The Office of Health Economics has released a comprehensive study of the cost of R&D for new medicines. It reviews research published over the last three decades, which shows an increase in costs from $199 million per new medicine in the 1970s to $1.9 billion in the 2000s. An OHE costs analysis based on new data for 1998-2002 agrees with comparable analyses for the same time period.

The study identifies four major factors that are producing higher R&D costs. First, out-of-pocket expenses have increased, up nearly 600% from the 1970s to the 2000s. Second, success rates for clinical development are falling as tougher therapeutic areas are tackled—e.g. neurology (Alzheimer's), autoimmune diseases (arthritis) and oncology. Success rates have declined from one in five in the 1980s to about one in ten in the 2000s. Third, R&D times have been affected by both more extensive regulation and more complex science. The time required to research a new drug and gain approval grew from six years in the 1970s to 13.5 years in the 2000s. Fourth, the cost of capital has risen from 8% in the 1970s to 11% in the 2000s. It costs more to provide an acceptable return to investors that compensates for the high risks of investing in R&D for new drugs.

In the face of these challenges, companies are continuing to emphasize changes intended to improve the efficiency of R&D, addressing those factors within their control. This includes, for example, making decisions far earlier in R&D about the market prospects of a drug candidate and more tightly managing clinical trial costs, often by outsourcing some aspects and/or siting trials in lower-cost locations.

The promise of the new, gene-based sciences is tremendous. Rapidly evolving R&D technology, however, requires a wide range of expertise and data. In response, new collaborations are arising that involve a range of public and private entities, sharing both risks and rewards. Incentives for continued innovation, however, still depend on the willingness of payers to reimburse for new treatments.

“Just as new approaches to R&D are crucial to the future,” said Dr. Mestre-Ferrandiz, “so are new approaches to facilitating market entry and use. These are essential both to encouraging R&D and ensuring that patients have the earliest access possible to life-changing therapies.”

Cost estimates are a key aspect of the international debate about the reasonableness of pharmaceutical prices and the magnitude of the long-term investments involved.