Content uploaded by Christopher Adams
Author content
All content in this area was uploaded by Christopher Adams on Jun 16, 2015
Content may be subject to copyright.
Content uploaded by Christopher Adams
Author content
All content in this area was uploaded by Christopher Adams on Jun 16, 2015
Content may be subject to copyright.
HEALTH ECONOMICS
Health Econ. (2009)
Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/hec.1454
SPENDING ON NEW DRUG DEVELOPMENT
1
CHRISTOPHER PAUL ADAMS
a,
and VAN VU BRANTNER
b
a
Bureau of Economics, Federal Trade Commission, Washington, DC, USA
b
Global Consumer & Small Business Banking, Bank of America, Charlotte, NC, USA
SUMMARY
This paper replicates DiMasi et al.(J.Health Econ. 2003; 22: 151–185; Drug Inf.J. 2004; 38: 211–223) estimates of
expenditure on new drug development using publicly available data. The paper estimates that average expenditure
on drugs in human clinical trials is around $27m per year, with $17m per year on drugs in Phase I, $34m on drugs in
Phase II and $27m per year on drugs in Phase III of the human clinical trials. The paper’s estimated expenditure on
new drug development is somewhat greater than suggested by the survey results presented in DiMasi et al.
(J. Health Econ. 2003; 22: 151–185; Drug Inf. J. 2004; 38: 211–223). The paper combines a 12-year panel of research
and development expenditure for 183 publicly traded firms in the pharmaceutical industry with panel of drugs in
human clinical trials for each firm over the same period. The paper estimates drug expenditure by estimating the
relationship between research and development expenditure and the number of drugs in development for 1682
company/years (183 firms multiplied by the number of years for which we have financial and drug development
information). The paper also estimates expenditure on drugs in various therapeutic categories. Copyright r2009
John Wiley & Sons, Ltd.
Received 14 May 2007; Revised 24 November 2008; Accepted 5 January 2009
KEY WORDS: pharmaceuticals; drug development
1. INTRODUCTION
DiMasi et al. (2003, 2004) estimate the cost of new drug development for all drugs and for drugs in
certain therapeutic categories, respectively. The authors estimate the average cost of new drug
development to be $802m per new drug. This number has become a central part of the policy debates on
numerous issues regarding the pharmaceutical industry including the Medicare Prescription Drug Act,
drug importation, generic entry and vaccine development. Drug companies argue the high cost of drug
development justifies the high prices paid by governments, insurers and customers. Given the
importance of the $802m number to the debate it is important to know whether it is correct and what it
means.
DiMasi et al. (2003) calculate the cost of new drug development with data from two sources. The
authors survey 10 large pharmaceutical firms and ask those firms to report the expenditure in human
clinical trials for 68 drugs chosen at random from the Tuft’s drug development database called the
CSDD. The authors then use information on average success rates and successful durations from the
CSDD data to calculate the cost of bringing a new drug to market. Recently, Light and Warburton
(2005) point out numerous problems with DiMasi et al. (2003). In particular, because ‘cost data used
1
The authors are not aware of any potential conflicts that may bias their work. As far as the authors are aware, the study raises no
ethical issues.
*Correspondence to: Bureau of Economics, Federal Trade Commission, 601 New Jersey Avenue NW, Washington, DC 20580,
USA. E-mail: cadams@ftc.gov
Copyright r2009 John Wiley & Sons, Ltd.
was proprietary and confidential, readers cannot know how each company collected its data, or what
was counted as research costs, and no independent verification of the accuracy of the information is
possible’ (p. 1031). This paper provides an independent verification of the survey cost data by using an
alternative publicly available data source on research and development expenditure. Adams and
Brantner (2006) verify the second part of DiMasi et al. (2003) paper by using publicly available data to
estimate success rates and average successful durations.
By comparing aggregate annual expenditure on research and development across firms and over time
to the number of drugs in human clinical trials for each firm and each year, we can determine the
‘marginal expenditure’ on an additional drug in development. If Drug Firm A spends an additional
$50m in 1992 relative to 1991 but in 1992 Drug Firm A has two additional drugs in development we
argue this provides an estimate of average annual expenditure by Drug Firm A, i.e. $25m per drug per
year. Similarly, if Drug Firm B spends $100m more than Drug Firm A in 1992 but Drug Firm B has an
additional four drugs in development in 1992, then we estimate drug expenditure to be $25m per drug
per year. Note that this is an estimate of the correlation between expenditure and the number of drugs in
development. We are not attempting to estimate the impact of an additional dollar of expenditure on
the number of drugs in development or the impact of additional drug on the amount of expenditure.
