It is commonly known that research and development (R&D) of new medicines is very expensive, but there is much controversy with regard to how expensive it actually is. In this study, we provide detailed and up-to-date insight into R&D costs of medicines using a novel, top-down model built on a single definition of pharmaceutical R&D costs and its principal drivers.
Our model shows that the average R&D costs per new molecular entity (NME1) are 2.5 bln USD in 20172 (Figure 1). These costs are composed of out-of-pocket success costs (7%), out-of- pocket failure costs (40%) and costs of capital (53%). We also conclude that R&D costs differ substantially between different therapeutic areas: the average development costs of a medicine for an orphan disease could be as low as 0.5 bln USD, while the costs of a medicine for an oncological disorder could be as high as 6.5 bln USD.
The insights of this study can help substantiate discussions on R&D costs with facts. Furthermore, they may help pharmaceutical companies, academic researchers and policymakers in their quest to increase the efficacy of R&D expenditure. While there is no low- hanging fruit, conceptually, this might be achieved in the following ways:
- Reducing the costs of capital. Given that it is the largest contributor to R&D costs, it makes sense to explore options for reducing these costs. We see three avenues to do so:
- Reducing the time from preclinical phase to market: by allowing earlier access to market
- Reducing the amount of funds that are capitalized: by regulating the sale of intellectual
property through publicly funded institutions
- Reducing the rates of return on capital: by using public finances