Unbiased Analysis of Today's Healthcare Issues

Cost to bring drug to market: $802m

Written By: Jason Shafrin - Apr• 29•06

According to the PhRMA (Pharmaceutical Research and Manufacturers of America) U.S. drug companies spent $39.4 billion on research and development in 2005. Much of this money goes towards the clinical trials necessary for FDA approval. But how much does it cost to bring a drug to market?

In order to bring a drug to market, a firm must go through a variety of phases for FDA approval. There are pre-clinical trials on animals. Next, in phase I, a small number of healthy volunteers are tested in order to establish safe doses and to gather information on the compound. In phase II, 100-300 individuals with the disease are selected in order to determine safety and efficacy. Phase III repeats phase II, but instead uses a sample of 1000 to 3000 individuals and examines the long run health effects of the drug as well.

DiMasi, Hansen and Grabowski (2003) estimate the cost of bringing a drug from phase I to market. Their data come from the Tufts Center for the Study of Drug Development (CSDD). The firms included in their survey represent 42% of all pharmaceutical R&D expenditures in the U.S. The authors found that the time from the start of clinical testing to marketing approval was approximately 90.3 months. This figure is in addition to any development time which occurs before phase I clinical trials. The authors take into account the cost of money used to finance the R&D using a 9% real cost of capital estimate. The final estimate is that it costs–including the expense of failed drugs–$802 million to take a drug from phase I trials to approval. Over 50% of this figure is the cost of capital needed to finance the R&D over such a long period.

Some observers would say that reducing FDA restrictions would reduce the price of drugs consumers face. I do not believe this to be the case. After the R&D is spent, firms price their drug to maximize profits subject to consumer demand. Reducing R&D costs will reduce the sunk costs, but not the marginal costs for pharmaceutical producers. What reducing FDA restrictions will do is increase a firm’s incentive to invest in drug development, because the revenue threshold to make an adequate return on capital will be reduced with a lower cost of gaining approval.

DiMasi, Hansen, Grabowski (2003) “The price of innovation: new estimates of drug development costs,” Journal of Health Economics; Vol 22, pp. 151-185.

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11 Comments

  1. [...] Pharmaceutical companies spent hundreds of millions of dollars in order to gain FDA approval for their products. A biologist at the FDA headquarters makes between $38 and $86 thousand.  The diffeence between these two sums is emormous; thus, it would not be surprising if the FDA was ripe with corruption. [...]

  2. [...] Costs are now up around a billion dollars or more and you’ve just tacked on several more years. Healthcare Economist · Cost to bring drug to market: $802m Now only about 1/5 of all drugs that make it to phase I clinical trials are ever going to get [...]

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  4. [...]  It’s a tough process as it takes, on average, 90 months (that’s 7 years!) and $802 million to get a drug to market (that includes the cost of all the failed [...]

  5. [...] to this article it takes on average 90.3 months and $802 million (2005) to get a drug through FDA approval, so [...]

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  7. [...] 2: What is in the pipeline?:  It takes 10+ years to bring a new drug to market and costs 800+ million – if a drug is not already in Phase 2 or 3 for your specific Rare Disease, it’s unlikely that [...]

  8. [...] time and cost for a new drug to be approved in the United States is about 800 million dollars and over seven years. That’s the sort of cash you have to have to jump through all the hoops that the FDA [...]

  9. [...] April 29, 2006 in Academic Articles, Medical Studies | 8 comments [...]

  10. [...] it takes an estimated $800 million over a 7.5 year time span to produce a new drug these days, I don’t have much of a problem handing over a few bucks if [...]

  11. [...] more drugs that can help individuals with other diseases.  This will help drug makers cover the $800 million it costs to develop a [...]