NCPA - National Center for Policy Analysis


April 7, 2005

Out of concern over antibiotic-resistant strains of bacteria, the Food and Drug Administration is advocating a reduction in the demand for antibiotic use. However, the FDA's cautious approach ignores the supply side, where pharmaceutical companies have fewer incentives to develop new antibiotic drugs, says economist Paul Rubin.

The cost of delaying new drugs outweighs the cost of allowing them on the market and possibly withdrawing them later. For example:

  • The Office of Management and Budget estimates the value of a life between $1 million and $10 million; assuming a reasonable life value of $5 million, the cost of approving an antibiotic that is later withdrawn is $50 million.
  • However, the risk of withdrawing a drug from the market has never been higher than 3.4 percent, so the actual cost of withdrawing a drug that turns out to be harmful would be, at most, about $1.5 million with an upper-bound limit of about $6 million to account for any unreported deaths.

The costs of delaying a drug, however, are far greater. Take the antibiotic Ketek. Its approval was delayed three years even though it had been approved earlier in Europe and Japan:

  • The average cost of approving a drug such as Ketek is $802 million, and the cost of capital (foregone interest) in the pharmaceutical industry is 11 percent.
  • Rubin estimates that Aventis, the maker of Ketek, spent $60 million on its first Phase III clinical trial for FDA approval, and then an additional $200 million on a larger Phase III clinical trial in order to meet FDA approval (not including the $802 million average cost).
  • The three-year delay in Ketek's approval cost Aventis a staggering $518 million, says Rubin, far greater than the cost of $6 million for approving and then withdrawing a drug.

Source: Paul H. Rubin, "The FDA's Antibiotic Resistance," Regulation, Winter 2004-2005, Cato Institute.

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