Pharmaceutical companies love to complain about how expensive it is to bring a new drug to market often throwing the number $1.3 billion dollars around. It’s easy to understand why, it’s makes high drug prices easier to swallow.

Those high prices get progressively harder to swallow when you learn that pharmaceutical companies routinely spend 3 times as much on marketing and administration as they do on research and development or that a lot of “new” drugs are just slight modifications of older drugs.

But a new report is calling into question even the $1.3 billion number itself. Seems like some things were included in that $1.3 billion price tag that shouldn’t have been like the 39% of that $1.3 billion dollars that pharmaceutical companies enjoy as tax breaks. Or how about the fact that some of their “costs” include–get ready for this–the money they would have made if they would have invested money into the stock market instead of R and D. From the report:

Half of the authors’ estimated R&D costs consist of the ‘cost of capital’, based on an estimated 11 per cent return on funds invested, had R&D projects not been undertaken.

It’s like saying that a 5$ sandwich actually cost me $1 million because I could have bought a winning lottery ticket with that money. Ok, that’s a bit of an embellished example but you get the point. That’s not how you calculate costs and that’s why no other industry calculates costs that way either.

On top of that, drug trial costs and the length of time for the R and D process are also exaggerated leading to overestimates of drug development costs.

When you put all that together, the cost of R and D for a new drug is in the ballpark of $180-$231 million, less than 80% of the estimate pharmaceutical companies like to throw around. Both drug prices and the huge profits drug companies make become much more difficult to digest in light of that information.

Pass the Tums…