The Economics of Pharmaceutical Drug Testing. Overview and Explanations

Most countries have some type of regulatory agency that's in charge of approving new drugs. So let's say a pharmaceutical company comes up with a drug that's intended to treat cancer. Now this regulatory agency which in the United States would be the Food and Drug Administration the FDA that regulatory agency has to make it an important trade-off, they're basically trading off how long do they spend scrutinizing this new drug that treats cancer. So did they spend 5 years 10 years 15 years they want to maximize the amount of safety for the public, if they don't scrutinize drugs at all and just let all drugs onto the market then there could be a lot of drugs that end up harming or killing people. So they want to scrutinize this new cancer drug and make sure that it's safe but by the same token the longer the period of time that they spend testing this cancer drug but they're creating a delay that is going to lead to lives being lost.

How Long Should We Test Drugs?

It's kind of either way there can be lives lost if you don't do any kind of testing at all then you have lives lost due to safety and if you delay this drug for years there are people who have cancer and could potentially be cured of cancer but they're not getting the drug due to the delay and so there are lives being lost. So basically the regulatory agency has to make this trade-off and figure out what's in the best interest of the public.


Graphing the Numbers

I want to sketch this out for you graphically. Let's say that we have on the y-axis we have the number of deaths and let's say that in the x-axis we have the number of years of testing. We got one year of testing two years three years and so forth. Now let's say we can think about the deaths due to the drug being unsafe, let's say the cancer drug is not safe. We only do one year of testing then it might be that the drugs that we are testing lead to 1 million deaths due to safety issues because we only looked at drugs for 1 year there's a lot of people who end up dying. But as we go to 5 years of testing, we'll have less than 100,000 deaths. So the number of deaths due to it being an unsafe drug is going to decrease as we do more and more testing. 


However, there's another graph we have to think about which is the deaths due to the delay of not getting the drug on the market fast enough. So let me just sketch that out, let's say that this upward sloping curve is the curve representing deaths due to the delay of not getting drugs. When I say delay I mean that the FDA or whatever agency didn't approve the drug fast enough and so while the drug was still being tested there were people dying because they didn't get access to the drug who might have lived if they get the drug.


Total Deaths Curve

So now we can look and from the perspective of society what we want to do is we want to minimize the death rate, we want to minimize the number of deaths. It doesn't matter from society's perspective whether the deaths are due to delay or due to unsafe drugs, they're looking at the total number of deaths. So the number of total deaths is what society cares about. What we can do is we can add up the two curves, for example with one year of testing to get the number amount of total deaths we could say "What was the point where deaths due to delay?" so let's say that was 50,000 let's just throw out a number there and then if one year there's 1 million deaths due to unsafe drugs. So 50,000 due to a delay 1 million due to unsafe drug and so that would be 1,050,000 which is total deaths.


So now I'm gonna draw the total death curve. Let's say this total curve looks something "U" shape that's the total curve. So all I did was that each year we add up the number of deaths due to unsafe drugs the number of deaths due to the delay and then we graph this, which is the total number of deaths. 

So from society's perspective, we want to minimize the number of people who died. It's pretty common sense so where are we gonna have the lowest number of deaths? It's gonna be right at the bottom of the total death curve. Let's say that this is 975,000. So basically the amount of testing, if we draw that down it, comes out to 3 years of testing. That's basically saying "We account for deaths due to delay of not getting the drug out fast enough and people dying because they didn't get access to it and deaths due to unsafe drugs." When we think about the market for drugs for cancer drugs or whatever 3 years is the amount that's gonna minimize the number of people who die from either of those causes.


Issues for the Regulator

Here's an issue that's from society's perspective as to the best benefit but what about the regulator? What about the regular like I said in the US that's have FDA, whatever your country is you might think about the regulating agency and say what is this regulatory agency? You might think "They're a government agency they just want to do what's best for society." Well, sure probably a lot of people there who feel that way but by the same token there's a lot of pressure on regulators. When there's a death due to unsafe drugs, let's say 1000 people died because some drug got approved and it ended up killing people and there's a lot of scrutinies now on the regulator saying "Hey, why did you approve this drug, what are you doing here? There are a lot of these people who need to be fired. We need to get rid of the head of the regulatory agency." But when there are deaths due to a delay it's not quite as publicized. The deaths due to unsafe drugs are more public and it might lead to more issues for the regulatory agency.


So this is the socially optimal level this three years of testing but maybe the regulator goes for and this is the this is so this ends up being the actual level. So you actually have this inefficient level of testing. So you have five years of testing when actually the socially optimal level is three and it's because you have to think about the incentives of the regulator, it's not that they're bad people they don't care about people dying but they want to keep their jobs and they know they're very sensitive that "If we approve a drug too quickly, people are going to be helped lives are gonna be saved due to not having unnecessary delay but there's a chance that there's gonna be unsafe drug on the market and that's gonna lead to a lot more publicity and public outcry about whether or not we're doing our job." and so you might have a situation where actually the actual level the actual amount of years of testing might be higher than the amount that's socially optimal.