ECONOMICS AND TRADE | Achieving growth through open markets
23 April 2008
The Cost of Developing a New Drug
New wonder medicines come from years of research, high costs
(The following article is taken from the U.S. Department of State publication, Focus on Intellectual Property Rights.)
The Cost of Developing a New Drug
By Neal Masia
Many of us know a family member or friend who has benefited from a new medicine: Advances in treating cancer, HIV/AIDS, cardiovascular disease, and a broad host of other afflictions have been nearly continuous in recent decades, thanks to – in many instances – new drug discoveries. Economists estimate that almost half of the increase in life expectancy achieved over the past 15 years in the industrialized world can be attributed to new drugs. In the United States alone, the economic gains from medical innovation are estimated at more than $500 billion per year.
Finding new cures is an extremely expensive and risky proposition, however. Estimates about the cost of developing a new drug vary widely, from a low of $800 million to nearly $2 billion per drug. Even the high end of those estimates may soon be considered a bargain. Recently, Pfizer announced that it is investing $800 million just for a set of Phase III trials for a single drug.
Where does all the money go?
In the United States and most other countries with pharmaceutical industries, private industry undertakes or funds virtually all discovery and development of new medicines, often building on basic medical hypotheses developed through university and publicly funded research. Industry scientists searching for a new drug typically must sort through 5,000 to 10,000 new chemical inventions that look promising, in order to identify a pool of 250 compounds that then enter into preclinical laboratory and animal testing. Of those 250 unique compounds, fewer than 10, on average, will show enough potential to qualify for Phase I human testing to establish basic safety.
Phase 1 trials usually include a very small group of healthy volunteers who are tested to determine whether the candidate drug is both safe and effective. A compound or drug candidate that makes it through Phase I then enters small-scale Phase II trials in patients with a specific condition to test whether the compound has the intended effect on the disease. If it shows promise, it graduates to Phase III trials, which are wide-scale tests involving thousands of patients in carefully controlled clinical testing. Some drug candidates undergo several different types of Phase III trials in order to test for different kinds of effects. On average, for every five compounds that make it into human trials (of the original 5,000 to 10,000 studied), U.S. government authorities will grant the pharmaceutical company approval to market just one.
Overall, the discovery and development of a new medicine takes about 12 to 15 years. Patents are granted along the way, and it usually takes at least a few years between the granting of patents and marketing approval. This means that, despite the standard 20-year patent life, the average effective patent life for a new drug – the amount of time where the product is sold under patent protection – is roughly 10 to12 years. In addition to the direct costs of development, firms must pay returns on the capital they invest on behalf of shareholders over the course of a decade or more, a cost that increases as development times increase.
At current levels of reimbursement, economists estimate that only about 30 percent of new medicines actually earn enough revenue during their patented product lifecycle to cover the average upfront cost of development. If a firm incurred the average cost of drug development and only invented "average" drugs, it would quickly go out of business.
The enthusiasm and support among investors for pharmaceutical companies to find new cures depends on the expected returns of a relative handful of products. A society that guarantees strong patent protection helps give investors confidence that their high-risk investments might pay off down the road. Conversely, without confidence that discovery of a new cure can produce a potentially large payout, investors in pharmaceutical firms, as well as pharmaceutical firms looking to expand in other countries, will demand that their funds be returned or invest them elsewhere.
If investors made the decision to pull out today and pharmaceutical research investments stopped, consumers would not necessarily notice the absence of new medicines for a decade or more, given the decade-long drug-development-cycle time. Smaller firms and biotechnology companies would certainly notice, however, since they would have more difficulty raising investment capital if expected returns were lower. Capital-starved companies would soon disappear, along with the promise they hold for new treatments.
Continued investor confidence has enabled large-scale research and development to continue in the pharmaceutical industry, in the United States and in other countries. Pfizer alone is investing over $8 billion this year and employing more than 12,000 scientists in the search for new cures, with significant investments in cardiovascular disease, cancer, HIV/AIDS and other infectious diseases, central nervous system (CNS) afflictions, and a wide range of other chronic and acute diseases. New discoveries in these areas are dependent on both the ingenuity of scientists and the confidence of the investors who fund their investigations.
The support of the international community for strong intellectual property rights regimes is a key ingredient in bolstering that confidence.
[Dr. Neal Masia is director of economic policy at Pfizer, Inc.]
