Mark Shapiro is the Vice President of Clinical Development at Clinipace.

Although cost control for drugs has been common in countries with socialized medicine or government-payer systems, this issue is now beginning to take center stage here in the United States.  Despite wide coverage in the popular media, such as Dr. Ezekiel Emanuel’s editorial in The New York Times, it was quite striking to see calls for more value-based pricing at the American Society of Clinical Oncology (ASCO) meeting earlier this year.

The cost of new drug development is the most-often-cited justification for the high and rising cost of new drugs.  According to the team at the Tufts Center for the Study of Drug Development (CSDD), “developing a new prescription medicine that gains marketing approval, a process often lasting longer than a decade, is estimated to cost $2,558 million.”  That figure includes average out-of-pocket costs of $1,395 million and time costs (expected returns that investors forego while a drug is in development) of $1,163 million.  Relative to their study in 2003, the CSDD estimates that “the cost to develop and win marketing approval for a new drug has increased by 145% between the two study periods, or at a compound annual growth rate of 8.5%.”

Despite these dramatic costs, it has long been known that pharmaceutical companies price drugs based on value and demand rather than cost, to the extent possible. Of course, this is also subject to formulary negotiations with insurers. Strong biotechnology investment in new oncology therapeutics has partly been justified by the relative price insensitivity of oncology drugs versus other types of therapeutics.  This has led to both a large increase in new oncology treatments, but also a substantial increase in oncology drug costs. ASCO notes the following:

“In the past year, alarming statistics about drug costs have emerged:

  • The average monthly cost of a branded cancer treatment has more than doubled to $10,000 over the past decade.
  • Cancer drug costs are steadily increasing over time, with some approaching nearly $40,000 per patient per month in 2014 dollars.
  • Seven of the 10 most expensive drugs reimbursed by Medicare are cancer drugs.
  • Seven U.S. drugs cost more than $100,000 annually, up from only four drugs in 2010; four of seven of these drugs are used in cancer treatment.”

These numbers might seem alarming, but delving into what is actually happening in the marketplace tells an interesting story.  The cost of medical care is generally divided into three buckets: salaries for doctors and nurses, hospital or facility costs and drug and medical device costs. That third bucket, drug costs, is considerably smaller than the other two, and it has often been noted that one factor in the relatively high per capita cost of US healthcare is the higher salaries enjoyed by our clinicians. In oncology, the cost of older chemotherapies is quite low relative to newer drugs. However, those drugs were administered by intravenous infusion in a clinic. Therefore, the fully loaded cost to the healthcare system for traditional chemotherapies includes the cost of the drug, the cost of the facility it was administered in and the salaries of the doctors and nurses involved in the visit. In this paradigm, the cancer center or hospital providing the drug is purchasing it from a wholesaler, stocking it in a pharmacy and charging a marked-up retail price to the insurance company paying for the patient’s care. For the patients, there is also the hidden cost of the time required to travel to and from the clinic, plus the time involved in the visit itself.

Contrast that with newer, targeted molecular therapies, which have supplanted many traditional chemotherapies as first-line and second-line treatments. Patients take these drugs daily in their home.  In the former situation, the costs to the healthcare system represent revenue that is shared between the clinicians, facilities, wholesalers and drug manufacturers. In the new paradigm, drug manufacturers are trying to capture some of the money that went to clinicians and facilities by providing more convenient and more tolerable therapies. Of course, to bring these therapies to the market, they must also have clinical advantages. What gets left out of many discussions of drug costs is the value to patients and their caregivers of that convenience. Furthermore, one must consider the source and where their motivations lie. Today, there is incredible competition for healthcare dollars, but much of that is happening between insurers, hospitals, clinicians and manufacturers.

This raises some interesting questions about the future of oncology therapeutics.  The business model in oncology long relied on revenue to the facility from the markup and administration of chemotherapy.  Targeted therapies shifted some of that revenue from sites and clinicians to drug manufacturers.  However, we have seen an explosion of new immunotherapies that involve complex involvement from personnel at the cancer center.  From cell-based treatments like Provenge to new biologic immunotherapies like Opdivo and Keytruda, the coming frontier of drugs must be administered by infusion in the clinic setting.  As these new treatments push targeted therapies and chemotherapies into second- or third-lines, some revenue will shift back again to the clinical site and administering clinical personnel.

Cost of development - oncology drugs

Figure 1. Provenge in the treatment of asymptomatic metastatic castrate-resistant prostate cancer1

However, drug prices don’t always make sense to the layperson. One often repeated but misleading concern is the following commonly phrased statement (also from the NYT editorial): “Opdivo only adds an average of 3.2 months of life and costs $150,000 per year.”   The high annualized cost is misleading when the average patient only takes the drug for a short period of time, resulting in a short period of time to recoup the drug’s cost.  In this case, the average cost of the drug is $40,000, not $150,000. These arguments tend to mislead in other ways.  For one select group, the drug may only add 3.2 months of average survival, but the drug may also extend life for longer periods in other populations.  Additionally, before they can ethically be tested for first-line treatment, oncology drugs have to gain approval starting as second- or third-line treatments where life expectancy is already quite short.  So, as a last-line treatment, an extension of 3.2 months is very significant, but these drugs may extend life for much longer periods when used earlier in patients’ therapy.  Therefore, until additional studies can be conducted to support first-line treatment, the addressable market is small even after an initial approval as a second- or third-line treatment.

This also neglects the other aspect of innovation in oncology, which has been a shift towards more tolerable therapies.  Chemotherapies are relatively imprecise and work due to their toxicity, making them viable treatments for a wide range of cancers. However, today we understand cancer not as an unchecked growth to be stopped, but on the level of very specific gene rearrangements and driver mutations that vary tumor to tumor.  Targeted therapies and immunotherapies are designed to target mutant pathways expressed in cancer or unmask the mechanisms by which cancer hides from the immune system. By precisely targeting the mutations that are specific to a specific class of tumors or even an individual patient’s tumor, oncology has led the way towards personalized medicine.   So, extending life is part of the goal, but improving the quality of life during that time is another.  In large part, new treatments in oncology have done both: extend life and reduce the side effects of treatment, improving the quality of life during that time. However, by definition, targeted therapies are “targeted” toward specific aspects of specific tumors, resulting in fewer patients that might benefit; thus, the market is smaller than it was for traditional chemotherapy.

Collectively, we can conclude that there is clear pressure on the oncology drug development business model — gaining approval for a third-line indication under pricing pressure will make it harder to recoup development costs without substantially extending survival.  Moreover, additional post-approval development costs may be required to expand the approved tumor types and move from later-stage into first-line therapy.  With newer therapies that treat cancer differently and may even “cure” certain cancers, the entire development pathway will change, especially when the biggest benefit may be to use these treatments as early as possible after diagnosis.

For decades, no one in the industry talked about “curing” cancer.  The best we could do was extend survival.  Today, we are learning that combinations of new immunotherapies may be the key to actually curing cancer.  In fact, there is now serious talk about curing many types of cancer in the next few years.  At the same time, new pressures on oncology drug costs are going to impact these therapies.  Therefore, we can expect changes in the business model underpinning investment in, development of and sale of oncology therapeutics.


1Cheever MA, Higano CS. PROVENGE (sipuleucel-T) in prostate cancer: the first FDA-approved therapeutic cancer vaccine. Clin Cancer Res 2011;17:3520–6.