The Estimated R&D Costs for a New Drug

July 2020
RJ Panzo

How would you respond to a patient who has told you that “I can’t afford my medicines because drug companies are price gouging”?

It’s not an easy question to answer. It would be difficult to pinpoint a single problem in a complex system that not only includes drug companies, but also manufacturers, insurance providers, clinicians, pharmacies, among many others. Having spent my entire career in the Life Sciences, I’ve been fortunate to have been part of some early R&D projects, a couple of commercial launches, and post-launch development of current commercial products. From my perspective, I can only speak on how much time, money, and work goes into that drug development lifecycle. According to a new JAMA report, “the mean cost of developing a new drug has been the subject of debate, with recent estimates ranging from $314 million to $2.8 billion.”

The Objective

The purpose of the JAMA study was to “estimate the research and development investment required to bring a new therapeutic agent to market, using publicly available data.” Data were obtained from the U.S. Securities and Exchange Commission, the FDA database, and ClinicalTrials.gov. News Medical Life Sciences states that the data “was treated as the capital required to develop the drug, at the cost of capital, that is, the amount to be invested that will yield the rate of return required to persuade the investor to make a given investment. It was set at 10.5% a year.” Data was taken from 2009-2018.

This is how the data was captured:

  1. Expenditures per year of drug development (both direct and indirect personnel and overheads) were collected from all programs
  2. Sums were then converted to 2018 USD rates
  3. Since data could be varied between different drugs and modalities, data estimates were given quality ratings of high, medium, and low. For example, completely documented costs were labeled as high-quality, while acquisitions, collaborations, and licensing agreements were given low-quality tags
  4. Failure costs were also included using data on the aggregate success rate of clinical trials
    • Phase 1 clinical trial approvals = 14%
    • Phase 2 clinical trial approvals = 35%
    • Phase 3 clinical trial approvals = 59%

The Results

  • The FDA approved 355 new drugs and biologics from 2009-2018.
  • The median capitalized research and development investment to bring a new drug to market was estimated at $985.3 million
  • The mean investment was estimated at $1.3 billion
  • Oncology and Immunology drugs cost the most to develop at $2.7 billion
  • Dermatology drugs cost the least to develop at $747 million
Ned Pagliarulo / BioPharma Dive, data from “Estimated Research and Development Investment Needed to Bring a New Medicine to Market, 2009-2018,” JAMA

The Conclusions

This study can only provide an estimate of the R&D costs for drug development, solely based on publicly available data. JAMA states, “differences from previous studies may reflect the spectrum of products analyzed, the restricted availability of data in the public domain, and differences in underlying assumptions in the cost calculations.”

Of the 355 new drugs and biologics that were approved over the study period, R&D expenditure data was only available from 63 products—that is a mere 18% of the total. According to News Medical Life Sciences, “the disproportionate representation of smaller companies could have skewed the estimate towards a lower estimate since such firms likely have less to spend on drug development than larger pharmaceutical firms.” An example of this skewing can be seen with the cost of development for Oncology and Immunology drugs. The median, which came in at $2.7 billion, had a mean of $4.5 billion. BioPharma Dive says, “the latter number likely driven by the estimated cost of developing Dupixent, which, at more than $6 billion, was a dramatic outlier in the data.”

Another limitation is that the drugs included in this study were mostly orphan, first-in-class, or fast-tracked drugs. Pre-clinical/clinical costs, tax credits, the overall process from development to market all would have an effect on the estimates gathered for this study. Additionally, differences in assumed success rates and capital costs based on drug modalities could also affect these estimates.