Money for pharmaceutical drugs
Money for pharmaceutical drugs

The popular view of drug development is that it is fantastically expensive undertaking.  The most recent cost estimate (according to research published by the Tufts Center for the Study of Drug Development) is a whopping $1.3 billion.

Some would say that such a high cost is advantageous to the pharma industry since it creates a powerful argument for premium pricing and patent term extension.

But is the number true?

A recent report in the London School of Economics journal BioSocieties by Donald Light (University of Medicine & Dentistry of New Jersey/Stanford University) and Rebecca Warburton (University of Victoria) casts doubt on the hefty price tag.

In an interview with the Burrill Report (listen here), the authors cited the following problems with way the pharma development costs are calculated:

  • Incomplete sampling of pharma companies
  • Incomplete sampling of drugs for cost estimation
  • Focus on new chemical entities only (only 22% of all drug approvals)
  • Use of the mean cost instead of the median cost
  • Use of an unrealistically high cost of capital (11%)
  • Failure to deduct tax credit from the total cost (R&D is an expense)
  • Inclusion of discovery costs (a large proportion of which were underwritten by public funds for academic research)

So what is the true cost?  The authors believe the actual cost of developing a new drug to approval is $59 million (or less) plus discovery cost.  Indeed, audited numbers for all trials reported to the IRS by pharmaceutical companies in the late 1990s put the figure even lower at $22.5 million (download the PDF report: “Evidence regarding research and development investments in innovative and non-innovative medicines”).

So who’s telling the truth?  One way to conclusively put the issue to rest would be for the pharma companies (who strongly dispute the authors’ findings) to disclose their audited R&D expenses for all drugs approved in the past five years.

Expect this issue to grow and grow as national health-care budgets come under increasing pressure.

John McCulloch

John provides assistance to life sciences entrepreneurs in business strategy, management, intellectual property, financing and licensing. See more…