There are a number of advantages to this approach. First, we are using publicly available data so
our results can be verified by other researchers. Second, we are using data from 183 publicly traded
firms rather than 10 firms selected by the study’s authors. Our selection criteria is that the firms
have research and development expenditure information in the CompuStat data base, be in the
pharmaceutical industry (see Danzon et al., 2004) and have drugs in the Pharmaprojects data set
(see Adams and Brantner, 2006). These firms range in size from 100 employees to almost 180 000
employees with sales ranging from $2m annually to almost $45b annually. Third, we are using
contemporaneous reports of research and development expenditure where the reports are scrutinized by
both the market and the SEC. In their comment on DiMasi et al. (2003), Light and Warburton (2005)
argue that
considering the clear interest of pharmaceutical companies in higher (rather than lower) estimates of
drug development costs, and sampled firms’ likely awareness of the intended use of the survey data, it
is not unlikely that companies would deliberately and systematically overstate costs in their survey
responses (p. 1031).
We argue that such biases are less likely here given the large number of firms and the checks on the
reports including audits.
Of course there are also serious concerns about the approach we use here. First, the data are
aggregate research and development expenditure. Those not only include expenditure on drugs in
human clinical trials but also include development expenditure on drugs yet to reach trials. To identify
the amount spent in human clinical trials we must infer the information from cross sectional and time-
series variation in expenditure that is associated with variation in the number of drugs in development.
Such variation may lead to spurious estimates. For example, if one firm specializes in anti-infective
drugs and we compare the specialty firm’s expenditure on anti-infective drugs to that of a firm that has
just one or two anti-infective drugs, we may estimate that expenditure on the extra drug as being small.
This low estimate may be due savings from specialization rather than an accurate measure of the cost of
adding another anti-infective drug.
Second, we are estimating changes for the ‘marginal drug’, which may be more expensive than the
average drug.
2
The relationship between expenditure on the marginal drug and expenditure on the
average drug depends on what assumption the reader is willing to make regarding how expenditure per
2
Thanks to Eric Durbin for pointing this out.
C. P. ADAMS AND V. V. BRANTNER
Copyright r2009 John Wiley & Sons, Ltd. Health Econ. (2009)
DOI: 10.1002/hec
drug changes with the number of drugs. If expenditure per drug is constant then the marginal and the
average are the same. On the other hand, if expenditure per drug is increasing with the number of drugs
in development then marginal expenditure will be higher than average expenditure. A number of papers
suggest that there may be economies of scale or scope in drug development (Cockburn and Henderson,
1996, 2001; Danzon et al., 2004). If there are economies of scale then we would expect marginal
expenditure to be less than average expenditure.
3
Note that marginal expenditure may be a more useful
measure for determining the incentive effects of policy changes.
Third, we use Pharmaprojects’ definition of a ‘drug development project’ and assign the drug to the
‘originator’. In general, this definition corresponds to a new patented molecular entity. In the main
part of the analysis we drop drugs that are new formulations of existing drugs (i.e. an extended
release version of an existing drug). The analysis does not account for the fact that the drug
development project is part of a joint venture (and thus expenditure is spread across multiple firms) or is
being developed by an altogether different firm (and our method is assigning the drug project to the
wrong firm).
4
Such mis-measurement may bias our estimates downward. It should be noted that our
counts of drugs in the different phases are measuring the development associated with the originating
firm.
In order to have a number that is comparable to DiMasi et al.’s (2003) average expenditure over the
sample period, we control for differences between firms and differences over time. We attempt to
control for some cross-sectional variation by conditioning on net sales. If for example, larger firms
spend more on drug development projects than smaller firms then net sales should control for this
variation. Similarly, if firms are spending more on drug development projects at the end of the period
than at the beginning then our controls for time will provide a better sense of the average expenditure
per project during the period. Note that identification of spending per drugs is coming to some extent
from the fact that larger firms have more drugs and that there are more drugs over time in the database.
The controls attempt to separately identify the effect of having another drug in human clinical trials
from the effect of being large or later in time.
