Saturday, March 15, 2008

Drug development costs

The price of innovation: new estimates of drug development costs by Joseph DiMasi, Ronald Hansen and Henry Grabowski is an excellent introduction into the nitty gritty of estimating costs of R&D in the pharmaceutical industry especially for someone reading about this topic for the first time.
1. I was surprised to learn that some of the firms surveyed were unable to respond because of lack of data. It sounds as though the firms themselves do not have a clear idea as to what R&D development costs are. DiMasi et. al. estimate an average of $403 million (in 2000 dollars) and capitalizing the costs until drug approval doubles the estimate to $802 million (in 2000 dollars).
2. They don't quite answer why drug development costs have increased (7.4% over the inflation rate) so quickly but hints at two possiblities: a) Pharmaceutical companies are focusing more on chronic and degenerative diseases that are more complex and costly to test, and b) firms need to test the cost effectiveness of their drugs not against a placebo but against the current treatment alternatives which can require larger clinical trials.
3. Another possibility that they do not explore is the promised rewards of a blockbuster drug. The rewards can be so large that the pharmaceutical companies do not pay attention to the cost. (This is speculative of course since I'm not familiar with the field.)

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