Sanofi Pasteur to expand in Toronto

Sanofi Pasteur, which makes vaccines, is planning to expand its operations in Toronto.

Federal Court Overrules Supreme Court on Presumption of Validity

Go read the post on this topic at Sufficient Description. It brings up an interesting topic - when courts review the validity of patents, does it have to comply with administrative law principles, or is it its own standard? Professor Siebrasse notes that Gauthier J. in Eli Lilly / cefaclor 2009 FC 991 essentially ruled that Supreme Court musing on this point was wrong, and agrees with Gauthier J.

More on the Light and Warburton article on Drug Costs

I don’t want to be a blogger that leaves negative comments unaddressed in the comments section, so I want to bring up two good comments to my post on the Light and Warburton article.

First – actually, I shouldn’t have said anything about 11% being a high cost of capital. I certainly don’t keep track of what a reasonable cost is. It could be 20%, for all I know ;)

Second – Norman Siebrasse, who keeps an excellent blog SUFFICIENT DESCRIPTION, comments

But it does seem to me that including the cost of capital is appropriate. If the return to a pharma company cannot cover the cost of capital, then it won't raise the capital, and the research won't get done. To my mind, the reason we want to know drug costs is to know whether the need to promote the research justifies the high price. If that is right, then surely the costs that are essential to the research being undertaken must be included. The authors say "Calculating the cost of capital is a widely accepted exercise to determine whether a project
should be undertaken; but as a claim on public money or citizens’ cash, it is unreasonable." The authors seem to agree that if the cost of capital is not covered, the project will not be undertaken. I don't understand why they say incuding these costs is unreasonable. So far as I can see, they do not offer any argument at all on p. 8, where the point is discussed at greatest length - it looks to me like an unsupported assertion.

As is often the case, Norman’s comments stop me in my tracks and cause me to re-assess.

My initial reaction was to agree – but then to express doubt that the pharma industry is making this clear when they recite a big cost of R&D number.

But that strikes me now as too glib. Norman is right – cost of capital is a reasonable thing to include in “drug costs” if one wants to know if we are providing enough protection (as opposed, maybe only in my mind ;) , to “R&D costs”).

I re-read that section in the Light and Warburton article. I think a key part of their position is

In other industries, huge investments to develop new products, like a new chip from Intel,
do not lead firms to make the argument for government-protected prices by claiming that
‘You owe us for all our R&D costs, plus what we would have made had we not undertaken
the project in the first place’.

In other words, Light and Welburton want to know why cost of capital makes a case for supporting more protection for a pharmaceutical company than a computer chip company (or whatever). Presumably, all innovative industry needs to cover the cost of capital.

Analysis of Drug R&D spending hits the popular press

I always think its the beginning of the end of the line for an idea or concept when people start publicly making fun of it. So THIS ARTICLE in Slate Magazine about the Light and Warburton study on drug R&D costs is interesting. The article concludes:

So the drug companies' $1.32 billion estimate was off, according to Light and Warburton, by only $977 million. Let's call it a rounding error.

Are Pharmaceutical R&D Costs Exaggerated?

Here is a link to a recent paper (pdf) by Donald Light and Rebecca Warburton titled "Demythologizing the high costs of pharmaceutical research", (BioSocieties, February 2011) which systematically critiques the estimates of pharmaceutical-related R&D costs routinely promoted by the research-based pharmaceutical companies. As put by Andre Picard in a recent Globe and Mail article, "Drug R&D costs are less than estimated - so why the high prices?",

It costs, on average, $1.3-billion (U.S.) in research and development to bring a new drug to market. That level of investment in R&D by Big Pharma justifies the high cost of prescription drugs.

Those statements are repeated so often that they have come to be accepted as fact.

But are they fact or fiction?

and

So, what do you get when you crunch all those numbers?

According to Dr. Light and Dr. Warburton, the net median R&D cost of developing a prescription drugs varies from $13-million to $204-million, depending on the kind of drug.

Over all, they estimate R&D costs $59.4-million for each new drug.

That is a far cry from $802-million or $1.3-billion.

Its worth it to read both the newspaper article and the original paper - the newspaper article summarizes the arguments quite a bit.

Particularly egregious, IMHO, is the inclusion of a "cost of capital" in the R&D costs. The cost of capital is used to decide whether to embark on a project by seeing whether it will make a return higher than you could get by just investing the money - i.e. by subtracting the cost of capital, or money. That's fine, but I don't think that what most people or policy makers have in mind when they hear about the R&D costs to bring a drug to market - the numbers are misleading if the reader doesn't understand that cost of capital is included.

Furthermore, the $1.3 billion or $802 million estimate includes an assumption that the cost of capital is 11% - which strikes me as high. I wish I could guarantee myself an 11% return on the stock market!

11% a year, over several years... really adds up ;)

Another interesting issue is for which drugs these numbers are being reported. According to Light and Warburton, the numbers commonly referenced by the pharmaceutical industry reflect the most expensive-to-develop 1/5 of all drugs. Again, I don't think this is what most people understand when discussing the average cost to develop pharmaceuticals.

Another interesting aspect of the Light and Warburton article (there are many ;) ) includes a discussion of risk and a comparison of pharmaceutical companies to Intel.

In other industries, huge investments to develop new products, like a new chip from Intel,do not lead firms to make the argument for government-protected prices by claiming that‘You owe us for all our R&D costs, plus what we would have made had we not undertaken the project in the first place’.
...
The corporate risk of R&D for companies like Pfizer or GlaxoSmithKline are thus lower than for companies like Intel that have only a few innovations on which
sales rely.

which raises all sorts of interesting questions about the principle of technology-neutrality in patent law, and whether its effective violation in the pharmaceutical area is really wise policy.