June 6, 2016

How the FDA Drives up Drug Prices

Sherzod Abdukadirov

Former Research Fellow

Those who adamantly defend the FDA's stringent safety and efficacy requirements overlook the real costs of such policy: Drugs take considerably longer to reach patients, and when they do get to the market, they are often priced beyond the reach of many patients.

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Recent congressional attempts to speed up the Food and Drug Administration approval process for antibiotics and some medical devices make only a tentative step toward addressing high drug prices. Drug development costs, driven higher by increasingly stringent FDA regulations, reduce competition and ultimately lead to higher prices for consumers. Yet many policy proposals neglect the FDA's role in driving up those prices.

Drug development costs have skyrocketed over the last quarter century. Researchers at the Center for the Study of Drug Development estimated the cost of drug development in three studies stretching back to the early 1990s. According to their estimates, in 1991 a pharmaceutical company had to earn $412 million to make new drug development a worthwhile investment. By 2003, this number more than doubled to $1.047 billion. By 2016, the number more than doubled again to $2.558 billion (all numbers are in 2013 dollars). The estimates show that in the last quarter century, the cost of drug development increased more than six times.

The biggest drivers of this increase are higher clinical trial costs, especially phase III efficacy trials, along with a lower probability that the new drug will be approved by the FDA. In fact, the probability that a potential drug entering clinical trial stage will be eventually approved by the FDA decreased from 23 percent to 11.83 percent. This means that the FDA is asking drug makers to produce more and more data, yet it's increasingly less likely to approve new drugs.

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