New research reframes the debate over drug development costs

The typical cost of developing new drugs may not be as high as generally believed, with some extremely expensive drugs skewing public debates about the costs of pharmaceutical research and development, according to a new RAND study.

Using a new method to assess research and development costs for 38 drugs recently approved by the US Food and Drug Administration, researchers found that the average or median cost of developing a new drug was much higher than the mean (median ) development cost.

The researchers estimated an average direct research and development cost of $150 million versus an average of $369 million.

The costs were higher after adjusting for profits that drug developers could have made if they had invested those sums in other activities and for drugs that never reached the market. With these adjustments, the researchers estimated an average research and development cost of $708 million for the 38 drugs examined, with the average cost rising to $1.3 billion due to a small number of high-cost outliers.

The average cost of developing a new drug was 26% lower when only two drugs were excluded, falling from $1.3 billion to $950 million. The findings are published in the journal JAMA Network Open.

“Our work shows that it may not be as expensive to develop the typical new drug as previously estimated,” said Andrew Mulcahy, the study’s lead author and a senior policy researcher at RAND, a nonprofit research organization.

Reliable estimates of research and development costs are essential for evaluating the appropriateness of incentives such as regulatory patent exclusivity and other rules that ensure that drug developers can achieve fair returns on their investments.”

Andrew Mulcahy, Senior Policy Researcher, RAND

Remarkable advances in medicine, including innovations such as treatments for COVID-19 and treatments for hepatitis C, have resulted from investments in drug research and development. These successes played out through a heated debate about the extent to which US drug price regulation can reduce investment in new drugs.

The pharmaceutical industry argues that lower prices will have a devastating impact on research and development. In contrast, the Congressional Budget Office has projected that efforts to lower drug prices for Medicare beneficiaries would reduce the number of new drugs by just 1% over 30 years.

RAND researchers estimated spending on research and development of new drugs by examining the annual public disclosures about such spending that companies report to the US Securities and Exchange Commission. The analysis included information on more than 200 listed companies during the period 2014-2019.

The study used Citeline’s Trialtrove database of clinical trials to help examine clinical trial activity for each of the 38 new drugs approved for clinical use by the FDA in 2019.

To better account for variation in clinical research intensity and the full range of new drug launches, the study estimated costs per patient-month using 6 years of company-wide R&D and activity cost data from all drug developers that were examined.

The study found that 20 large companies accounted for 81% of all patient-months and had 27% lower average and median costs per patient-month compared to other drug companies.

The researchers say their findings that the average cost of developing a new drug is skewed by a few extremely expensive drugs suggests that the average cost of bringing drugs to market is probably a better tool to use during policy discussions about high drug costs in USA.

“The new approach we used gives us greater confidence that we are collecting more of the costs earmarked for research and development compared to previous studies of this type,” Mulcahy said.

Support for the study was provided by Arnold Ventures. Other authors of the study are Stephanie Rennane, Daniel Schwam, Reid Dickerson, Lawrence Baker and Kanaka Shetty.

RAND Health Care promotes healthier societies by improving health care systems in the United States and other countries.