How the Cost of Pharmaceutical Research Influences Drug Prices

Drug Prices and the Cost of Pharmaceutical Research

Before the cost of pharmaceutical research can be determined, it is necessary to study “how” pharmaceutical research is funded and by “whom.”

In essence, pharmaceutical research is funded primarily by government through tax dollars, private companies and non-profit organizations. (Ref. In effect, everyone pays for pharmaceutical research. What are the reasons R&D influences drug prices in the U.S. more than other countries?

Influence vs. Drug Prices
Clinical trials by pharmaceutical companies are funded by private organizations. Some believe drug prices in the U.S. cost more than other countries because the government allows long periods of exclusivity for “new” drugs.

New drugs are given monopoly rights by the FDA (US Food and Drug Administration) and last for two to eight years. It is easy to see how government influences the cost of drugs by allowing pharmaceutical companies to hold lengthy rights to new drugs. This lengthy delay also grants pharmaceutical companies the ability to influence the generic pharmaceutical industry from introducing generic versions of new drugs. (Ref.

New Technologies and the Cost of Drug Prices
It might be assumed that when new pharmaceutical technologies replace older ones, new research influences drug prices. However, according to studies by B.A. Weisbrod in the Journal of Economic Literature (1991:523–552), “With respect to the NIH, it would be useful to learn more about the way the size and allocation of the scientific research budget are influenced, perhaps quite indirectly, by the health insurance system, through its impact on the eventual market for new technologies of various types” (Ref.

The Cost of Pharmaceutical Research
The Tufts Center for the Study of Drug Development found several interesting facts regarding the cost of pharmaceutical research that directly impacts the cost of drugs. These include:

  • “Average out-of-pocket cost of $1.4 billion and an estimate of $1.2 billion in returns that investors forego on that money during the 10-plus years a drug candidate spend in development.” (Information provided by 10 pharmaceutical companies on 106 randomly selected drugs first tested in humans between 1995 and 2007.
  • $312 million spent on post-approval development
  • $2.9 billion to study new formulas, drug dosage and new testing indications”