The High Cost of Making Pharmaceuticals

The process of developing a drug is incredibly expensive and costs have skyrocketed over the past few decades. According to the Pharmaceutical Research and Manufacturers of America (PhRMA), the cost for developing a single new drug, including money spent on researching unsuccessful drugs which don’t pass FDA screening, was $1.2 billion in the early 2000s, up from about $140 million during the 1970s. Estimates released in August 2013 by Forbes indicate that the price of developing a single drug is about $5 billion per medicine accepted by the FDA.

A large reason for these high costs is the incredibly high rate of failure during drug development. About 95 percent of all pharmaceuticals researched for use in humans fail to achieve the effectiveness and safety standards required for FDA approval, according to Forbes estimates. During 2013, the companies represented by PhRMA spent a total of $48.5 billion on research and development activities related to pharmaceutical drugs.

Another reason for the high costs associated with taking a drug to market is the fact that there is a complicated regulatory process. According to the Burrill Report , the rising costs associated with drug development can be explained, at least in part, due to regulatory barriers in place that slow approval and place many hurdles between the drug and the marketplace. “In the 2000s, that time grew to 13.5 years from just 6 years in the 1970s,” the Burrill Report explained.

The National Institutes of Health weighs in, recognizing it does indeed take a lot of time, money and perseverance to take a drug to market. The NIH explains:

The process of testing and approving drugs is broken into four phases: drug discovery, preclinical testing, clinical trials and FDA review.

Due to high attrition rates, mainly during preclinical translation, bringing one new drug to market comes at a high cost in terms of time and resources, and in the human cost to patients and their families. One drug typically involves the investigation of up to 10,000 compounds and takes about 14 years to be approved.

But let’s take a deeper look into what drives the time and money spent by pharmaceutical companies: clinical trials. The funding of clinical trials, of which there are many rounds a drug must pass before meeting FDA approval, are arduous. Almost weekly we hear news that a promising drug has shown great promise in studies with rats or mice, or perhaps even in primates. The scientific reality, however, is that while it is necessary to start with various animal testing there is no way of knowing what will happen in humans until the drug is tested in humans. Of course, if the drug doesn’t seem to work in animal testing it will never get that far, but success at any one stage of testing does not by any stretch of the imagination guarantee success at any other stage, which is probably well understood by most who have taken a basic biology course in high school.


The FDA process places a large focus on clinical trials, but many drug makers spend a lot of time and money before trials ever start on studying a disease or condition to discover therapeutic targets. Once these targets are located, researchers work to discover a “lead compound,” a molecule that affects the targeted protein or other therapeutic target in a way that could benefit patients. At this point, there is still more pre-clinical trial work to be completed in order to file an Investigational New Drug Application (IND) with the FDA.

Notwithstanding this objective reality, some commentators have taken issue with these high cost estimates and the explosive rate at which they’ve grown and have even tried to cast a spurious pall on how companies report their drug development expenditures. However, the truth of the matter is that, whether the money comes from government funding or a private company, or whether money is spent on costs outside of research and development, the pursuit of the next generation of medications requires major investment and funding. Anyone who believes otherwise is simply fooling themselves, or perhaps more likely trying to fool you into believing them.

It is nearly universally accepted (and for a reason) that the process from discovery to market is long and costly. Drugs do not invent themselves and there are significant costs associated with nearly 13 to 14 years awaiting approvals. But even that really doesn’t capture what transpires in reality. Pharmaceutical companies do not just passively wait for approval, they are required to take significant and costly affirmative steps. So the critics can do all the mathematical trickeration they want, they can bemoan tax incentives not being taking into account and further complain about pharmaceutical companies partnering with Universities to discover the next generation of life saving and life prolonging drugs. But if you are going to factor tax incentives into the analysis then you absolutely need to factor in the time-value of money into the equation, as well as the astronomical failure rate, which creates extraordinary risk. Ask any investor about risk and they will tell you that the greater the risk the greater the reward must be to accept that risk. With a near 95% failure rate that means the risk is huge, so there must be a risk premium if we want the drugs we say we want. These things cost money, and lots of it!

