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Comment by tbrownaw | Hacker News Reader

> One also has to include the money spent by small companies that failed and were not bought out, not just the money the big companies spend buying the successful ones.

If you're looking at the total amount spent by "the economy" (drug development costs X% of GDP), sure. If you're looking at "why are drug prices so high", it probably doesn't make sense to to include costs funded from other places (which in this example I assume would be research grants ie taxes, and venture capital funds).

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For the private parts of development, the costs are absolutely priced in. A large drug company needs to amortize the cost of all development attempts, not just the successful ones. Private investments into smaller firms price in a very large chance of failure, so the cost of capital is quite high.

That's not quite right. A drug company with a new product will charge whatever the market will bear. What the costs do is control the scope of the industry: if profits are high, the industry expands to try more kinds of drugs, stopping when the attempts on the margin are just profitable enough (on average). If profits are not expected to be adequate, the industry contracts.

That's close to what I tried to say.

Perhaps you prefer: A company must think it's likely that they'll have a good return on all development costs, not just the costs of drugs that happen to be successful, to continue to invest.

> if profits are high, the industry expands to try more kinds of drugs, stopping when the attempts on the margin are just profitable enough (on average).

Of course, something like pharmaceutical products, with exclusive sales of specific products, few sellers, strategic conduct relative to other industries (insurers), and heavy regulatory influence is not guaranteed to converge to normal profit.

I'm not going to invest a drug company with a 90% chance of failure unless I can expect to get a 10x return if it succeeds.

The problem with this argument is it assumes the cost of a failure is the same as the cost of success, which it cannot be: the successful drug has to go through more rounds of testing and approvals than a failure.

In reality many failures are early or first round failures. Not free but a small fraction of the price of getting to market.

So to you example a 90% failure rate may only require a 2x or 3x return on your successes to “break even”.

Clinical trial failure rates (or inversely success rates) have been analyzed before.

https://www.nature.com/articles/nrd.2016.136

"They found that the probability of success was 63% in Phase I trials, 31% in Phase II trials, 58% in Phase III trials and 85% during the regulatory review process"

42% failure rates in phase 3 is enormously high. By then you've pretty much spent 90%+ of all the cost of getting a drug approved.

But it's 42% of 19%. So out of 1,000 drugs, you're looking at 805 being ruled out before you even get to that "most expensive phase", which is my point. At Phase 3, you're looking at 113 succeeding, so you're "only" eating the really expensive[1] costs of Phase 3 for 82[2] of 1,000 attempts.

[1] Which isn't to say there's zero cost for Phase 1 or Phase 2, but it's a lot lot less than Phase 3 trials.

[2] 1,000 drugs, 63%, 630 of which make it through Phase 1. In Phase 2, 195 drugs, 31% of 630 succeed and make it through to Phase 3, and then 82 drugs (58% of 195) make it to regulatory approval.

Right, but with the cost distribution for clinical trials, costs increase by 4x in phase 2, then 8x in phase 3 (relative to phase 1).

So despite attrition that reduces candidates by 9x by phase 3, costs have increased by 8x.

[1]https://www.sofpromed.com/how-much-does-a-clinical-trial-cos...

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