There’s one factor that, as much as anything else, determines how many medicines are invented, what diseases they treat, and, to an extent, what price patients must pay for them: the cost of inventing and developing a new drug, a cost driven by the uncomfortable fact than 95% of the experimental medicines that are studied in humans fail to be both effective and safe.
A new analysis conducted at Forbes puts grim numbers on these costs. A company hoping to get a single drug to market can expect to have spent $350 million before the medicine is available for sale. In part because so many drugs fail, large pharmaceutical companies that are working on dozens of drug projects at once spend $5 billion per new medicine.
“This is crazy. For sure it’s not sustainable,” says Susan Desmond-Hellmann, the chancellor at UCSF and former head of development at industry legend Genentech, where she led the testing of cancer drugs like Herceptin and Avastin. “Increasingly, while no one knows quite what to do instead, any businessperson would look at this and say, ‘You can’t make a business off this. This is not a good investment.’ I say that knowing that this has been the engine of wonderful things.”
A 2012 article in Nature Reviews Drug Discovery says the number of drugs invented per billion dollars of R&D invested has been cut in half every nine years for half a century. Reversing this merciless trend has caught the attention of the U.S. government. Francis Collins, the director of the National Institutes of Health, in 2011 started a new National Center for Advancing Translational Medicine to remove the roadblocks that keep new drugs from reaching patients.
“One point your numbers tell you is how horrendous the failure rate is and how that causes the cost of success to be so much higher,” says Collins. “We would love to contribute to making that failure rate lower, to identifying those bottlenecks and to trying to reengineer the pipeline so if failures happen, they happen very early and not in later stages where the costs are higher.”
The good news is that a close look at the data we collected provides some hints as to how to improve the industry’s hit rate – and how individual companies, without lowering the overall cost of developing a drug, can at least reduce their own expenses. Some companies – like Bristol-Myers Squibb, Regeneron Pharmaceuticals, and Aegerion – do far better than their peers.
Fighting The Law Of Averages
Where do my estimates come from? Using data from the Innothink Center for Research in Biomedical Innovation, I tabulated the number of brand new drugs launched by 98 publicly traded biotechnology and drug companies over the past decade. Then, using FactSet Systems, I tallied each company’s research and development spending over the ten years preceding their most recent drug approval. Then I divided the second number by the first. (Again, the whole list and methodology is here.)
Sixty-six of the 98 companies studied launched only one drug this decade. The costs borne by these companies can be taken as a rough estimate of what it takes to develop a single drug. The median cost per drug for these singletons was $350 million. But for companies that approve more drugs, the cost per drug goes up – way up – until it hits $5.5 billion for companies that have brought to market between eight and 13 medicines over a decade.
| Number of drugs approved | R&D cost per drug ($MIL) | |
| Median | Mean | |
| 8 to 13 | 5459 | 5998 |
| 4 to 6 | 5151 | 5052 |
| 2 to 3 | 1803 | 2303 |
| 1 | 351 | 953 |
| Sources: Innothink Center For Research In Biomedical Innovation; FactSet Systems. | ||
Why? For every small company that succeeds, there are many more that fail. A big pharmaceutical company carries that weight of failure, with both its successes and its failures on the books.
Why Does Big Pharma Spend So Much?
Some caveats, though: drug companies have tax incentives to count costs in research and development, which could inflate the figure; they also are likely to spend extra money in order to get those medicines approved in other countries. Even more important is the fact that some R&D costs come from monitoring the safety of medicines after they become hits to monitor reports of side effects. “Our safety infrastructure is close to 1,000 people,” says Paul Stoffels, the co-chairman of pharmaceuticals at Johnson & Johnson, which had the most new drugs approved and spent $5.2 billion per drug. “That is a whole biotech company and it is also part of our R&D budgets.”
Also, a small company cannot spend enough to pay for a $1 billion-plus program for a heart drug, as Pfizer, Roche, and J&J have, or for an Alzheimer’s medicine. But if such a drug succeeds, the payoff can be enormous – see Pfizer’s Lipitor, which is now generic but which had annual sales of $11 billion. Bigger drugs can be more expensive to develop.
| 10 Year R&D Spending ($MIL) | R&D Spending Per Drug ($MIL) | |
| Median | Mean | |
| >20,000 | 6348 | 6632 |
| >5,000 | 2883 | 2961 |
| >2,000 | 1917 | 2480 |
| >1,000 | 1459 | 741 |
| Sources: Innothink Center For Research In Biomedical Innovation; FactSet Systems | ||
Size has a cost. The data support the idea that large companies may be spend more per drug than small ones. Companies that spent more than $20 billion in R&D over the decade spent $6.3 billion per new drug, compared to $2.8 billion for those that had budgets of between $5 billion and $10 billion.
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