> In your original post, you referred to the claim that it costs billions of dollars as a "scam"
Yes and I still mean it, it is a scam because now people cite this study and think 'cost' where in reality they should think 'opportunity cost'.
I'm not walking back anything, this is literally a talking point coming from some lobbyists to justify the widespread practice of fake pricing of drugs in the US.
Let me just copy paste the relevant section in the document that we are referring to.
"First, we summed direct and indirect research and development spending on a therapeutic agent in each year. All sums were inflation adjusted to 2018 dollars using the US consumer price index.
Second, we accounted for failed projects by dividing total research and development expenditures on a drug in a particular year by the corresponding aggregate phase-specific probability of success, similar to what was done in previous studies of costs of drug development.3-7 For example, for each drug, we divided phase 1 costs in each year by 0.138, which accounted for spending on the other 6.2 phase 1 trials that would fail, on average, for each successful development program. We used phase 1 rates to adjust preclinical expenditures, and we used the proportion of biologics license applications and new drug applications that are approved by the FDA to adjust costs once these applications were submitted to the agency for regulatory approval. Licensing fees and milestone payments, where captured, were adjusted using the success rate for the trial phase that was ongoing when the payments were made. When a phase shift took place within the financial year, we allocated the cost proportionally to the time spent in each phase. For example, if development moved from phase 1 to phase 2 on July 1 of a given year, we divided the costs equally between each phase. Similarly, in the year of approval, we multiplied the total cost by the fraction of the year elapsed by the time of approval. Hence, if a drug was approved on July 1, we only counted 50% of the costs in the year of approval since firms often incurred postapproval costs related to pharmacovigilance or testing in other indications.
Third, we applied a real cost of capital rate of 10.5% per year (ie, weighted average cost of capital in the pharmaceutical industry), as in the DiMasi et al study.4 Cost of capital is the required rate of return for an investor and encapsulates a risk-free rate (ie, opportunity cost) and premium based on the likelihood of business failure.24"
I’m not sure you are reading this correctly. Is it the cost of capital rate you are hung up on? If so, how do you account for the time period between investment in a successful drug and when you start actually bringing in money? There’s a few years where you’ve put in several hundred million dollars and make zero back. You can split hairs about what the discount rate should be, but you need to account for that delay somehow. Spending $100 and making back $200 next year is very different than spending $100 and making back $200 in five years.
Yes and I still mean it, it is a scam because now people cite this study and think 'cost' where in reality they should think 'opportunity cost'.
I'm not walking back anything, this is literally a talking point coming from some lobbyists to justify the widespread practice of fake pricing of drugs in the US.
Let me just copy paste the relevant section in the document that we are referring to.
"First, we summed direct and indirect research and development spending on a therapeutic agent in each year. All sums were inflation adjusted to 2018 dollars using the US consumer price index.
Second, we accounted for failed projects by dividing total research and development expenditures on a drug in a particular year by the corresponding aggregate phase-specific probability of success, similar to what was done in previous studies of costs of drug development.3-7 For example, for each drug, we divided phase 1 costs in each year by 0.138, which accounted for spending on the other 6.2 phase 1 trials that would fail, on average, for each successful development program. We used phase 1 rates to adjust preclinical expenditures, and we used the proportion of biologics license applications and new drug applications that are approved by the FDA to adjust costs once these applications were submitted to the agency for regulatory approval. Licensing fees and milestone payments, where captured, were adjusted using the success rate for the trial phase that was ongoing when the payments were made. When a phase shift took place within the financial year, we allocated the cost proportionally to the time spent in each phase. For example, if development moved from phase 1 to phase 2 on July 1 of a given year, we divided the costs equally between each phase. Similarly, in the year of approval, we multiplied the total cost by the fraction of the year elapsed by the time of approval. Hence, if a drug was approved on July 1, we only counted 50% of the costs in the year of approval since firms often incurred postapproval costs related to pharmacovigilance or testing in other indications.
Third, we applied a real cost of capital rate of 10.5% per year (ie, weighted average cost of capital in the pharmaceutical industry), as in the DiMasi et al study.4 Cost of capital is the required rate of return for an investor and encapsulates a risk-free rate (ie, opportunity cost) and premium based on the likelihood of business failure.24"