DiMasi et al. (2003) uses a similar approach to verify their own estimates. The authors use firm level
R&D expenditure reported by PhRMA and estimate lagged expenditure on firm level counts of
approved drugs. The authors estimate average expenditure per approved drug to be between $354m and
$558m. These numbers are similar to their estimate of $403m using the survey data. Other researchers
have simply divided aggregate R&D expenditure by the total number of approvals per year. The
concern with these approaches is that less than one in four drugs in human clinical trials actually make it
to the market and the process can take between 6 and 12 years with substantial variation across drugs
(Adams and Brantner, 2003).
The rest of the paper proceeds as follows. Section 2 discusses the data used in this study and provides
some background information on new drug development. Section 3 presents the results. Section 4
concludes.
2. DATA AND BACKGROUND
This paper combines data from two data sources. Information on each firm’s research and development
expenditure comes from the Standard Poor’s CompuStat Industrial file and Global Vantage Industrial
Commercial file used by Danzon et al. (2004).
5
This data set provides financial information on publicly
traded drug companies including net sales, employment and expenditure on research and development.
3
To the extent one is concerned that large firms may have lower (or higher) expenditure per drug than smaller firms, some of this
variation is accounted for in the analysis through conditioning on sales revenue.
4
Danzon et al. (2005) analyze joint ventures.
5
All monetary values are in 1999 dollars using the domestic manufacturing Producer Price Index.
SPENDING ON NEW DRUG DEVELOPMENT
Copyright r2009 John Wiley & Sons, Ltd. Health Econ. (2009)
DOI: 10.1002/hec
Information on drugs in development comes from a Pharmaprojects data set used by Adams and
Brantner (2006) and Abrantes-Metz et al. (2005). This data set uses public information to track drugs
through the development process, providing information on the length of time in different phase as well
as when and if drugs completed a development phase. The two data sets overlap for the years
1989–2001. The data sets are matched using the name of the pharmaceutical firm.
6
Pharmaprojects
updates its information on the firms developing each drug after a merger, so we used text searches of the
database and searches of a related data set called the Manufacturing Index to determine the ownership
of drugs over time.
7
According to Danzon et al. (2004) there are 383 firms in their original data. Once we match these
firms to firms in the Pharmaprojects data we are left with 183 firms. It is not clear exactly why there are
firms that do not match. The two data sets do not exactly overlap in time and that may explain some of
it. Another explanation is that the Pharmaprojects does not capture name changes or mergers among
smaller firms (see footnote 7). Table I presents some basic summary statistics for this sample of firm/
year combinations. Table I shows there are an average of four drugs in development for each firm for
each year 1989–2001. Note this measure is not a very good measure of the stock of drugs in development
because we only observe drugs entering one of the stages of human clinical trials after 1989. In the
average firm/year $264m is spent on research and development, $2355m is made in sales and there are
11 000 employees. Note that medians are substantially lower than the means suggesting that the
distributions are all skewed toward zero.
Figures 1–3 present the distribution of the number of drugs in human clinical trials per firm/year, the
amount of R&D expenditure per firm/year, and a scatter plot of the two, respectively. The first two
figures show that the distributions of drugs and expenditures are heavily skewed to zero. The third
figure seems to show a positive correlation between the amount of R&D expenditure per firm per year
and the number of drugs in development per firm per year.
Figure 4 presents a summary of the research and development process for new drugs. The first
stage of drug discovery is commonly called ‘preclinical development’. In this stage pharmaceutical
firms analyze thousands of drugs to determine whether one may have an affect on a disease or
condition. As candidates are discovered these drugs are tested on animals to determine whether the
drug may be safe and effective in human beings. It is estimated that drugs spend over 4 years in
preclinical testing. DiMasi et al. (2003) do not have direct survey information on preclinical expenditure
because pharmaceutical firms do not track preclinical expenditure by particular drug candidates.
Given this and given that the Pharmaprojects data are based on public information and are not very
reliable regarding drugs in preclinical development, we do not estimate expenditure on preclinical
development.
After preclinical development the sponsoring firm applies for an investigation new drug application
(IND) with the FDA in order to test the candidate in humans.
8
There are three steps to human clinical
Table I. Firm/year summary statistics
Variable Obs Mean Median Std. Dev. Max
Number of drugs 2245 4 2 6 45
R&D expenditure ($m) 1682 264 37 551 4678
Net sales ($m) 1701 2355 110 5438 44 611
Employees (’000) 1537 11 1 25 179
6
This matching was done by hand in order for it to be as accurate as possible.
7
This was done for all mergers involving firms in the Forbes’ top 20 of pharmaceutical industry over the period as well as any other
major mergers in the pharmaceutical industry.
