Typical cost of developing new pharmaceuticals is skewed by high-cost outliers

(Press-News.org) The typical cost of developing new medications may not be as high as generally believed, with a few ultra-costly medications skewing public discussions about the cost of pharmaceutical research and development, according to a new RAND study. 

Using a novel method to assess spending on research and development for 38 drugs that were recently approved by the U.S. Food and Drug Administration, researchers found that the mean, or average, cost of developing a new drug was much higher than the mid-point (median) cost of development. 

Researchers estimated a median direct research and development cost of $150 million compared to a mean of $369 million. 

Costs were higher after adjusting for earnings drug developers could have made if they had invested these amounts in other activities and for drugs that never made it to the market. With these adjustments, researchers estimated a median research and development cost of $708 million across the 38 drugs examined, with the average cost rising to $1.3 billion driven by a small number of high-cost outliers. 

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

“Our work suggests that it may not be as costly to develop the typical new drug as has been previously estimated,” said Andrew Mulcahy, the study’s lead author and a senior policy researcher at RAND, a nonprofit research organization. “Reliable research and development cost estimates are essential to assessing the appropriateness of incentives such as patent regulatory exclusivity and other rules that assure that drug developers can achieve fair returns on their investments.”

Remarkable developments in medicine, including breakthroughs such as COVID-19 treatments and cures for hepatitis C, have resulted from investments in drug research and development. These successes have played out through a vigorous debate on the extent to which U.S. drug price regulation might decrease investments in new drugs. 

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

RAND researchers estimated spending on new drug research and development by examining annual public disclosures about such spending that companies report to the U.S. Securities and Exchange Commission. The analysis included information about more than 200 publicly traded companies during 2014-2019.

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

To better account for variation in clinical research intensity and the full scope of delivering new drugs to market, the study calculated costs per patient-month using 6-year, company-wide R&D cost and activity data from all of the drug developers examined. 

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

Researchers say their findings that the average cost of developing a new drug is skewed by a few ultra-costly medications suggests that the median cost of bringing drugs to market probably is a better tool to use during policy discussions about high drug costs in the U.S.

“The novel approach we used provides us with greater confidence that we are capturing more of the spending that goes into research and development as compared to previous studies of this nature,” 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.

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