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The R&D Cost of a New Medicine


  • Mestre-Ferrandiz, J.
  • Sussex, J.
  • Towse, A.


The cost of R&D for a successful new medicine has been an important policy issue at least since the 1960s. Cost estimates matter not just because of intellectual curiosity or for industry understanding of its performance, but because they are a key aspect of the international debate about the reasonableness of pharmaceutical prices and the magnitude of the long-term investments involved. This publication reviews research published over the last three decades, which shows an increase in costs from £125 million ($199 million) per new medicine in the 1970s to £1.2 billion ($1.9 billion) in the 2000s (both in 2011 prices). An OHE costs analysis based on new data for 1998-2002 agrees with comparable analyses for the same time period. The study explores four major factors that are producing higher R&D costs - out-of-pocket expenses, success/failure rates, R&D times and the cost of capital. It also discusses measures companies are taking now to improve efficiency and offers a glimpse into the promise and challenges presented by the new, gene-based sciences.

Suggested Citation

  • Mestre-Ferrandiz, J. & Sussex, J. & Towse, A., 2012. "The R&D Cost of a New Medicine," Monographs, Office of Health Economics, number 000135.
  • Handle: RePEc:ohe:monogr:000135

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    Cited by:

    1. Ferraro, J. & Towse, A. & Mestre-Ferrandiz, J., 2017. "Incentives for New Drugs to Tackle Anti-Microbial Resistance," Briefings 001842, Office of Health Economics.
    2. Jonathan Dando & Maximilian Lebmeier, 2020. "A novel valuation model for medical intervention development based on progressive dynamic changes that integrates Health Technology Assessment outcomes with early-stage innovation and indication-speci," Journal of Innovation and Entrepreneurship, Springer, vol. 9(1), pages 1-28, December.
    3. Anita Rao, 2020. "Strategic Research and Development Investment Decisions in the Pharmaceutical Industry," Marketing Science, INFORMS, vol. 39(3), pages 564-586, May.
    4. Towse, Adrian & Hoyle, Christopher K. & Goodall, Jonathan & Hirsch, Mark & Mestre-Ferrandiz, Jorge & Rex, John H., 2017. "Time for a change in how new antibiotics are reimbursed: Development of an insurance framework for funding new antibiotics based on a policy of risk mitigation," Health Policy, Elsevier, vol. 121(10), pages 1025-1030.
    5. Michael Schlander & Karla Hernandez-Villafuerte & Chih-Yuan Cheng & Jorge Mestre-Ferrandiz & Michael Baumann, 2021. "How Much Does It Cost to Research and Develop a New Drug? A Systematic Review and Assessment," PharmacoEconomics, Springer, vol. 39(11), pages 1243-1269, November.
    6. O'Neill, P. & Mestre-Ferrandiz, J. & Puig-Peiro, R. & Sussex, J., 2013. "Projecting Expenditure on Medicines in the NHS," Research Papers 000115, Office of Health Economics.
    7. Sauré, Philip, 2017. "Time-intensive R&D and unbalanced trade," European Economic Review, Elsevier, vol. 91(C), pages 229-244.
    8. 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 of Labor Economics (IZA).
    9. Billette de Villemeur, Etienne & Versaevel, Bruno, 2019. "One lab, two firms, many possibilities: On R&D outsourcing in the biopharmaceutical industry," Journal of Health Economics, Elsevier, vol. 65(C), pages 260-283.
    10. Barrenho, E & Smith, PC & Miraldo, M, 2013. "The determinants of attrition in drug development: a duration analysis," Working Papers 12204, Imperial College, London, Imperial College Business School.
    11. Mestre-Ferrandiz, J. & Deverka, P. & Pistollato, M. & Rosenberg, E., 2014. "The Current Drug Development Paradigm: Responding to US and European Demands for Evidence of Comparative Effectiveness and Relative Effectiveness," Occasional Papers 000076, Office of Health Economics.
    12. Sanzenbacher, Geoffrey T. & Wettstein, Gal, 2020. "Drug insurance and the strategic behavior of drug manufacturers: Evergreening and generic entry after Medicare Part D," Journal of Health Economics, Elsevier, vol. 72(C).
    13. Juan Carlos Rejon-Parrilla & Jaime Espin & David Epstein, 2022. "How innovation can be defined, evaluated and rewarded in health technology assessment," Health Economics Review, Springer, vol. 12(1), pages 1-11, December.
    14. Rejon-Parrilla, J.C & Hernandez-Villafuerte, K. & Shah, K. & Mestre-Ferrandiz, J. & Garrison, L. & Towse, A., 2014. "The Expanding Value Footprint of Oncology Treatments," Consulting Reports 000050, Office of Health Economics.
    15. Nicol, Dianne & Critchley, Christine & McWhirter, Rebekah & Whitton, Tess, 2016. "Understanding public reactions to commercialization of biobanks and use of biobank resources," Social Science & Medicine, Elsevier, vol. 162(C), pages 79-87.
    16. Dai, Rong & Watal, Jayashree, 2021. "Product patents and access to innovative medicines," Social Science & Medicine, Elsevier, vol. 291(C).
    17. Michael Drummond & Adrian Towse, 2014. "Orphan drugs policies: a suitable case for treatment," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 15(4), pages 335-340, May.
    18. Jörg Mahlich & Arne Bartol & Srirangan Dheban, 2021. "Can adaptive clinical trials help to solve the productivity crisis of the pharmaceutical industry? - a scenario analysis," Health Economics Review, Springer, vol. 11(1), pages 1-10, December.
    19. Gregory G. Lubiani & Albert A. Okunade & Weiwei Chen, 2018. "Income Elasticity Decomposition Models and Determinants of U.S. Pharmaceutical Expenditures," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 46(4), pages 389-403, December.
    20. Watal, Jayashree & Dai, Rong, 2019. "Product patents and access to innovative medicines in a post-trips-era," WTO Staff Working Papers ERSD-2019-05, World Trade Organization (WTO), Economic Research and Statistics Division.
    21. O'Neill, P. & Mestre-Ferrandiz, J. & Puig-Peiro, R. & Sussex, J., 2014. "Projecting Expenditure on Medicines in the NHS: Second Edition," Research Papers 000070, Office of Health Economics.
    22. Gehrke, Birgit & von Haaren-Giebel, Friederike & Carlsson, Sissa & Dreier, Lukas & Häfner, Lukas & Ingwersen, Kai, 2015. "Branchenanalyse Pharmaindustrie: Geschäftsmodelle von Lohnherstellern und deren Auswirkungen auf Beschäftigung und Arbeitsbedingungen," Study / edition der Hans-Böckler-Stiftung, Hans-Böckler-Stiftung, Düsseldorf, volume 127, number 305, December.
    23. Towse, A. & Hernandez-Villafuerte, K. & Shaw, B., 2018. "A Critique of the Paper "The Estimated Costs of Production and Potential Prices for the World Health Organization Essential Medicines List"," Consulting Reports 002015, Office of Health Economics.

    More about this item


    Economics of Industry;

    JEL classification:

    • I1 - Health, Education, and Welfare - - Health


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