Cost of drug development

One study assessed both capitalized and out-of-pocket costs as about US$1.8 billion and $870 million, respectively.

In an analysis of the drug development costs for 98 companies over a decade, the average cost per drug developed and approved by a single-drug company was $350 million. But for companies that approved between eight and 13 drugs over 10 years, the cost per drug went as high as $5.5 billion.

A new study in 2020 estimated that the median cost of getting a new drug into the market was $985 million, and the average cost was $1.3 billion, which was much lower compared to previous studies, which have placed the average cost of drug development as $2.8 billion.

Alternatives to conventional drug development have the objective for universities, governments and pharmaceutical industry to collaborate and optimize resources.

Research and development

Severin Schwan, the CEO of the Swiss company Roche, reported that Roche's research and development costs amounted to $12.3 billion in 2018, a quarter of the entire National Institutes of Health budget. Given the profit-driven nature of pharmaceutical companies and their research and development expenses, companies use their research and development expenses as a starting point to determine appropriate yet profitable prices.

Pharmaceutical companies spend a large amount on research and development before a drug is released to the market and costs can be further divided into three major fields: the discovery into the drug’s specific medical field, clinical trials, and failed drugs.

Discovery

Drug discovery is the area of research and development that amounts to the most time and money. The process can involve scientists to determine the germs, viruses, and bacteria that cause a specific disease or illness. The time frame can range from 3–20 years and costs can range between several billion to tens of billions of dollars. Research teams attempt to break down disease components to find abnormal events/processes taking place in the body. Only then do scientists work on developing chemical compounds to treat these abnormalities with the aid of computer models.

After "discovery" and a creation of a chemical compound, pharmaceutical companies move forward with the Investigational New Drug (IND) Application from the FDA. After the investigation into the drug and given approval, pharmaceutical companies can move into pre-clinical trials and clinical trials.

Trials

Drug development and pre-clinical trials focus on non-human subjects and work on animals such as rats. This is the most inexpensive phase of testing.

The Food and Drug Administration mandates a 3 phase clinical trial testing that tests for side effects and the effectiveness of the drug with a single phase clinical trial costing upwards of $100 million.

After a drug has passed through all three phases, the pharmaceutical company can move forward with a New Drug Application from the FDA. In 2014, the FDA charged between $1 million to $2 million for an NDA.

Failed drugs

The processes of "discovery" and clinical trials amounts to approximately 12 years from research lab to the patient, in which about 10% of all drugs that start pre-clinical trials ever make it to actual human testing.> Each pharmaceutical company (which have hundreds of drugs moving in and out of these phases) will never recuperate the costs of "failed drugs". Thus, profits made from one drug need to cover the costs of previous "failed drugs".

Financial risk

Overall, research and development expenses relating to developing drugs amount to billions of dollars. A 2012 study found that research and development of a drug is riskier than product development in other industries because it is lengthy, costly, and highly uncertain, particularly due to unpredictable human physiological responses to drugs. As an example, in 2018, Roche spent $11 billion for research and developmental expenses, and had two failed Phase III trials for an Alzheimer's drug candidate.