterol-lowering medications.

I have no idea whether all these extra complications justify the cost of MS medications, but I can say that the price estimate you listed for the consumer is in line with what I have been told. Luckily the drug companies also fund copay assistance programs, so that people who need these medications and don't have any or enough insurance coverage can still hopefully get them.
posted by vytae at 8:11 PM on July 24, 2011 [1 favorite]

It depends on the drug. Some small molecule compounds are probably less expensive to make than the cost for release testing and packaging. Some biotech drugs are fabulously difficult to make as vytae describes.

A lot of people in my shoes would be reveling in bitterness and blasting the pharma sector right about now, but seriously, Light and
Warburton are way off base. I've personally spent 0.1% of their cost estimate in a single order for less than 1 mg of protein (a mere ≈960,000 times the price of gold) to develop an assay (one out of 50 or so) that we only used through one phase of development!

The real issue is that there is a huge gap in the drug discovery process mostly due to our inability to predict the behavior of complex systems, so drug companies spend a lot of money on duds. I could rant about this at length but, hey, I already have. Bottom line is that a lot of the cost of drugs these days has more to do with the cost of non-drugs that died hard in development and testing.
posted by Kid Charlemagne at 10:35 PM on July 24, 2011 [1 favorite]

I've read that most pharma companies spend more on advertising and marketing than on R&D. I don't have a link on-hand, but I would think that marketing is the lion's share of a drug's price.
posted by anonymisc at 1:20 AM on July 25, 2011

A drug company also has to stay compliant with the FDA, and that costs money. My husband writes software for a big drug company (he's a contractor, not an employee) and it is a full-time job and the regulations change all the time, even after 14 years on the job.
posted by cooker girl at 6:03 AM on July 25, 2011

I've read that most pharma companies spend more on advertising and marketing than on R&D. I don't have a link on-hand, but I would think that marketing is the lion's share of a drug's price.

That is true, but the advertising spending is concentrated on the cheapest drugs. OTC and mass-market prescription drugs like anti-depressants, viagra and statins are pretty inexpensive to make and are heavily advertised.

The niche biotech drugs and chemo drugs like Herceptin which are expensive to make and to buy are not advertised to the general public.
posted by atrazine at 3:07 AM on July 27, 2011