Cost of Drug Development

28 January, 1999

Cost of Drug Development - A Narrative

During the 1990s, the average length of time required to develop a drug has increased to 15 years. This lengthening of development time dramatically increases the cost of bringing a new drug to market due to increased cost of capital needed for R&D. US Government economists have estimated the pre-tax capitalized cost of bringing a new drug to market at $359 million. Another estimate is $500 million. In other words, from 1976 to 1996, R&D costs increased 10-fold and, allowing an annual inflation of 5%, it would be 4-fold. This estimate, however, captures the final cost for drugs that entered clinical trials during the late 1970s and actually it is difficult to project what it may cost to develop a drug beginning the research process today.
Due to the astronomically increasing costs associated with bringing a new drug to market, full commercial success is possible only for a minority of products. A 1994 study found that only 3 out of every 10 drug products (new chemical entities) introduced from 1980 to 1984 had returns higher than their average after-tax R&D costs. In one estimate the break-even hurdle can only be overcome at R&D costs below $400 million from now on. (The break of these costs is approximately: basic/investigative, 10%; preclinical, 15%; manufacturing/process, 15%; clinical, 55%; post-marketing, 5%). As 20% of products with highest revenues generated 70% of returns during the period and, given the high cost and high risk of drug research, companies must rely on a limited number of highly successful products to finance R&D. It is thus a common trend to pick up drug candidates by sales expectations and financial motivations. The pharmaceutical industry is prone to take risk-averse strategies and deficit reduction.

How long time and how much increase of the drug development costs may the pharmaceutical industry bear in keeping its economically feasible procudctivity? There has been a traditional norm based on the statistics that the probability of acquiring a novel drug (as referred to as "pikashin" in Japan) is proportional to the invested R&D costs. In the face of this dilemma, there should be a clear depart from this conventional norm, and the historic fact that the novel solutions to the treatment of serious diseases were first underestimated in terms of their financial potential and should be more appreciated. Aspirin, penicillin, steroid hormones and benzodiazepines are old examples, and one of the recent ones is erythropoietin.

Innovative research in a venture company is an acceptable risk and in fact fills the pipelines with new drugs at a rapid pace (1996, 21% over 1995 in the number of medicines being tested or seeking approval; 1997, similar increase over 1996). Thus a "discovery" industry is emerging in the name and form of biotechnology venture companies. If the approach to the drug discovery is risk-averse and traditional in its concept, then even a major pharmaceutical company would be disqualified as an inventor and eventually forced to play only a limited role.　

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