Why Are Cancer Drugs So Expensive?

All drugs are costly to produce, but cancer drugs are notoriously expensive to push through to market, and every year, treatments get more and more expensive. In this clip from Industry Focus: Healthcare, host Kristine Harjes and Motley Fool contributor Todd Campbell explain how much the U.S. is spending on cancer treatments today, and why big pharma drugmakers charge such high prices for their drugs and treatments.

A full transcript follows the video.

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This video was recorded on Sept. 13, 2017.

Kristine Harjes: In 2014, I saw a statistic that the direct medical cost of cancer care top $87 billion in the U.S. alone. To me, that begs the question, where do we go from here? Is specifically cancer treatment going to continue to be so expensive?

Todd Campbell: It's an eye-popping amount of money we're spending on cancer drugs now. We've eclipsed $100 billion in spending on oncology medicine. It's a major issue, and I think it's no real surprise that one of the authors of the study that we referenced earlier in the show actually came from Memorial Sloan Kettering, which is a very highly regarded cancer center, and in the past they've been very vocal about the concern of high-priced drugs making it to market that haven't been proven to boost overall survival. Instead, most approvals for cancer drugs, because cancer is so hard to treat, are based on surrogate endpoints, things like progression-free survival and overall response rate. It's a very big, big problem to investors and to patients, because the costs that are associated with these drugs, the reason we're spending so much on the costs, is climbing incredibly fast. The inflation rate for drug development, especially in the preclinical stage drugs, is throwing much more rapidly than other parts of the economy. And those costs have to be borne by somebody. And you can't just go out and say, "We're going to cut prices across the board," and mandate it, because then what happens to innovation? If you don't generate out a tremendous reward, then that capital, that investment, will head somewhere else -- either toward building the next Amazon, or whatever.

Harjes: Right. So, as a drug maker, when you're looking at your opportunity cost, where should you deploy your capital, you're going to figure out, where do I have the best risk versus reward? And one of the reasons why these cancer drugs are getting more and more expensive, and across the board, not just even in oncology, drugs are getting more expensive, it's because they're going toward more narrowly defined targeted patient populations. So, just by the rules of economics, if you're trying to make a bunch of money, but you have a very small pool of people that you're selling your product to, it has to be a pretty expensive product in order for you to even recoup your investment that you put into it. So, if you're looking at a drug like, say, the gene therapy that was approved on August 30th that we talked about a couple times on the show now, Kymriah from Novartis (NYSE: NVS), this is a drug that potentially only has a couple of hundred patients that it could actually help. So, the price is absolutely astronomical. This is a drug that's going to cost $475,000 for a treatment.

Campbell: $475,000. And really what we're talking about there is a 20 day vein-to-vein treatment. So, 20 days, it's going to cost $475,000. It's pretty jaw-dropping. I think you really alluded to something, and that's, from a drug makers perspective, they're looking at it and saying, "Yeah, precision medicine is wonderful, but it's incredibly complex, and with that complexity comes costs. And the higher these costs are earlier in drug development, the more selective we have to be in choosing which drugs we're going to pursue." And that's kind of scary from a patient perspective, because it means the only drugs that are actually going to end up moving further and further, deeper and deeper into the clinic toward market, are going to be those drugs that are the most commercially relevant.

Kristine Harjes has no position in any of the stocks mentioned. Todd Campbell owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.