The first answer to that question is the increasing R&D expenditures. The cost of a pharmaceutical innovation is difficult to establish. The classical studies on that matter (SCHWARTZMAN, 1976; KATZ, 1980; HANSEN, 1979) employ data from the 60s and the 70s that were extrapolated to reflect the conditions of the 80s. They yield an estimate around US$100-120 millions. Today, according to various industrial sources, these estimations should be more than doubled to reflect reality.
Grabowski and Vernon (1990) more recently found that «real drug price increases in the 1980s were necessary for the average new drug introduction to recover its R&D costs». They projected over the 80s the net present cash flow value under the assumption of prices rising at the same rate than inflation, and show that under these conditions, NCE could not pay in the 80s the R&D expenditures of the 70s.
Additional regulation from the FDA first, and then from other agencies in the world, is to a large extent responsible for the increase in R&D expenditures. The average developing time has grown from about 35 months in the early 60s to more than 145 months in the late 80s (THOMAS, 1990). The FDA review time has critically raised as did the clinical development time. To a large extend this is the tribute paid for safety. But this is not the only reason. The pharmaceutical industry very likely faces declining returns in R&D: new active NCEs are more and more difficult to find, and the beneficial effects are more and more difficult to prove.
In some pathologies there did not exist any drug therapy until recently. In that case some significant progress against no treatment or placebo are (relatively) easy to show: examples are the use of thrombolytics in the early stages of AMI, chemotherapy in some cancers or alpha-blockers in BPH. But in many cases, which will become more and more frequent in the future, new drugs are developed in domains where do exist therapeutic solutions that may be considered as relatively satisfactory.
A typical example is proton pump inhibitors in peptic ulcers which are currently treated with anti-H2. In such cases, the alleged therapeutic superiority is much more difficult to demonstrate and the trials require more patients. The more the industry develops effective drugs the more difficult it will be for new entities to prove a therapeutic superiority that may compensate for their high prices. As the high price is itself a consequence of this difficulty, the industry will face an inflationary vicious circle.
Another point is the growing requirement that new drugs prove a real effectiveness in terms of «terminal end-points» and not only in term of «intermediate end-points». It is not enough to prove that a drug does have an action on a definite biologic parameter. More and more regulatory agencies require that the drugs actually cure real diseases in real conditions and avoid real deaths.
Recent example is the development of ACE-inhibitors in heart failure where «megatrials» including thousands of patients followed during more than four years in average were necessary to show about a 20 per cent mortality reduction in patients with heart failure after AMI2. A short term trial like ISIS-4 includes 58,000 patients with a five weeks treatment to demonstrate a 6.2 per cent reduction in overall mortality.
2 These trials are SAVE (captopril), SOLVD (enalapril), AIRE (ramipril), TRACE (trandolapril), etc.
In these cases, patients in the placebo arm were in fact treated with conventional treatments like beta-blocker, aspirin, etc. so that its is harder to bring a benefit compared to the «natural» course of an untreated disease.
Finally, increasing regulations and more severe medical requirements do not necessarily conflict with companies interests. First during the last decade, companies were more or less able to pass the development cost on prices, at least on the US domestic market. Second, the high cost of development is obviously used as a barrier to entry by large companies. Small companies cannot follow the trend and are eliminated, leading to the reduction of competition. L.G. Thomas (1990) clearly shows from market data that «largest US pharmaceutical companies apparently benefited from the regulation, as sales gains due to reduced competition more than offset the quite moderate declines in research productivity».