8
If the firm wants to eventually market the drug in the US the firm must apply for an IND prior to undertaking human trials. That
said, there are exceptions.
C. P. ADAMS AND V. V. BRANTNER
Copyright r2009 John Wiley & Sons, Ltd. Health Econ. (2009)
DOI: 10.1002/hec
trials. In Phase I, the drug is tested for safety on a small group (e.g. 20) of healthy volunteers. Phase II
tests concentrate on safety but the test is on a larger group of patients with the condition (e.g. 200).
Phase III are the large efficacy trials with upwards of 3,000 patients participating. Once the trials are
completed the results of all three stages are presented to the FDA in the form of a new drug application
(NDA).
Table II presents some basic summary statistics on the drugs owned by the firms in the sample. The
first set of three rows show the mean length in months of successful durations. The second set of three
Figure 1. Drugs in development
Figure 2. Annual R&D expenditure
SPENDING ON NEW DRUG DEVELOPMENT
Copyright r2009 John Wiley & Sons, Ltd. Health Econ. (2009)
DOI: 10.1002/hec
Figure 3. R&D expenditure by drugs in development
Figure 4. CDER chart of the development process
Table II. Summary statistics for drugs
Obs Mean
Duration (months)
Phase I 235 16.58
Phase II 144 30.65
Phase III 130 27.15
Success (frequency)
Phase I 314 0.75
Phase II 302 0.48
Phase III 184 0.71
C. P. ADAMS AND V. V. BRANTNER
Copyright r2009 John Wiley & Sons, Ltd. Health Econ. (2009)
DOI: 10.1002/hec
rows shows the frequency with which drugs successfully complete the phase. The table shows that these
drugs seem to be fairly representative (see Adams and Brantner, 2006; DiMasi et al., 2003). Successful
durations vary by a month or two and success rates vary by a few percentage points of those reported in
Adams and Brantner (2006).
3. RESULTS
3.1. Mean expenditure estimates
Table III presents regression results for the amount of research and development expenditure on the
number of drugs in human clinical trials. There are six regressions reported in the table. First are the
basic regressions on the number of drugs in human clinical trials then on the number of drugs in each of
the three phases of development. These regressions are then repeated adding measures of time and firm
characteristics. All results report robust standard errors clustering on firm name. The number of drugs
is the number of drugs in development for each firm/year combination. Note that ‘new formulations’ of
existing drugs are not included in the count variable.
9
This is done in order to make the estimates closer
to DiMasi et al. (2003) estimate for new molecular entities.
10
The variable time is simply the number of
years from 1988. The variable ‘sales’ is the amount of net sales for each firm/year. The time and sales
variables allow the analysis to capture changes in expenditure over the time period and across firms,
where ‘sales’ is probably best thought of a measure of firm size.
Table III shows that average expenditure per drug in human clinical trials is between $74m and $27m
per year.
11
Once we include controls for time and firm characteristics, the results suggest that the
average expenditure on drugs across all three phases of development is approximately $27m per year.
This estimate is quite precise and is statistically different from zero at traditional levels. If sales are not
accounted for then Phase I expenditure is estimated to be $81m per year, $68m for drugs in Phase II and
$77m for drugs in Phase III. Once time and sales are accounted for, these estimates fall to $16m, $34m
and $27m respectively.
12
The Phase II and III expenditures are estimated precisely and are statistically
different from zero. The Phase I estimate is less precisely estimated and 0 lies within the traditional
confidence interval.
How do these results compare to the estimates of expenditure in DiMasi et al. (2003)? We estimate
the average annual expenditure on drugs in all three phases of human clinical trials is $27m. If we take
DiMasi et al. (2003) estimates of expenditure for each phase of $15m, $24m and $86m for Phases I, II
and III, respectively, and weight them proportionally to the time spent in development and the
probability of being in each of the phases then we have the appropriate comparison.
13
This
transformation gives an estimate of annual expenditure of $21m.
14
Our estimate is higher than this
transformed estimate from DiMasi et al. (2003) although $21m lies within the 95% confidence
interval.
15
To compare the expenditure by phase it is necessary to do another transformation. The
numbers presented in DiMasi et al. (2003) are for the average drug over the length of the phase, while
9
A new formulation may, for example, be an extended release version of an existing approved drug.
10
Thanks to an anonymous referee for this suggestion. The estimates of expenditure per drug including formulations are lower
than the estimates presented here. The last section suggests that this occurs because expenditure on new formulations is
substantially lower than for other drugs.
