Innovation in the pharmaceutical industry: New estimates of R&D costs

https://doi.org/10.1016/j.jhealeco.2016.01.012Get rights and content

Highlights

  • R&D costs of 106 new drugs were obtained from a survey of 10 biopharmaceutical firms.

  • Costs for compounds that were abandoned were linked to costs of approved compounds.

  • Pre-tax out-of-pocket per approval is $1395 million (2013 dollars).

  • Pre-tax capitalized per approval is $2558 million (2013 dollars).

  • Total capitalized costs were found to have increased at a real annual rate of 8.5%.

  • With post-approval R&D costs the estimate increases to $2870 million (2013 dollars).

Abstract

The research and development costs of 106 randomly selected new drugs were obtained from a survey of 10 pharmaceutical firms. These data were used to estimate the average pre-tax cost of new drug and biologics development. The costs of compounds abandoned during testing were linked to the costs of compounds that obtained marketing approval. The estimated average out-of-pocket cost per approved new compound is $1395 million (2013 dollars). Capitalizing out-of-pocket costs to the point of marketing approval at a real discount rate of 10.5% yields a total pre-approval cost estimate of $2558 million (2013 dollars). When compared to the results of the previous study in this series, total capitalized costs were shown to have increased at an annual rate of 8.5% above general price inflation. Adding an estimate of post-approval R&D costs increases the cost estimate to $2870 million (2013 dollars).

Introduction

We provide an updated assessment of the value of the resources expended by industry to discover and develop new drugs and biologics, and the extent to which these private sector costs have changed over time. The costs required to develop these new products clearly play a role in the incentives to invest in the innovative activities that can generate medical innovation. Our prior studies also have been used by other researchers, including government agencies, to analyze various policy questions (US Congressional Budget Office, 1998, US Congressional Budget Office, 2006).

The full social costs of discovering and developing new compounds will include these private sector costs, but will also include government-funded and non-profit expenditures on basic and clinical research that can result in leads and targets which drug developers can explore. These additional costs can be substantial.1 However, it is difficult to identify and measure non-private expenditures that can be linked to specific new therapies. Thus, we focus here on the private sector costs.

The methodological approach used in this paper follows that used for our previous studies, although we apply additional statistical tests to the data (Hansen, 1979, DiMasi et al., 1991, DiMasi et al., 1995a, DiMasi et al., 1995b, DiMasi et al., 2003, DiMasi et al., 2004, DiMasi and Grabowski, 2007). Because the methodologies are consistent, we can confidently make comparisons of the results in this study to the estimates we found for the earlier studies, which covered earlier periods, to examine and illustrate trends in development costs. These studies used compound-level data on the cost and timing of development for a random sample of new drugs first investigated in humans and annual company pharmaceutical R&D expenditures obtained through surveys of a number pharmaceutical firms.

We analyze private sector R&D activities as long-term investments. The industrial R&D process is marked by substantial financial risks, with expenditures incurred for many development projects that fail to result in a marketed product. Thus, our approach explicitly links the costs of unsuccessful projects to those that are successful in obtaining marketing approval from regulatory authorities. In addition, the pharmaceutical R&D process is very lengthy, often lasting a decade or more (DiMasi et al., 2003). This makes it essential to model accurately how development expenses are spread over time.

Given our focus on resource costs and how they have changed over time, we develop estimates of the average pre-tax cost of new drug development and compare them to estimates covering prior periods. We corroborated the basic R&D cost results in this study by examining the representativeness of our sample firms and our study data, and by incorporating a number of independently derived results and data relating to the industry and the drug development process into analyses that provide rough comparators for at least components of our cost results. The details of those analyses are provided in our online supplement.

