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The Cost of Drug Development

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Abstract

The Tufts Center for the Study of Drug Development designed the recent study of the costs of new drug research and development to capture only the costs incurred by industry, but typically R&D efforts in the private and public sectors are complements, not substitutes.
The
new england journal
of
medicine
n engl j med 372;20 nejm.org may 14, 2015
1972
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DOI: 10.1056/NEJMc1503146
The Cost of Drug Development
To the Editor: In his Perspective article in this
issue of the Journal, Avorn
1
comments on the
methods and policy implications of our most re-
cent study of the costs of new drug research and
development (R&D).
2
Avorn makes the valid and
important point that not all costs associated with
the discovery and development of new drugs are
borne by the private sector. Our study was de-
signed to capture only the costs incurred by in-
dustry. The full social cost would be the sum of
the private costs and government and nonprofit
funding for research that contributes to the dis-
covery and development of new drugs. The latter
element of social cost would be very difficult to
quantify adequately. Our sample selection crite-
ria do not exclude cases in which companies use
information obtained from research funded by
nonprofits or government to guide their own ac-
tivities. By and large, R&D efforts in the private
and public sectors are complements, not substi-
tutes. The Tufts Center for the Study of Drug De-
velopment recently issued a white paper detailing
the relative R&D contributions of the private and
public sectors for the same set of drugs men-
tioned in Avorn’s article.
3
These scientific and
development histories demonstrate the rich inter-
connectivity of all sectors in the drug-discovery
and drug-development ecosystem.
We would also like to address a few additional
discrete points made by Avorn. First, our meth-
ods are already fully known. We have provided a
methods backgrounder
4
and noted that the meth-
ods are the same as those used in our previous
studies. A full exposition of methods can be
found in our study published in 2003.
5
Second, our definition of “self-originated” is
perhaps broader than what is suggested. It in-
cludes compounds that originated in an acquired
company.
Third, drug failures are key contributors to
development costs. Our estimate of the clinical-
approval success rate of 11.8% (as compared with
21.5% in our previous study) was based on pub-
licly available information (commercial pipeline
databases) for a broad set of companies regard-
ing investigational compounds that met survey-
inclusion criteria (nearly 1500 molecules). It is
consistent with results from other studies.
Finally, pharmaceutical companies are over-
whelmingly equity-financed. If the offering of debt
(corporate bonds) at low rates were a superior
form of financing for them, then company capi-
tal structures would ref lect that. Investors would
not fund the R&D activities of drug companies
at the bond rate levels indicated in Avorn’s article.
The discount rate that we use represents the
funding requirements that were actually experi-
enced, on average, by drug developers during the
period that is analyzed.
Joseph A. DiMasi, Ph.D.
Tufts Center for the Study of Drug Development
Boston, MA
joseph.dimasi@tufts.edu
Henry G. Grabowski, Ph.D.
Duke Universit y
Durham, NC
Ronald W. Hansen, Ph.D.
University of Rochester
Rochester, NY
Disclosure forms provided by the authors are available with
the full text of this letter at NEJM.org.
1. Avorn J. The $2.6 billion pill — methodologic and policy
considerations. N Engl J Med 2015;372:1877-9.
2. DiMasi JA, Grabowski HG, Hansen RW. Innovation in the
pharmaceutical industry: new estimates of R&D costs. Boston:
Tufts Center for the Study of Drug Development, November 18,
2014 (
http://csdd.tufts.edu/news/complete_story/cost_study_press
_event_webcast
).
3. Chakravarthy R, Cotter K, DiMasi JA, Milne C-P, Wendel N.
Public and private sector contributions to the research and devel-
opment of the most transformational drugs of the last 25 years.
Boston: Tufts Center for the Study of Drug Development, January
2015 (http://csdd.tufts.edu/files/uploads/PubPrivPaper2015.pdf ).
4. How the Tufts Center for the Study of Drug Development
pegged the cost of a new drug at $2.6 billion. Boston: Tufts
Center for the Study of Drug Development, November 18, 2014
(http://csdd.tufts.edu/files/uploads/cost_study_backgrounder.pdf ).
5. DiMasi JA, Hansen RW, Grabowski HG. The price of innova-
tion: new estimates of drug development costs. J Health Econ
2003;22:151-85.
DOI: 10.1056/NEJMc1504317
Correspondence Copyright © 2015 Massachusetts Medical Society.
The New England Journal of Medicine
Downloaded from nejm.org at UNIVERSITY OF ROCHESTER on May 14, 2015. For personal use only. No other uses without permission.
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Tufts Center for the Study of Drug Development
  • Boston
Boston: Tufts Center for the Study of Drug Development, January 2015 (http://csdd.tufts.edu/files/uploads/PubPrivPaper2015.pdf).