11
Most of the decrease seems to come from including the sales variable.
12
Note that these results are most properly thought of as correlations between the number of drugs and the amount of expenditure.
There has been no effort made to account for endogeniety in the joint decisions to increase expenditure and take more drugs into
clinical trials.
13
From DiMasi et al. (2003) the average durations are 12, 26 and 34 months, respectively.
14
The average expenditure is (12*1510.71*26*2410.31*34*86)/(12126134) 5(18014431906)/72 521.
15
$21m does not lie within the 90% confidence interval. Although, this does not account for sampling error with the original
DiMasi et al. (2003) estimate.
SPENDING ON NEW DRUG DEVELOPMENT
Copyright r2009 John Wiley & Sons, Ltd. Health Econ. (2009)
DOI: 10.1002/hec
we have estimated expenditure for 1 year. If we use the phase durations presented in Table II we can
estimate expenditure for the whole phase. This procedure gives 1.3817m 5$24m for Phase I, which is
more than DiMasi et al. (2003) estimate of $15m for Phase I. For Phase II the same method produces an
estimate of $86m, which is much higher than the DiMasi et al. (2003) estimate of $24m. Finally, for
Phase III this method gives an estimate of $61m, which is less than the DiMasi et al. (2003) estimate of
$86m. For Phases I and III, the DiMasi et al. (2003) estimates lie within the 95% confidence interval
around our estimates. However, there is no overlap between the confidence interval around the DiMasi
et al. (2003) estimate of Phase II expenditure and the confidence interval around our estimate.
It is not clear what explains such a large discrepancy between our estimate of Phase II expenditure
and DiMasi et al. (2003) estimate. One possibility and a more general concern is that our method may
be misallocating expenditure to drugs in different stages of development. This may occur for two
reasons. First, we assume that if a drug moves into a new phase in a particular year then the drug has
been in that phase for the whole year. Still, given the expected difference in Phases II and III expenditure
this assumption is more likely to lead to an underestimate of Phase III expenditure than an overestimate
of Phase II expenditure. Second, the relationship between financial years and the years assigned in the
data. Again, this may reduce the accuracy of the estimates but it is unlikely to bias the estimates.
Another possibility is that there is under reporting of drugs in human clinical trials particularly in the
earlier phases.
16
As other work has shown, expenditure on research and development is increasing at a substantial
rate. In fact, here we have it increasing at a parabolic rate although this is due to the particular
functional form that is used in the estimation. The results also show that there is a strong relationship
between sales and research and development expenditure with every $1 in sales associated with an extra
$0.07 in R&D expenditure. Note also, adding sales to the regression substantially improves the model’s
ability to explain the data. The constant in this estimation cannot really be interpreted as we do not have
a measure of the stock of drugs in development as of 1989. We are only able to observe new
development starts in 1989 and later.
The baseline regression measures the average expenditure on new drugs by firm and year. It does not
account for whether that average may be driven up by the large increase in R&D expenditure observed
Table III. R&D expenses OLS (robust standard errors)
12345 6
All phases 74.31
74.86
26.85
(5.87) (5.91) (3.44)
Phase I 80.72
78.05
16.78
(18.61) (18.61) (10.35)
Phase II 68.01
69.07
33.59
(12.72) (12.67) (6.80)
Phase III 76.94
80.08
26.78
(23.90) (24.07) (11.08)
Time 62.34
62.27
23.75
25.31
(10.88) (13.08) (5.91) (6.76)
Time
2
4.32
4.31
2.09
2.19
(0.83) (0.97) (0.46) (0.53)
Sales 0.07
0.07
(0.01) (0.01)
Constant 22.64 21.49 147.19
147.97
19.87 23.16
(20.88) (21.00) (31.04) (36.18) (17.20) (17.69)
Observations 1682 1682 1682 1682 1682 1682
R
2
0.59 0.59 0.60 0.60 0.89 0.89
Standard errors are clustered on firm names.
Is statisically different from 0 at 1% level and
is at 5% level.
16
It is not clear exactly how such under reporting would bias the results and in what direction.
C. P. ADAMS AND V. V. BRANTNER
Copyright r2009 John Wiley & Sons, Ltd. Health Econ. (2009)
DOI: 10.1002/hec
during the period or by large expenditures by the larger pharmaceutical firms. Latter regressions add a
parabolic time trend and a parameter (‘sales’) to capture variation across firms. The time trend estimates
capture the large increase in expenditure that occurred during the period. The sales coefficient suggests
that large firms, at least large firm/years, are associated with large expenditures per drug.
