Developing a new medicine is an expensive undertaking. An analysis published in the Journal of Health Economics in March 2016 found that the average cost of developing a drug is $2.558 billion USD. The analysis from the Tufts Center for the Study of Drug Development is based on an average out-of-pocket cost of $1.395 billion USD, plus the inclusion of what economists call “time costs,” described by Joseph A. DiMasi, director of economic analysis at Tufts, as “expected returns that investors forego while a drug is in development.”
Critics have complained that DiMasi’s estimates are too high, and that including lost revenue as drug development costs -- at a whopping $1.163 billion USD -- distorts the facts, and validates high prices for medicine.
Leaving time costs out of the equation:
- If you take the actual cost of $1.395 billion USD and add a post-approval cost estimate of $312 million USD (for research to evaluate dose strength and other factors), you get $1.707 billion USD for each new drug -- without time costs.
- A simpler calculation, with a similar result: Take the average cost of manufacturers’ R&D and divide it by the number of new drugs. The answer: $1.756 billion USD per drug.
- The Tufts analysis was based on information provided by 10 pharmaceutical companies on 106 drugs tested by humans from 1995 to 2007.