In a 2010 study conducted by Eli Lilly and Company, the total cost of drug discovery and development for a single drug was calculated to be about $1.8 billion. The study was based on 2008 data from thirteen large pharmaceutical companies. The cost has increased substantially from $800 million in the late 1990s.
Because of the recent rise of drug development virtual companies, there are a growing number of companies with only one drug candidate in development and none on the market. Virtual companies have no employees except executives, no laboratories, and no manufacturing facilities. They contract out everything from discovery and development through manufacturing. One interesting type of virtual company is formed and funded by patient foundations for so-called orphan diseases, those with less than 200,000 victims.
The cash virtual companies have for drug development may be limited. In any event, a small biotech company, virtual or not, has nowhere near two billion dollars to bring a drug to market. But small biotech companies do bring drugs to market. What is the difference, then, between big pharma and small biotech companies? What is the cost of drug development for these one-drug-candidate biotech companies?
To answer these questions, let’s begin by deconstructing big pharma’s drug discovery and development costs. There are four cost components:
- Preclinical and clinical trials
- Failed drugs
- Cost of capital or time cost of money
The inclusion of research costs for discovery of the drug candidate and of development costs for preclinical and clinical trials are obvious. What may not be so obvious are cost of failed drugs and cost of capital. Since more than eight in nine drugs fail somewhere in clinical trials, the one successful drug must bear the cost of the failed drugs, which can be substantial. Moreover, the pharmaceutical company could have invested the money in financial markets instead of drug discovery and development, so the profit from those alternative potential investments must be accounted for as well. Accounting for this forgone investment profit is called the cost of capital, time cost of money or opportunity cost, and is a legitimate drug discovery and development cost.
The magnitude of discovery and clinical costs up until the drug is launched are summarized in Figure 1.