Increasing Investment Needed to Develop a New Drug
In recent years, the R&D process has become increasingly complex and costly. Clinical trials in particular have become more complicated for many reasons, including difficutly recruiting and retaining volunteers, increasingly complex diseases being studied, and more testing against comparator drugs.[i]
As the complexity of the process has increased, so have the costs. On average today, companies spend an estimated $1.2 billion to $1.3 billion on R&D for each biologic (large molecule) and traditional small molecule drug approved. This represents an increase of $500 million since 2000. These figures include the cost of failures and capital.[ii]
As an investment, pharmaceutical R&D involves substantial risks. First, the nature of scientific research and the translation of new knowledge into a successful new product are inherently uncertain. Then, the rigors of the FDA approval process add to the risk: the Congressional Budget Office reports that "relatively few drugs survive the clinical trial process."[iii]
Once a medication is approved, the commercial success rate of pharmaceuticals is low. In fact, just two in 10 medicines ever produce revenues that match or exceed average R&D costs.[iv] Further, recent research from the Tufts Center for the Study of Drug Development show that the time until new medicines have competitors within their class has decreased from 10.2 years in the 1970s to 2.5 years in 2000 through 2003.[v]
Nevertheless, biopharmaceutical companies remain committed to the discovery and development of new treatments, as demonstrated by their disproportionately large R&D investment, even in the face of recession. In 2008, the investment totaled $65.2 billion.[vi]
"The pharmaceutical industry is one of the most research-intensive industries in the United States. Pharmaceutical firms invest as much as five times more in research and development, relative to their sales, than the average U.S. manufacturing firm."
- Congressional Budget Office[iii]
[i] J. A. DiMasi, “Measuring Trends in the Development of New Drugs: Time, Costs, Risks and Returns,” presentation to the SLA Pharmaceutical & Health Technology Division Spring Meeting (Boston, MA), 2007; Tufts Center for the Study of Drug Development, “Growing Protocol Design Complexity Stresses Investigators, Volunteers,” Impact Report 10, no. 1 (January/February 2008).
[ii] J. A. DiMasi, and H. G. Grabowski, “The Cost of Biopharmaceutical R&D: Is Biotech Different?” Managerial and Decision Economics 28 (2007): 469-479.
[iii] Congressional Budget Office, "Research and Development in the Pharmaceutical Industry", (Washington, DC: CBO, October 2006).
[iv] J. Vernon, J. Golec, and J. A. DiMasi, “Drug Development Costs When Financial Risk Is Measured Using the Fama-French Three-Factor Model,” Health Economics Letters (2009).
[v] Tufts Center for the Study of Drug Development, "Marketing Exclusivity for First-in-Class Drugs Has Shortened to 2.5 Years," Tufts CSDD Impact Report 2, no. 5 (2009).
[vi]Burrill & Company, analysis for PhRMA, 2009. Includes PhRMA research associates and nonmembers; Pharmaceutical Research and Manufacturers of America, PhRMA Annual Member Survey (Washington, DC: PhRMA, 2009).
