The Fifteen Years It Takes To Develop a Drug Doubles Its Capital Cost

Pharmaceutical research and development budgets range from one billion to five billion dollars. However, those figures significantly underestimate the real costs, because they ignore the time-value of money. It takes fifteen years to develop a new drug, according to Wayne Winegarden of the Pacific Research Institute:

The R&D budget is spent over time, therefore, the time value of money must be taken into account. Due to the time value of money, $366.7 million spent in the 15th year of the R&D program does not have the same value as the $366.7 million spent in the first year of the R&D program. The easiest way to see this is to imagine one investor who is funding the entire R&D program. That investor needs $366.7 million to fund the first year’s research efforts. That initial first year investment will not see any earnings until the innovative drug has been approved for use – in this case after 15 years. Alternatively, the investor could have put the funds that were used in the first year in an interest earning asset and earn income on the money.

The lost potential earnings continue to compound throughout the entire 15 year R&D process.

The estimated capital costs of the $5.5 billion R&D budget at the end of the R&D process is $11.1 billion, the estimated capital costs of the $2.0 billion R&D budget at the end of the R&D process is $4.0 billion, and the estimated capital costs of the $500 million R&D budget at the end of the R&D process is $1.0 billion.

Comments (6)

Trackback URL | Comments RSS Feed

  1. Thomas says:

    It is staggering the costs that drug companies incur trying to get particular meds off the ground and into the market. However, this is what it takes as more complicated diseases require more innovative drugs.

    • Matthew says:

      Just imagine the costs when a pharmaceutical company develops a high cost specialty drug.

  2. Walter Q. says:

    This long development process also leaves little time for the company to make back its costs because the patent on the drug once it hits the market is a window of only a few years.

  3. Devon Herrick says:

    The current system and costs more money than is necessary to ensure safe drugs. In the age of so-called, Big Data, patients who volunteered could begin to participate in clinical trials and use the drugs through State II and Stage III. The data from their use could be aggregated into a database and used to ultimately win FDA approval.

  4. SPM says:

    The longer the FDA takes to approve drugs the more costs the Pharma company has to incur, and the more expensive the drugs are once they are sold to the public. Having a more timely and more efficient approval process by the FDA would be a step in the right direction for lowering drug costs, but that would require less bureaucracy…good luck getting this administration behind such a concept.

  5. Bob Hertz says:

    I may be mixing apples and oranges here, but doesn’t Microsoft spend billions of dollars on designing a new version of Windows, and then sells the new version for $198?

    I am sure that many corporations bring products to market that are ‘duds’. I suppose that in non-medical fields they can cut their losses sooner.

    Also, there are millions even billions of people who could buy Windows, whereas there might be only 150,000 people who would ever buy a specialty drug for a rare disease.