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Yeah, $5Bn may be a bit of an exaggeration, but it's not off by an order of magnitude; this review, based on data from Eli Lilly, put the fully capitalized R&D number at $1.8Bn in 2010:

https://www.nature.com/articles/nrd3078

(one can certainly quibble over the "cost of capital" assumptions these days, but the model isn't wildly wrong.)

> That billion dollar figure is risk adjusted per product meaning that's the cost of all R&D and clinical trials against the number of products that hit the market.

Yes, but as you know, you can't simply separate the successful products from the ones that fail. The former pay for the latter.

> A lucky startup can pull off a successful trial for a few hundred million (i.e. Sofosbuvir), if not tens of millions for an orphan drug.

Sure, one can always hit the lottery. But unlike startups (where the N-independent-failures model works OK), drugs don't make it to market without a deep-pocketed company willing to set huge piles of money on fire in the final phases.

Your other comment below does a good job of explaining why trials are insanely expensive...which is why lucky startups almost never run their own. So you're dependent on a system where deep-pocketed mega-corporations need to exist simply to get the drugs on the market, and they are reliant on massive returns to take the risk in the first place.

Globally there are ~50 new drugs per year. Total public and private spending on drug R&D hits ~190B per year. So even including government and charity donations your only up to 4 billion per drug. Private companies nominally cover ~60% of that dropping their investment to ~2.3 billion per successful drug.

However, that’s overly generous as a great deal of tax breaks etc indirectly subsidize that 2.3 Billion. So, it’s true drugs are expensive on average to create, larger numbers tossed around are generally intentionally misleading.

This is not a bad back of the envelope analysis. Forbes did one a while back that looked at 10 year R&D spend and then 10 year approvals (to account for the delay). Numbers vary wildly between companies.

But one thing to keep in mind is using your number, there are plenty of drugs that get approved that only have a few billion in sales over their lifetime. So either break even or not even breaking even. It’s a massive blockbusters like Lipitor ($10B in sales per year) that pays for all the mediocre drugs.

I think the issue people have is the public spends about 1.4 trillion on patented prescription drugs per year globally which is more than 10x what drug companies are spending on R&D. Especially when manufacturing and distribution is such a small fraction of this cost.

While time value of memory explains some of that it’s still a huge discrepancy. Advertising etc make up the difference and while cost effective for the company, their harder to justify as a fraction of drug prices. Especially when over prescription is so harmful due to side effects and adverse drug interactions.

Genuinely curious - why do these drugs cost so much? Can we make it cheaper? I know there’s a lot of hit & miss and that the cost of the drug also covers the misses, but it feels like we should be able to do this for millions, not billions.

https://www.pcisynthesis.com/want-to-know-why-early-drug-dev...

and

http://sitn.hms.harvard.edu/flash/2020/modern-drug-discovery...

are decent reads.

Mostly it's the complexity of the compounds involved, the supply chain, and regulatory costs.

And the the time value of money. see my sibling post.

It has to do with the time value of money and long development timelines. Here is a great blog post from a scientist trying to find investors for drug to cure his wife's terminal disease.[1]

>it takes a hundred dollars of drug revenue 17 years from now to motivate someone to invest one dollar today. No wonder drugs are expensive.

That is a 10,000% return on investment required to break even.

http://www.cureffi.org/2019/04/29/financial-modeling-in-rare...

It genuinely takes a massive amount of labor using mostly highly paid professionals like doctors, nurses, and research scientists. Even before any trials start, the support materials for a premarketing application for a drug are usually in the thousands of pages and include clinical trial protocols that describe minutiae like how blood samples will be drawn so data is comparable between hospitals. Then you have to find participating hospitals, PIs, and patients which means lots of negotiation and patient screenings and TV/radio/web advertising. Then you have to manufacture the drugs in small to medium quantities. Then you have to actually run the trials which means paying a lot of people and most if not all of their medical care related to the clinical trial.

Phase I trials, for example, are usually carried out under constant medical supervision and push the dosage as high as they can until 50% of the cohort will no longer tolerate it. That alone is usually thousands or tens of thousands per day per patient.

By the time you get to phase III where you have hundreds to thousands of patients, you're shelling out up to $1k per patient for the incentive and $100-1k per checkup for the length of the trial. A 1k person phase III can easily cost tens of millions in labor just to administer the drug and collect samples once a month for a year. Data provenance and normalization is important so a not insignificant chunk of this time is largely unavoidable paperwork.

And getting FDA approval is not the finish line. It's just the start of the roll-out. Now employ teams of reps to get the drug covered by every commercial insurance company and all Medicare/Medicaid parties so that patients have access to this life-saving treatment, get policies and authorization forms and billing codes created and implemented. Do outreach to make sure doctors and patients even know that a drug has been approved and how it compares to existing options.

"A $5 billion a year budget can go very far and the people should get the rewards for taking the risk, especially for a disease like HIV that has significant quality of life impacts on vulnerable populations."

This requires the starting axiom that profits are more important than human lives with respect to global public health. This is something that we as humans can decide, not some law of nature.

Big pharma's lobbying to enshrine IP rights by embedding them in the WTO has led to untold deaths from lack of access to medications in the developing world.

This Citations Needed podcast on "Vaccine Apartheid" contains much interesting information, even if you don't agree with the headline.

https://citationsneeded.medium.com/episode-129-vaccine-apart...

On a purely technical note, it's interesting to think about why it's cheaper to do the R&D to put a rocket into orbit than to develop a new therapy. Why does cutting-edge lab equipment cost $100k - $1M? This supply chain seems ripe for disruption.