17
This
variation across firms is also captured to some extent via the quantile regression analysis presented in
the next section.
18
This analysis suggests larger firms spend more on clinical trials.
Note that the measured positive relationship between sales and expenditure may not be causal.
Larger pharmaceutical firms may have different R&D strategies than smaller firms. For example, Big
Pharma may run substantially more trials over different treatments, comparison groups, and
populations compared with smaller firms. Such trials may put the firm in a better position to sell the
drug internationally and in multiple domestic markets for different indications. Note also that these
numbers do not measure expenditure by smaller non-publicly traded firms such as those funded by
venture capital firms.
3.2. Quartile expenditure estimates
Table IV presents results from the 25, 50 and 75% quartile regressions. Comparing these results to the
results from columns 5 and 6 in Table III we see that expenditure per drug per year is substantially less
at the lower quartiles. At the bottom quartile, expenditure per new drug in development is around $9m
per year, with $15m at the median and $18m at the top quartile. All these numbers are estimated fairly
precisely. These numbers compare to $27m per year for the mean. Similarly, estimated expenditures per
phase of development are substantially lower at the 25, 50 and 75% quartiles relative to the mean. The
results suggest that the distribution of expenditure on drug development is quite skewed. These results
suggest that a number of firms spend very large sums on drug development.
As before, we can transform our median estimates to compare with the median estimates presented in
DiMasi et al. (2003). This procedure gives 1.3814.60 5$20m for Phase I, which is more than DiMasi
et al. (2003) estimate of $14m for Phase I. For Phase II the same method produces an estimate of $36m,
which is much higher than the DiMasi et al. (2003) estimate of $17m. Finally, for Phase III this method
gives an estimate of $30m, which is much less than the DiMasi et al. (2003) estimate of $62m.
3.3. Implications for cost estimates
If we use the mean estimates for expenditure on drugs in development in place of the survey estimates
used by DiMasi et al. (2003) we can recalculate the over all ‘cost of drug development’ or more
accurately the net revenue needed to make investment in drug development profitable. Doing this
calculation using the same durations and success rates as reported in Adams and Brantner (2006) we
estimate new drug development cost to be $1214m, which is much higher than the original estimate of
$802m or even the Adams and Brantner (2006) estimate of $867m. These high estimates may be due to
measurement of expenditure on the marginal drug rather than the average drug.
19
However, such an
estimate may be more useful to policy makers as it is more likely to measure the impact of changes in
17
The baseline analysis is measured at the firm/year level. This means that we are measuring the expenditure of the average firm/
year on a drug rather than the expenditure on the average drug. If the average firm/year is large then our measure may be high
because large firms happen to spend more on drugs. By adding a coefficient for firm size the measure can be adjusted to account
for the variation in expenditure across firms. Note however, that if the average drug is developed in a large firm then these results
may need to be adjusted either by adding back in the sales coefficient multiplied by the sales of the firm, which produces the
average drug or by looking at the quartile estimates in the next section.
18
Note that the coefficient estimate on sales is larger for the 75% quartile compared with the 50% quartile and the 25% quartile.
That is, for drugs with larger expenditures there is a stronger relationship between the size of the firm and the size of the
expenditures.
19
Note also that these estimates are based on the very high Phase II expenditure estimates.
SPENDING ON NEW DRUG DEVELOPMENT
Copyright r2009 John Wiley & Sons, Ltd. Health Econ. (2009)
DOI: 10.1002/hec
policy on the development of new drugs. We could interpret these estimates as stating a firm would need
expected net revenue of over $1 billion to develop one more drug for the market.
20
3.4. Expenditure by therapy
DiMasi et al. (2004) presents estimates of drug development costs for a small number of major
therapies. In attempt to replicate this work, Table V presents results similar to those presented in
Table III but where the drug counts are by major therapeutic category. Table V presents the marginal
cost of a drug by major therapy grouping. This number is estimated by counting the number of drugs in
human clinical trials for each of the major categories presented.
21
Note, that we would not expect these
numbers to be negative.
