MYTH: A typical new drug costs US$500 million
9 October 2001
The typical new drug, brought successfully to market, costs approximately US$500 million for research and development. This often quoted figure is based on a paper written by J.A. DiMasi and published in 1991.4 The DiMasi paper put the cost of developing a new drug at US$231 million. Subsequent studies used a higher opportunity cost of capital and changed other parameters, and the figure became $312 – $359 million.5 Adjusted to 2000 dollars the amount turns into $473 million. And this figure is quite simply rounded up to arrive at $500 million. Yet the original study has several limitations, and the subsequent estimates based on the study inherit these flaws. The initial calculation was based on several assumptions that can be disputed. Assumptions were made for the cost of pre-clinical studies. Assumptions were also made about the length of the R&D process, the opportunity cost of capital (in other words, potential revenue if the capital were invested elsewhere) and success rates.6 Additionally, the study puts the opportunity cost of capital (not actual spending) at half of total R&D costs, but it doesn't take into account tax deductions or government grants awarded to a company for R&D expenses. Aside from relying on assumptions, the initial study wasn't representative of the 'average' drug, nor was it designed to be. The original study focused on drugs that were researched and developed exclusively by multinational pharmaceutical companies. Yet development of many drugs depends on major public involvement in both basic research and clinical trials.7 Calculating an average cost for R&D has limited usefulness, in any case, because costs may differ greatly between drugs for chronic diseases and drugs for acute infections, or between innovative drugs and me-too drugs. Recent independent estimates on drug development costs vary. The group Public Citizen (using DiMasi's original study as a base) computes the cash outlay for new drugs at $110 million, excluding opportunity cost but taking into account inflation and tax deduction;8 the Global Alliance for TB Drug Development (GATB) puts the cost of a new tuberculosis drug at around $40 million (excluding the cost of failure) using a chemical entity already identified. When the cost of failure is included, GATB estimates the cost at $76 – $115 million.9 One final drawback to the original DiMasi study, and a limitation for these subsequent efforts to put a price tag on drug development, is the data: it came from confidential industry sources in the 1980s and has not been available to other researchers. To gain a better sense of what it would cost to develop a drug, access to actual data is essential.