Research and Development Costs for New Drug Development is Increasing, Study Finds

Total costs for drug research and development (R&D) have risen 8.5% annually above inflation, according to a study published in the Journal of Health Economics.

“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,” explained Joseph DiMasi, Tufts Center for the Study of Drug Development, Tufts University, United States and coauthors.

The R&D costs of 106 randomly selected new drugs were obtained from a survey of 10 pharmaceutical firms and were used to estimate the average pre-tac cost of new drugs and biologics development. Based on the study, the estimated average out-of-pocket cost for each newly approved compound is $1395 million (in 2013 dollars). If the costs are capitalized until the point of marketing approval at a real discount rate of 10.5%, the total cost estimate before approval would be $2558 million (in 2013 dollars). Furthermore, the cost estimate has been increasing at an annual rate of 8.5% above general price inflation, as shown by comparing the results to the previous study in this series. Moreover, including an estimate of post-approval R&D costs would raise the overall cost estimate to $2870 million.

“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,” wrote the study authors.

Reference

DiMasi JA, Grabowski HG, Hansen RW. Innovation in the pharmaceutical industry: New estimates of R&D costs. J Health Econ. 2016;47:20-33. doi:10.1016/j.jhealeco.2016.01.012