The Price of Innovation: New Estimates of Drug Development Costs
Journal of Health Economics 22 (2003) 151–185
The price of innovation: new estimates of drug development costs
Joseph A. DiMasi a,∗, Ronald W. Hansen b, Henry G. Grabowski c
a Tufts Center for the Study of Drug Development, Tufts University, 192 South Street, Suite 550, Boston, MA 02111, USA b William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, NY, USA c Department of Economics, Duke University, Durham, NC, USA
Received 17 January 2002; received in revised form 24 May 2002; accepted 28 October 2002
Abstract
The research and development costs of 68 randomly selected new drugs were obtained from a sur-vey of 10 pharmaceutical firms. These data were used to estimate the average pre-tax cost of new drug development. The costs of compounds abandoned during testing were linked to the costs of com-pounds that obtained marketing approval. The estimated average out-of-pocket cost per new drug is US$ 403 million (2000 dollars). Capitalizing out-of-pocket costs to the point of marketing approval at a real discount rate of 11% yields a total pre-approval cost estimate of US$ 802 million (2000 dol-lars). When compared to the results of an earlier study with a similar methodology, total capitalized costs were shown to have increased at an annual rate of 7.4% above general price inflation. © 2003 Elsevier Science B.V. All rights reserved.
JEL classification: L65; O31
Keywords: Innovation; R&D cost; Pharmaceutical industry; Discount rate; Technical success rates
1. Introduction
Innovations in the health sciences have resulted in dramatic changes in the ability to treat disease and improve the quality of life. Expenditures on pharmaceuticals have grown faster than other major components of the health care system since the late 1990s. Consequently, the debates on rising health care costs and the development of new medical technologies have focused increasingly on the pharmaceutical industry, which is both a
The price of innovation: new estimates of drug development costs
Joseph A. DiMasi a,∗, Ronald W. Hansen b, Henry G. Grabowski c
a Tufts Center for the Study of Drug Development, Tufts University, 192 South Street, Suite 550, Boston, MA 02111, USA b William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, NY, USA c Department of Economics, Duke University, Durham, NC, USA
Received 17 January 2002; received in revised form 24 May 2002; accepted 28 October 2002
Abstract
The research and development costs of 68 randomly selected new drugs were obtained from a sur-vey of 10 pharmaceutical firms. These data were used to estimate the average pre-tax cost of new drug development. The costs of compounds abandoned during testing were linked to the costs of com-pounds that obtained marketing approval. The estimated average out-of-pocket cost per new drug is US$ 403 million (2000 dollars). Capitalizing out-of-pocket costs to the point of marketing approval at a real discount rate of 11% yields a total pre-approval cost estimate of US$ 802 million (2000 dol-lars). When compared to the results of an earlier study with a similar methodology, total capitalized costs were shown to have increased at an annual rate of 7.4% above general price inflation. © 2003 Elsevier Science B.V. All rights reserved.
JEL classification: L65; O31
Keywords: Innovation; R&D cost; Pharmaceutical industry; Discount rate; Technical success rates
1. Introduction
Innovations in the health sciences have resulted in dramatic changes in the ability to treat disease and improve the quality of life. Expenditures on pharmaceuticals have grown faster than other major components of the health care system since the late 1990s. Consequently, the debates on rising health care costs and the development of new medical technologies have focused increasingly on the pharmaceutical industry, which is both a