Cost of Developing Drugs: Why is it so High?
How much does it cost to develop a new drug? The answer, of course, depends on which product and which company we are dealing with. However, a Forbes journalist, Herper (2013) attempted to answer this question at a high level based on a study done by Dimasi (2003).
As with any analysis, authors sampled only 100 companies over a 10-year timeframe and have some assumptions on what the R&D cost should include. Here is how he calculated the numbers for each company:
R&D Cost Per Drug =(Each Company’s 10-year R&D Budget) / (Number of Drugs Approved)
Interim Answer: Overall, R&D costs range from $15M to $13.2B. The median was $800M and the average was $2B. So I see the costs are comparable to cars (around $6B) but the range is too wide to extract any meaningful insight.
To get more useful insight, he dissected the data by the number of drugs approved in those 10 years: 1, 2~3, 4~6, 8~13. I used the data from the table and charted the graphs below. Here is where it gets interesting. 70% of the companies fit into the category of launching only 1 drug during those 10 years. The median cost per drug for these small companies was $350 million.
Figure 1. For companies with only 1 drug approved in those 10 years: 70% of the sampled companies fit in this category and the median was $350M.
But for companies that approved more than 2 drugs, the cost per drug increases by double fold and sixfold (up to $5.5 billion median) for companies that succeeded in approving 8~13 drugs over a decade. (Figures 2 & 3)
Figure 2. For companies with 2~3 drugs approved in those 10 years: median was $1.8B.
Figure 3. For companies with 4~6 drugs approved in those 10 years: $5.2 B.
Figure 4. For companies with 8~13 drugs approved in those 10 years: $5.5 B
As a summary, Figure 5 shows the cost drug development increases as the number of drugs approved increases. Please bear in mind that this is just a correlation and not a cause–and-effect relationship.
Figure 5. Companies with a higher number of drugs approved tend to bear significantly higher drug development costs.
Companies who can approve more drugs are bigger-sized companies. Does this mean that the R&D centers of bigger companies are less efficient than those of smaller ones (especially the singletons)? One popular explanation for such high cost is the high failure rate of experimental drugs. 95% of candidate drugs do not make it to the market. This is Included in the R&D costs. In addition, a big pharmaceutical company frequently invests in experimental studies of small ventures of which most fail. The big pharma picks up tabs for that as well.
My response: it is not the high failure rate that should worry us. It is the high cost for each failure.
If the cost of each failure was low, then the total cost should be low enough. In fact, R&D scientists should be encouraged to fail more often but EARLY. This is how an organization can increase innovation while keeping costs down. My future article will elaborate on how an R&D organization can achieve this even in a big corporate setting. Having worked in this industry for many years, I have observed that most companies invest too much in their experimental drugs before they realize it will not work. There is a better way and I hope to share it with you.
Instead of closing this article, I want to keep it alive by inviting your input. What contributes to the high drug development costs? Voice your views by posting it to the Cause-Effect (Fishbone or Ishikawa) diagram. Let’s crowdstorm on the cost drivers before moving onto solutions. To edit, click on the gear icon at the left bottom or leave a comment and I’ll update it for you.
Here is an interesting infographic on US Healthcare cost breakdown. (source: eyeforpharma)
