According to a report on Pharmalot, Merck is expanding its move into oncology by striking a deal with Ariad Pharmaceuticals to buy the cancer drug AP23573 mTOR from Aiad Pharmaceuticals.

“Here’s the deal: Ariad will receive an initial payment of $75 million, up to $452 million more in milestone payments based on the successful development in different cancer indications, and up to $200 million more based on sales thresholds. Ariad can also expect at least $200 million in estimated contributions by Merck to global development, and up to $200 million in repayable advances from Merck to cover its share of global-development costs, after Ariad has paid $150 million of those costs. (See “Merck Invests $1B In A Cancer Pill“)

So this is what the pharma industry means when it says it costs $1 Billion to “develop” a new drug!

I’ve argued that the $1 Billion number is based less on actual costs than on a Tufts’ analysis, which includes about $400 million in “lost opportunity” costs (see “Tufts Hangs Tough on Opportunity Cost Analysis“).

Merck’s deal with Ariad is a wonderful example of an “opportunity” that Merck is pursuing instead of putting that $1 Billion in its own development effort!

Increasingly, Big Pharma is turning to “buying” drugs from smaller, more innovative companies rather than developing them on their own!

No doubt, Big Pharma will continue to portray themselves as innovative companies that need to cover the costs of innovation with higher drug prices. In reality, Merck had to out bid competitors to make this deal with Ariad. One has to wonder how much of that money goes to actual development efforts versus Ariad’s bottom line? I’m no accountant, but it looks like everything after the initial $75 Million and $452 Million is pure gravy for Ariad to sock away for investors.