It is exceptionally disingenuous to pretend there are not exorbitant, escalating costs associated with coming up with scientifically promising drug candidates and then pursuing the long and arduous path to market required by the FDA. But the most bizarre aspect of this whole story is how critics attempt to villainize pharmaceutical companies, often characterizing them as evil companies that only care about profits. NEWSFLASH: there are easier, safer ways to make money than in an industry with a 95% failure rate! The truth is that pharmaceutical companies that seek to come up with life saving treatments for diseases are not evil. Only those who are truly out of touch could even begin to suggest otherwise.


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Join the Discussion

6 comments so far.

  • [Avatar for Anon]
    October 21, 2014 11:43 am


    Whether or not you think “I truly don’t think that a patent is justified when almost no R&D is invested in the invention.” does not change the fact that patent law is not so tied.

    Innovation is not linear – I have used an analogy in the past that is on point here. The patent system does not pave roads – it paves a parking lot.

    (and to your first point, no, the argument is not a modified “but for” – precisely because the view of “justified money” is NOT a proper SOLE view of the rationale for having a patent system)

  • [Avatar for Cha]
    October 21, 2014 04:48 am


    When you say “Innovation – the fruit of invention – would suffer greatly if this (allow patents in only the “but for” zones) would come to pass.” isn’t that a but for argument as well and hence tentative?

    Also, from an empirical point of view, why do you think that if we will tailor the patent system to different subject matter it will hurt innovation in general. I truly don’t think that a patent is justified when almost no R&D is invested in the invention. People will keep on inventing and innovating in these fields as long as they will get a benefit from their lead time in the market.

  • [Avatar for Anon]
    October 20, 2014 12:01 pm

    Comment stuck in filter – please release.

  • [Avatar for Anon]
    October 20, 2014 12:00 pm


    I take a (small) issue with your post – and not to diminish the “need,” but rather to emphasize the fact that the patent system was never meant to be limited to those arts that would not exist “but for.”

    Without carefully (and consistently) noting that “but for” is only one of many reasons why we have a patent system, special interest groups would be more likely to be able to employ a “divide and conquer” approach to reducing the strength of the patent system.

    Innovation – the fruit of invention – would suffer greatly if this (allow patents in only the “but for” zones) would come to pass.

  • [Avatar for Cha]
    October 20, 2014 07:56 am

    Now, this is an industry that needs patents, Gene!
    It will all but die without them.

  • [Avatar for Simon Elliott]
    Simon Elliott
    October 19, 2014 05:06 pm

    I’d add that even after approval, the drug might be later withdrawn when other side effects are discovered. COX2 inhibitors were one of the hottest Pharma areas until patients showed cardiovascular complications. The sudden withdrawal of Vioxx seemed, to me, to be panicky.

    The debate also forgets that some of the most socially useful drugs, like antibiotics and vaccines, are generally far less profitable than drugs for mental health and erectile dysfunction.

    Finally, I’d add that the long business development cycles in Pharma mean that the effects of bad policy might not emerge for another decade. For example, vaccine researchers were pleased that you could get a good immune response to the acelluar pertussis vaccine without the nasty side effects of the whole cell pertussis. At the same time, there were warnings that the acellular vaccine might not be as effective long term, or in certain populations. But with the low profits of vaccines, who was motivated to make a new vaccine? People also forgot how bad pertussis (whooping cough) can be. In reality the cough is so bad that you break your ribs: it happened to my niece. After several years of large whooping cough outbreaks affecting young healthy people in wealthy nations, there now seems to be motivation. But do we have to wait another 13.5 years?

    I am seriously concerned that the recent policy (and SCOTUS) developments in patent law have increased the uncertainty in Pharma research. This is especially important in vaccine research where the target molecules are, by definition, naturally occurring. But will it take 10-20 years or another outbreak before the policy makers realize this problem?

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