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Comparison of the costs of drug development under different methods of calculation

Author

Listed:
  • Olga Rozanova

    (Gaidar Institute for Economic Policy; HSE University (ICEF))

Abstract

This paper compares two methods for estimating drug development costs: the conventional cost per expected approval and the probabilistic cost to achieve at least one approval with a given confidence level. The paper shows that, for typical success rates and high confidence levels, the probabilistic approach requires 2–4 times more trials—implying that standard average-cost figures can underestimate reliable investment by a similar factor. Extending the model to multiple phases, the analysis demonstrates that while the gap between the two objectives narrows over time, stochastic transitions often leave portfolios underfunded for subsequent phases. Thus, expected-value estimates carry a high risk of failing to meet confidence-based portfolio goals, with direct implications for research funding and policy design.

Suggested Citation

  • Olga Rozanova, 2026. "Comparison of the costs of drug development under different methods of calculation," Economics Bulletin, AccessEcon, vol. 46(1), pages 15-24.
    • Handle: RePEc:ebl:ecbull:eb-24-00490
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    File URL: http://www.accessecon.com/Pubs/EB/2026/Volume46/EB-26-V46-I1-P2.pdf
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    References listed on IDEAS

    as
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    7. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • I1 - Health, Education, and Welfare - - Health

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