R&D costs and returns by therapeutic category

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Objectives: This study examines the degree to which therapeutic class accounts for variability in drug development costs. It also scrutinizes how sales levels vary across the associated therapeutic classes for those drugs that have reached the marketplace. Data and Methods: A stratified random sample of 68 investigational drugs that first entered clinical testing anywhere in the world from 1983 to 1994 was selected from the pipelines of 10 pharmaceutical firms. Clinical period cost data were obtained for these compounds by phase. The sample consisted both of drugs that failed in testing and drugs that obtained marketing approval. We grouped the drugs by therapeutic category. Clinical period costs per approved new drug (inclusive of failures) were obtained for the analgesic/anesthetic, antiinfective, cardiovascular, and central nervous system (CNS) therapeutic classes. Worldwide sales profiles for new drugs approved in the United States from 1990 to 1994 over a 20-year product life cycle were computed based on IMS Health sales data. All costs and sales were expressed in year 2000 dollars. Results: Out-of-pocket clinical period cost per approved drug (inclusive of failures) for cardiovascular ($277 million) and CNS ($273 million) drugs was close to the overall average ($282 million). However, antiinfective drug costs were considerably above average ($362 million) and analgesic/anesthetic drug costs were modestly below average ($252 million). The results were qualitatively similar when the development timelines were used to determine capitalized (out-of-pocket plus time) costs. In comparison to the overall average of $466 million, the capitalized cost per approved drug was slightly lower for CNS ($464 million) and for cardiovascular ($460 million) drugs. The capitalized costs were $375 million for analgesic/anesthetic drugs and $492 million for antiinfective drugs. The mean net present values of life cycle sales for new drugs approved in the first half of the 1990s were $2434 million, $1080 million, $2199 million, $3668 million, and $4177 million for all drugs, analgesic/anesthetic drugs, antiinfective drugs, cardiovascular drugs, and CNS drugs, respectively. Conclusions: Development costs vary substantially from drug to drug. A drug's therapeutic class can explain some of that variability. The sales of new drugs by broad therapeutic category did not correlate well with average development costs. However, given the dynamic nature of pharmaceutical markets and changes over time in research and development (R&D) expenditure shares, the results are still consistent with a model of firm behavior that posits that R&D efforts will generally shift toward high net return, and away from low net return, therapeutic areas.








Henry G. Grabowski

Professor Emeritus of Economics

Professor Grabowski specializes in the investigation of economics in the pharmaceutical industry, government regulation of business, and the economics of innovation. His specific interests within these fields include intellectual property and generic competition issues, the effects of government policy actions, and the costs and returns to pharmaceutical R&D. He has over one hundred peer reviewed articles analyzing the economics of pharmaceuticals and also several books and monograph publications. Professor Grabowski has testified several times before Congress on the issues of FDA regulation, health care reform, drug innovation and generic competition and vaccine policies. He has received numerous awards and professional recognition including a special issue of essays published in his honor in 2011 in the International Journal of the Economics of Business. He also has served as an advisor to various government and business organizations, including the National Academy of Sciences, the Institute of Medicine, the Office of Technology Assessment, the Federal Trade Commission, and the General Accounting Office. The US Congress has recognized the significant role that a paper he published with Duke colleagues David Ridley and Jeff Moe had in the passage of legislation that incentivized development of new therapies for neglected diseases through the creation of priority review vouchers.

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