New OHE Study on Pharmaceutical R&D Costs Released

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New OHE Study on Pharmaceutical R&D Costs Released

Posted on 3 December 2012

How much it costs to research and develop a successful new medicine has been an important policy issue at least since the 1960s. Cost estimates matter not just because of intellectual curiosity or for industry understanding of its performance, but because they are a key aspect of the international debate about the reasonableness of pharmaceutical prices and the magnitude of the long-term investments involved.

The Office of Health Economics today released a comprehensive study of the cost of R&D for new medicines. It reviews research published over the last three decades, which shows an increase in costs from £125 million ($199 million)[1] per new medicine in the 1970s to £1.2 billion ($1.9 billion)[2] in the 2000s (both in 2011 prices). An OHE costs analysis based on new data for 1998-2002 agrees with comparable analyses for the same time period.

The study identifies four major factors that are producing higher R&D costs. First, out-of-pocket expenses have increased, up nearly 600% from the 1970s[3] to the 2000s[4]. Second, success rates for clinical development are falling as tougher therapeutic areas are tackled—e.g. neurology (Alzheimer's), autoimmune diseases (arthritis), and oncology. Success rates have declined from 1 in 5[5] in the 1980s to about 1 in 10[6] in the 2000s. Third, R&D times have been affected by both more extensive regulation and more complex science. The time required to research a new drug and gain approval grew from 6  years[7] in the 1970s to 13.5 years[8]  in the 2000s. Fourth, the cost of capital has risen from 8%[9] in the 1970s to 11%[10] in the 2000s. It costs more to provide an acceptable return to investors that compensates for the high risks of investing in R&D for new drugs.

In the face of these challenges, companies are continuing to emphasise changes intended to improve the efficiency of R&D, addressing those factors within their control. This includes, for example, making decisions far earlier in R&D about the market prospects of a drug candidate and more tightly managing clinical trial costs, often by outsourcing some aspects and/or siting trials in lower-cost locations.

The promise of the new, gene-based sciences is tremendous. Rapidly evolving R&D technology, however, requires a wide range of expertise and data. In response, new collaborations are arising that involve a range of public and private entities, sharing both risks and rewards. Incentives for continued innovation, however, still depend on the willingness of payers to reimburse for new treatments. 'Just as new approaches to R&D are crucial to the future,' Dr Mestre-Ferrandiz points out, 'so are new approaches to facilitating market entry and use. These are essential both to encouraging R&D and ensuring that patients have the earliest access possible to life-changing therapies'.

Contact: Jorge Mestre-Ferrandiz

Download Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.

[1] Hansen, R. (1979) The pharmaceutical development process: Estimates of development costs and times and the effect of proposed regulatory changes. In Chien, R.A. ed. Issues in Pharmaceutical Economics. Lexington, MA: D.C. Heath and Company. 151-191.

[2] Paul, S.M. et al. (2010) How to improve R&D productivity: The pharmaceutical industry's grand challenge. Nature Reviews Drug Discovery. 9(3), 203-214.

[3] $37 million in 2011 prices. DiMasi, J. et al. (1991) Cost of Innovation in the pharmaceutical industry. Journal of Health Economics. 10(2), 107-152.

[4] $216 million in 2011 prices. Paul et al (2010)

[5] 21.5% for phases 1-3, clinical development. DiMasi, J. et al. (2003) The price of innovation: New estimates of drug development costs. Journal of Health Economics. 22(2), 151-185.

[6] 13% for phases 1-3. Paul et al. (2010)

[7] Hansen (1979)

[8] Paul et al. (2010)

[9] Hansen (1979)

[10] DiMasi et al (2003)