The Cost of Developing a New Drug

This particular column stems from the CBO's Study, named: Research and Development in the Pharmaceutical Industry - i would like to express my satisfaction and happiness in connection with this study, read it because it is advisable:

Research and development costs vary widely from one new drug to the next. Those costs depend on the type of drug being developed, the likelihood of failure, and whether the drug is based on a molecule not used before in any pharmaceutical product (a new molecular entity, or NME) or instead is an incremental modification of an existing drug.

Innovative Drugs
A recent, widely circulated estimate put the average cost of developing an innovative new drug at more than $800 million, including expenditures on failed projects and the
value of forgone alternative investments.1 Although that average cost suggests that new-drug discovery and development can be very expensive, it reflects the research strategies and drug-development choices that companies make on the basis of their expectations about future revenue. If companies expected to earn less from future drug sales, they would alter their research strategies to lower their average R&D spending per drug. Moreover, that
estimate represents only NMEs developed by a sample of large pharmaceutical firms. Other types of drugs often cost much less to develop (although NMEs have been the source of most of the major therapeutic advances in pharmaceuticals).

The study that produced that cost estimate also calculated how long it takes to develop a new drug and the relative contribution of capital costs to a drug’s total R&D costs. On average, developing an innovative new drug takes about 12 years, the study concluded, and a firm’s actual expenditures make up only about half of the total reported cost. The rest represents the financial cost of tying up investment capital in multiyear drugdevelopment
projects, earning no return until and unless a project succeeds. That “opportunity cost” of capital reflects forgone interest or earnings from alternative uses of the capital. (Opportunity costs are common to all innovative industries, but they are particularly large for pharmaceutical firms because of the relatively long time that is often required to develop a new drug.)

Research and development spending per NME has grown significantly in recent years, for various reasons. First, failure rates in clinical trials have increased, possibly because
of greater research challenges or a willingness to test riskier drugs in such trials. Second, larger drug firms are said to have shifted the focus of their development efforts away from drugs for acute illnesses and toward drugs for chronic illnesses. Drugs that treat chronic illnesses can be more expensive to develop because they often require larger and longer clinical trials. Third, greater technological complexity in drug development and greater specificity in disease targets have helped to raise average R&D costs, as firms now identify drugs with particular molecular characteristics rather than using trial-and-error methods
to find compounds that work in some desired way. Not all new molecular entities provide unique therapeutic functions. Many NMEs are so-called “me-too” drugs. Despite that name, they are not necessarily imitations of other drugs. Rather, they may be innovative products that lost the race to be the first drug on the market in a given therapeutic class (such as antidepressants, antibiotics, or antihistamines). Such products can benefit consumers by
competing with, and sometimes improving on, the pioneering drug in a class.