Drug Development Costs Explained: Why Is It So Expensive?

A lifesaving vaccine, sealed in a vial, ready to be administered with a syringe for medical protection.

To ensure access and availability of innovative medicines that come at a high price, there is a need to understand the underlying R&D system and associated drug development costs. A recent World Health Organization (WHO) 2022 study examined the current models for pharmaceutical R&D and explored new options to improve access to innovative treatment for all.

The WHO 2022 study estimated that the average cost to develop a new drug ranges from US$43.4 million to US$4.2 billion. Two decades ago, DiMasi et al. (2003) estimated the cost of new drug development at US$802 million. Key contributing factors to drug development costs during that period included significant investment in capital, human resources, and technological expertise. Further, pharmaceutical companies need to adhere to strict regulations on testing and manufacturing standards. In 2015, the Tufts Center for the Study of Drug Development estimated the cost of bringing a new drug from discovery to submission for approval at $2.6 billion. The Tufts estimate was more than double that of the 2003 estimate (both in 2013 dollars).

Developing new drugs that can improve and save lives is a complex and costly endeavor. The high price tags associated with drug development have often raised questions and concerns. In this article, we delve into the factors driving the expensive nature of drug development, exploring the key cost drivers and potential solutions. Understanding these dynamics is crucial for ensuring access to innovative medicines while maintaining sustainable research and development efforts.

Cost Drivers

Simoens and Huys (2021) conducted a landscape review to identify and better understand the drivers of R&D costs of new drugs. The cost drivers identified included discovery and pre-clinical development costs, clinical development costs, the need for capitalization, and costs associated with company characteristics and product profiles. Other cost drivers include the industrial, regulatory, and policy environment, and process development and manufacturing cost contributions to R&D.

1. Attrition

Hammel and Michel (2019) assert that reducing attrition has the most significant potential to contain the rise in drug development costs. They point to the approximately 90% attrition rate after the start of clinical development.

2. Clinical development

The Simoens and Huys (2021) study revealed that clinical development accounts for 50 – 58% of R&D costs per new drug. Determinants of R&D costs include investment size in the different development phases (Phase I, II, and III trials and marketing authorization), duration, and phase success rates.

3. Duration and success rates

The WHO study reviewed published studies and found that development timelines and success rates vary considerably depending on the type of technology and therapeutic indication. For new drugs, Phase I trials ranged from 5 – 34 months, Phase II from 21 – 38 months, and Phase III from 30 – 45 months. Success rates measure the proportion of projects in one phase that successfully passes on to a subsequent phase. The overall success rate for Phase I trials successfully ending in Phase III ranged from 6 – 26% for new drugs. A recent review of RCTs in Phase III underlines the variation in success rates due to therapeutic indications. The average success rate from Phase III to new drug application (NDA) / biologic license application (BLA) for all indications was 60.1% compared to 45% for oncologic indications. The transition rate from NDA/BLA to approval was higher at 85%, indicating the need to improve in the clinical development stages.

4. Capitalization and product

Another cost driver is capitalization, whereby R&D costs are adjusted using a cost of capital rate to reflect the return required for investment. The Simoens and Huys (2021) study found that the cost of capital as a proportion of total costs per new drug ranged from 33 – 51%. The cost of R&D also depends on the company, the product class of the new drug, and how it is developed – in-house or through acquisition.

5. Industrial, regulatory, and policy environment

The industrial, regulatory, and policy environment affects the cost of new drug development. Estimates for drug development may not consider public funding for R&D. Globally, it is estimated that between one to two-thirds of R&D costs are funded by taxation or donations. Cost estimates may also not consider that R&D expenditure is deductible. Another factor that affects costs is government policies, e.g., to support the development of orphan medicines, countries like the US and Japan, and the EU provide incentives, expedited review by health technology assessment (HTA) agencies, and a period of guaranteed market exclusivity.

6. Process development and manufacturing cost contributions to R&D

Using a biopharmaceutical drug development lifecycle cost model, Farid et al. (2020) captured the costs, durations, risks, and interdependencies of clinical, process development, and manufacturing activities. Costs associated with process development and manufacturing per market success were estimated to be 13 – 17% of the R&D budget from pre-clinical trial to approval.

Moving Forward

In precision oncology, biomarker-driven therapies are personalized to patient characteristics. For example, to improve immunotherapy patient outcomes, pre-treatment genomic-based cancer screening is used to help identify patients most likely to respond to treatment. To improve R&D success rates, Pammolli et al. (2020) suggest using biomarkers to identify subgroups of patients.

Another cost-effective approach is to reuse approved drugs for new medical indications. To this end, artificial intelligence (AI) and machine learning approaches have been applied to systematically identify drug repurposing in cancer and other indications, including COVID-19 treatment.

Inefficiencies in traditional clinical trial systems contribute to the cost of drug development. Evidence of the positive impact of using technology in clinical trials is growing. New tech-enabled approaches have been applied to recruitment, obtaining informed consent, capturing remote outcome measures, and delivering interventions. To learn about virtual solutions applied to clinical trials, please access our White Papers Tech-Enabled Remote Monitoring Part 1 and Part 2.

How Vial Helps Reduce Drug Development Costs

Vial is committed to helping drug development and biotech companies reduce the high costs associated with drug development. In addition to their expertise and innovative CRO services, Vial offers fixed-fee pricing as a strategy to optimize cost efficiency throughout the drug development process.

Through a fixed-fee pricing model, Vial aims to foster a transparent and collaborative environment, where sponsors can achieve cost savings without compromising on the quality and integrity of their clinical trials. By partnering with Vial and leveraging our expertise, sponsors can benefit from a predictable and optimized cost structure, allowing them to navigate the financial challenges of drug development more effectively.

Contact a Vial team member today to explore how our fixed-fee pricing model and comprehensive services can help you optimize your drug development process and reduce costs.

For more information on the Vial CRO, visit us here.

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