Key insights

Our model shows that the average R&D costs per new molecular entity (NME) are 2.5 bln USD in 2017 (Figure 1). These costs are composed of out-of-pocket success costs (7%), out-of-pocket failure costs (40%) and costs of capital (53%). We also conclude that R&D costs differ substantially between different therapeutic areas: the average development costs of a medicine for an orphan disease could be as low as 0.5 bln USD, while the costs of a medicine
for an oncological disorder could be as high as 6.5 bln USD.

Implications

The insights of this study can help substantiate discussions on R&D costs with facts. Furthermore, they may help pharmaceutical companies, academic researchers and policymakers in their quest to increase the efficacy of R&D expenditure. While there is no lowhanging fruit, conceptually, this might be achieved in the following ways:

• Reducing the costs of capital. Given that it is the largest contributor to R&D costs, it makes sense to explore options for reducing these costs. We see three avenues to do so:
  - Reducing the time from preclinical phase to market: by allowing earlier access to market
  - Reducing the amount of funds that are capitalized: by regulating the sale of intellectual property through publicly funded institutions
  - Reducing the rates of return on capital: by using public finances
• Reducing development costs of medicines that do not reach the market. Out-of-pocket failure costs form a substantial part of total R&D costs. Therefore, reducing these costs has a considerable impact on R&D costs. We see different opportunities to do so:
  - Increasing efficiency of investment decisions: by reconsidering criteria for investment
  - Loosening approval criteria: by letting the market determine efficacy and value
• Reducing development costs of medicines that reach the market. Out-of-pocket success costs are small and, as a result, the potential impact of actions to reduce these costs is small as well