Company disclosures of R&D costs on SEC filings

Today I attended a work session of the Maryland House of Delegates subcommittee on Health Facilitates and Pharmaceuticals of the Health and Government Operations Committee. I was there to testify in support of HB 666, a bill titled: Public Health – Expensive Drugs – Manufacturer Reporting and Drug Price Transparency Advisory Committee. (PDF version here).

The subcommittee adjourned before discussing the bill. I had prepared a handout that addressed one issue, the details of R&D spending currently reported by companies on SEC reports. A copy of the attachment is here.

I had also prepared these notes on the bill, which I did not have the opportunity to use. We expect the bill to receive a hearing at a later date.

I am here to support HB 666, the legislation that would require transparency of the factors that are related to the price of drugs, including importantly, the costs of research and development.

New drugs are expensive to develop, but they are also often expensive, and the prices and revenues are very high. For several years my wife took Herceptin for HER2+ breast cancer. Roche, a swiss company, has earned more than $60 billion on this drug. She now takes a drug, also sold by Roche, that has a cost of about $3,000 per week, or more than $150,000 per year. A new drug for spinal muscular atrophy (SMA) is priced at $750,000 for the first year, and $375,000 per year for maintenance doses, for injections four times a year.

Why are these drugs so expensive? Drug manufactures say that high prices are justified by the large investments in R&D. In debates over efforts to curb high prices, R&D costs are always used to justify the high prices.

Unfortunately, there is considerable confusion and even misinformation about what those costs are. Moreover, the most widely quoted studies are prepared by industry consultants, using confidential data that often does not add up, and samples that are not representative.

The costs of drug development vary considerably by drug and even by disease. …. and there are also very different facts as regards public subsidies.

The proposed legislation provides a statutory framework to ensure that policy makers, consumers and others who pay for drugs have objective, verified and relevant information on R&D costs, by drug. This is very important.

When someone wants to apply to the Maryland SNAP program, for food subsidies, they have to work their way through a 17 page form. But when a drug company wants to charge a sick patient $100,000 for a drug, they don’t have to provide any economic data about the costs of drug development.

I would like to address [three] issues.

1. Companies have complained that information about R&D outlays will be misunderstood. We think there is much misunderstanding about R&D costs now. By creating standardized disclosures that are specific to drugs, as is anticipated in the bill, experts and stakeholders from all sides will be free to make whatever arguments they want about the proper way to evaluate the risks and other factors that people may find relevant. For example, by disclosing spending on each clinical trial, analysis can take into account the risks associated with each stage of drug development, and also to compare the costs of trials, per patient enrolled, to see if numbers are realistic.

Subsidies for R&D are also trial specific, including the 50 percent tax credit for Orphan drug trials, and various government grants related to specific trials.

2. The disclosures are not burdensome. Smaller firms already provide fairly detailed reporting on R&D costs by specific drugs, in their SEC files. It is the larger firms, like Pfizer, BMS or Amgen, which rarely disclose R&D costs by product. I have shared a document that quotes from SEC filings by four small companies and three large companies. The four small companies report R&D outlays on specific drugs by year. The three large companies rarely do, providing instead aggregated data which makes it impossible to assign costs to any specific drug. Both big and small companies disclose details about the R&D spending that would be even more useful if applied to the specific drugs, including, for example, by separating the cost elements into common categories, such as the costs of conducting trials, as opposed to more questionable items, such as the costs of acquiring licenses and other assets. I call attention to the notes on the BMS and Pfizer SEC reports, which give examples of companies claiming that the costs of paying benchmarks, acquiring assets or licensing marketing rights ends up as a claim about R&D spending. This creates confusion, and the Maryland bill provides the authority to provide better and more useful reporting on R&D costs.

3. These disclosures are important. Policy makers can no longer allow drug prices to be set by companies without some oversight and control. In order to do this, policymakers, and consumers, need information, not propaganda, and not misinformation. They need facts. Facts matter.

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