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Innovation in the pharmaceutical industry: New estimates of R&D costs

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  • DiMasi, Joseph A.
  • Grabowski, Henry G.
  • Hansen, Ronald W.

Abstract

The research and development costs of 106 randomly selected new drugs were obtained from a survey of 10 pharmaceutical firms. These data were used to estimate the average pre-tax cost of new drug and biologics development. The costs of compounds abandoned during testing were linked to the costs of compounds that obtained marketing approval. The estimated average out-of-pocket cost per approved new compound is $1395 million (2013 dollars). Capitalizing out-of-pocket costs to the point of marketing approval at a real discount rate of 10.5% yields a total pre-approval cost estimate of $2558 million (2013 dollars). When compared to the results of the previous study in this series, total capitalized costs were shown to have increased at an annual rate of 8.5% above general price inflation. Adding an estimate of post-approval R&D costs increases the cost estimate to $2870 million (2013 dollars).

Suggested Citation

  • DiMasi, Joseph A. & Grabowski, Henry G. & Hansen, Ronald W., 2016. "Innovation in the pharmaceutical industry: New estimates of R&D costs," Journal of Health Economics, Elsevier, vol. 47(C), pages 20-33.
  • Handle: RePEc:eee:jhecon:v:47:y:2016:i:c:p:20-33 DOI: 10.1016/j.jhealeco.2016.01.012
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    Cited by:

    1. Kristopher J. Hult, 2017. "Measuring the Potential Health Impact of Personalized Medicine: Evidence from MS Treatments," NBER Chapters,in: Economic Dimensions of Personalized and Precision Medicine National Bureau of Economic Research, Inc.
    2. repec:spr:manint:v:57:y:2017:i:6:d:10.1007_s11575-017-0326-y is not listed on IDEAS
    3. repec:eee:respol:v:46:y:2017:i:7:p:1255-1271 is not listed on IDEAS
    4. Billette de Villemeur, Etienne & Versaevel, Bruno, 2017. "One Lab, Two Firms, Many Possibilities: on R&D outsourcing in the biopharmaceutical industry," MPRA Paper 76903, University Library of Munich, Germany.
    5. repec:gam:jsusta:v:10:y:2018:i:2:p:322-:d:128903 is not listed on IDEAS
    6. Fossett, Sarah J. & Wunnava, Phanindra V., 2017. "Active Ingredients: Exploring the Key Factors Affecting the Rising Cost of Developing New Drugs," IZA Discussion Papers 10817, Institute for the Study of Labor (IZA).
    7. Jobjörnsson, Sebastian & Forster, Martin & Pertile, Paolo & Burman, Carl-Fredrik, 2016. "Late-stage pharmaceutical R&D and pricing policies under two-stage regulation," Journal of Health Economics, Elsevier, vol. 50(C), pages 298-311.

    More about this item

    Keywords

    Innovation; R&D cost; Pharmaceutical industry; Discount rate; Technical success rates;

    JEL classification:

    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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