The remainder of this paper is organized as follows. We briefly discuss the literature on pharmaceutical industry R&D costs since our 2003 study in Section 2. Section 3 briefly outlines the standard paradigm for the drug development process. In Section 4 we describe the survey sample data and the population from which they were drawn, and briefly outline the methodology used to derive full R&D cost estimates from data on various elements of the drug development process. We present base case pre- and post-marketing approval R&D cost estimates in Section 5. Sensitivity analyses are presented in Section 6. We describe the representativeness of our data, various approaches to validating our results, and responses to various critiques in Section 7. Finally, we summarize our findings in Section 8.

Section snippets

Previous studies of the cost of pharmaceutical innovation

Much of the literature on the cost of pharmaceutical innovation dating back decades has already been described by the authors in their previous two studies (DiMasi et al., 1991, DiMasi et al., 2003). The interested reader can find references and discussions about the prior research in those studies. The earliest studies often involved a case study of a single drug (typically without accounting for the cost of failed projects) or they analyzed aggregate data. We will focus here on studies and

The new drug development process

The new drug development process need not follow a fixed pattern, but a standard paradigm has evolved that fits the process well in general. We have described the process in some detail in previous studies, and the FDA's website contains a schematic explaining the usual set of steps along the way from test tube to new compound approval (http://www.fda.gov/Drugs/DevelopmentApprovalProcess/SmallBusinessAssistance/ucm053131.htm). Marketing approval applications for investigational compounds

Data and methods

Ten multinational pharmaceutical firms of varying sizes provided data through a confidential survey of their new drug and biologics R&D costs.6 Data were collected on clinical phase expenditures and development phase times for a randomly selected sample of the investigational drugs and biologics of the firms

Out-of-pocket clinical cost per investigational drug

To determine expected costs, we need estimates of the clinical development risk profile. We examined the dataset of 1442 self-originated compounds of top 50 pharmaceutical firms described above and estimated the phase transition probabilities shown in Fig. 1. The overall probability of clinical success (i.e., the likelihood that a drug that enters clinical testing will eventually be approved) was estimated to be 11.83%. This success rate is substantially lower than the rate of 21.50% estimated

Sensitivity analysis

We examined how sensitive the results were to extreme values in the data and to changes in certain critical parameters. In particular, we focus in detail in this section on variation in the discount rate used to calculate capitalized costs. We also determine the extent to which key cost drivers (cash outlays, risks, time, and the cost of capital) explain the increase in total cost per approved drug found for this study relative to our previous study.

In addition, since all of the parameters are

Critiques, sample representativeness, and validation

Our prior study results have been questioned on a number of methodological and data grounds (Angell, 2005, Goozner, 2004, Light and Warburton, 2005a, Light and Warburton, 2005b, Love, 2003, Young and Surrusco, 2001). We have rebutted each of these criticisms in detail in a number of venues (e.g., DiMasi et al., 2004, DiMasi et al., 2005a, DiMasi et al., 2005b). We review the critics’ main arguments only briefly here.

Goozner (2004) and Angell (2005) reject opportunity cost calculations because

Conclusions

Studies of the cost of developing new drugs have long been of substantial interest to drug developers, drug regulators, policy makers, and scholars interested in the structure and productivity of the pharmaceutical industry and its contributions to social welfare. The interest has been strong and growing over the last few decades during which cost containment pressures for drugs approved for marketing have expanded and concerns have been raised about industry productivity in an environment in

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    We thank the surveyed firms for providing data, and individuals in those firms who kindly gave their time when we needed some of the responses clarified. All errors and omissions are the responsibility of the authors. The Tufts Center for the Study of Drug development (CSDD) is funded in part by unrestricted grants from pharmaceutical and biotechnology firms, as well as companies that provide related services (e.g., contract research, consulting, and technology firms) to the research-based industry. Tufts CSDD's financial disclosure statement can be found here: http://csdd.tufts.edu/about/financial_disclosure. The authors and Tufts CSDD did not receive any external funding to conduct this study. The R&D cost and expenditure data for individual compounds and companies are proprietary and cannot be redistributed. Other data used were obtained from subscription databases and the Food and Drug Administration (FDA) and other websites.

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