22
The table shows cardiovascular, dermatological, genitourinary, anticancer
and neurological drugs all have more expenditure per drug in human clinical trials than the average
drug. Note, however, only genitourinary drugs are estimated to be statistically different from the
average at traditional levels. New formulations of existing drugs have substantially smaller expenditure
in human clinical trials than the average drug. In fact, expenditure on new formulation is not estimated
to be statistically different from zero, but is statistically different from the average. The reader may be
surprised that biotech drugs are estimated to have less than average expenditure (although the estimate
is not statistically different from the average). This may be due to imprecise measurement, or it may be
due to the way these drugs are categorized in the data. That is, more important biological drugs may be
categorized under their indication (anticancer or musculoskeletal) rather than as a product of the
biotech industry.
Some of these results can be compared with the results presented in DiMasi et al. (2004). It should be
noted, however, that in both this paper and the DiMasi et al. (2004) paper the sample sizes for
individual therapeutic categories can be quite small. There are three categories in which both papers
Table IV. R&D expenses quantiles (standard errors)
25% 25% 50% 50% 75% 75%
All phases 8.88
14.60
18.68
(0.12) (0.19) (0.15)
Phase I 7.65
18.35
18.31
(0.42) (0.55) (0.44)
Phase II 10.73
13.98
22.59
(0.36) (0.46) (0.39)
Phase III 7.84
13.05
15.45
(0.44) (0.58) (0.50)
Time 2.48
2.56
3.58
3.52
4.46
4.09
(0.69) (0.80) (1.01) (1.00) (0.80) (0.85)
Time
2
0.19
0.19
0.29
0.29
0.39
0.36
(0.05) (0.05) (0.07) (0.07) (0.05) (0.06)
Sales 0.07
0.07
0.08
0.08
0.10
0.10
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Constant 2.15 2.16 6.82
6.54
14.85
13.81
(2.27) (2.61) (3.31) (3.26) (2.52) (2.69)
Observations 1682 1682 1682 1682 1682 1682
Pseudo R
2
0.60 0.60 0.70 0.70 0.80 0.80
Standard errors are in parenthesis.
Refers to statistical significance from 0 at the 1% level,
at the 5% level.
20
Thanks to Mark Duggan for his thoughts about the differences between marginal and average drugs.
21
Note that we only include the larger therapeutic categories as smaller categories do not have enough drugs in human clinical
trials for reliable estimates. Thanks to an anonymous referee for this suggestion. We have also estimated expenditure by therapy
for each phase, but we do not include these results because of concern about the reliability of the estimates given the small
number of drugs in each phase for each therapy.
22
Therefore, the observed negative coefficients suggest that the model may be misspecified, although none of the negative
coefficients are statistically significantly different from zero.
C. P. ADAMS AND V. V. BRANTNER
Copyright r2009 John Wiley & Sons, Ltd. Health Econ. (2009)
DOI: 10.1002/hec
report results – cardiovascular, anti-infective and neurological/CNS.
23
For these three categories the
expenditure estimates for drugs in any of the three phases of human clinical trials are $36m, $27m and
$33m, respectively, where the estimate for cardiovascular drugs and neurological drugs are statistically
significantly different from 0 at the 95% level and the estimate for anti-infective drugs is not. To
compare these numbers to the numbers in DiMasi et al. (2004) we can make the same transformation as
above to get estimates of $17m, $33m and $17m respectively.
24
While the magnitudes of the estimates do
not differ that greatly, particularly for anti-infectives, the DiMasi et al. (2004) estimates are also located
within the traditional confidence intervals of the estimates presented in Table V.
These results support the argument in Adams and Brantner (2006) that there is substantial variation
in drug development costs by therapeutic category. On average annual expenditure by drug is $27m.
However, for genitourinary drugs like Viagra, the expenditure number is four times higher. It is also
higher for dermatological and cancer drugs. In contrast annual expenditure on new formulations of
existing drugs is only a couple of million of dollars. Do therapeutic categories with high annual
expenditures have high success rates and short durations to compensate? Not necessarily. Results
presented in Adams and Brantner (2006) suggest genitourinary drugs do have very high success rates
and relatively short durations. This means that their overall drug development costs may not be too
different from ‘the average drug’. However, cancer drugs have relatively low success rates and long
durations making them much more expensive than the average drug (Adams and Brantner, 2006).
4. CONCLUSION
Recent criticism of the study by DiMasi et al. (2003) argues it is not possible to verify the results because
the data are confidential. Further, Light and Warburton (2005) argue the sample of expenditure
estimates may not be representative and may be biased upwards. This paper attempts to replicate
DiMasi et al. (2003) expenditure estimates using publicly available data. By matching information on
Table V. R&D expenses OLS by therapy for all phases
123
Coefficient Robust SE Coefficient Robust SE Coefficient Robust SE
Cardiovascular 137.65
26.28 141.48
26.05 35.85
17.75
Dermatological 254.60
106.99 261.49
104.54 99.71
48.86
Formulations 3.69 8.96 6.28 8.42 4.01 3.45
Genitourinary 58.96 50.14 52.98 48.27 108.04
41.06
Anti-infective 129.96
35.87 130.07
35.50 26.56 14.83
Anticancer 56.17
27.82 52.25
26.50 43.14
15.78
Neurological 136.01
29.25 139.13
29.33 33.32
16.03
Biotechnology 26.89 15.03 26.48 14.88 24.40
6.75
Miscellaneous 10.14 16.79 9.31 16.24 2.81 5.08
Time 63.53
11.06 22.89
6.20
Time
2
4.60
0.84 1.96
0.49
Sales 0.07
0.01
Constant 7.54 22.91 168.53
34.66 25.67 17.71
Observations 1682 1682 1682
R
2
0.65 0.66 0.90
Standard errors are clustered on firm names.
Refers to statistical significance at the 1% level and
refers to the 5% level.
23
The last category may not overlap as the definition of CNS drugs in DiMasi et al. (2004) may not be the same as the definition of
neurological drugs used in Pharmaprojects.
24
The formula is the same as the one presented in footnote 14 where the expenditure estimates and the probabilities are from
DiMasi et al. (2004) and the proportion of time in each phase is as for the original formula. Note that DiMasi et al. (2004) do not
present duration by phase for individual therapeutic categories.
SPENDING ON NEW DRUG DEVELOPMENT
Copyright r2009 John Wiley & Sons, Ltd. Health Econ. (2009)
DOI: 10.1002/hec
drugs in development with research and development expenditure over the period 1989–2001 and across
some 180 firms, we infer the additional annual expenditure on each new drug in development. Our
results suggest expenditure on Phases I and II is higher than suggested by DiMasi et al. (2003) while
expenditure on Phase III is lower. If we combine our estimates in this paper with estimates on success
rates and durations from Adams and Brantner (2006) we find that the ‘cost of drug development’ (or the
net revenue needed to make investment in new drugs profitable) is over $1 billion and higher than the
DiMasi et al. (2003) estimate of $802m. As we are estimating expenditure on the additional drug we may
be estimating the revenue needed to invest in the marginal rather than the average drug. While this may
make our estimate higher, it may also make our estimate more useful when considering the
consequences of policy changes such as price regulation. This paper also confirms results presented in
Adams and Brantner (2006) that there is a substantial amount of variation in expenditure by therapeutic
category.
REFERENCES
Abrantes-Metz R, Adams C, Metz A. 2005. Pharmaceutical development phases: a duration analysis. Journal
Pharmaceutical Finance, Economics and Policy 14(4): 19–42.
Adams C, Brantner V. 2003. New drug development: estimating entry from human clinical trials. FTC Working
Paper 262, July 7, 2003.
Adams C, Brantner V. 2006. Estimating the cost of new drug development: is it really $802m? Health Affairs
March/April: 420–428.
Cockburn I, Henderson R. 1996. Scale, scope, and spillovers: determinants of research productivity in the
pharmaceutical industry. RAND Journal of Economics 27(1): 32–59.
Cockburn I, Henderson R. 2001. Scale and scope in drug development: unpacking the advantages of size in the
pharmaceutical research. Journal of Health Economics 20(6): 1033–1057.
Danzon P, Epstein A, Nicholson S. 2004. Mergers and Acquisitions in the Pharmaceutical and Biotech Industries,
The Wharton School, University of Pennsylvania, November.
Danzon P, Nicholson S, Sousa Pereira N. 2005. Productivity in biotech-pharmaceutical R&D: the role of experience
and alliances. Journal of Health Economics. 24(2): 317–339.
DiMasi J, Hansen R, Grabowski H. 2003. The price of innovation: new estimates of drug development costs.
Journal of Health Economics 22: 151–185.
DiMasi J, Hansen R, Grabowski H. 2004. R&D costs and returns by therapeutic category. Drug Information
Journal 38: 211–223.
Light D, Warburton R. 2005. Extraordinary claims require extraordinary evidence. Journal of Health Economics 24:
1030–1033.
C. P. ADAMS AND V. V. BRANTNER
Copyright r2009 John Wiley & Sons, Ltd. Health Econ. (2009)
DOI: 10.1002/hec
