Public Sector Replacement of Privately Funded Pharmaceutical R&D: Cost and Efficiency Considerations

OBJECTIVES: Economic research shows that sizable investment in basic medical research provides important societal benefits. In turn, the costs of developing medicines from molecules in pre-clinical research to FDA approvals are currently overwhelmingly borne by industry. However, calls have grown to replace private sector activity with government funding. We developed a model to estimate these replacement costs and to investigate the economic implications of funding changes.

METHODS: Our replacement model calculates the annual private sector R&D costs for all approved drugs during 2018-2022 using publicly available input data from a targeted literature review. In essence, we update estimates for each phase of developing one molecule through to FDA approval, risk adjust for clinical stage failure rates over the same period, then multiply this to account for the level of recent FDA approvals stratified across different innovation categories. Total annual development costs for all approved drugs were compared to the 2022 budget of the US National Institute for Health (NIH).

RESULTS: Average lifecycle R&D costs were $2.83 billion per molecule (not accounting for capitalization). Estimated costs to replace private sector R&D maintaining the same level of FDA approvals were $142.9 billion (basecase). These costs are 309% greater than the total NIH budget, and approximately 25 times the NIH’s dedicated clinical trials budget. Our results are likely conservative, excluding costs for drug manufacturing, medical education, distribution, or financing.

CONCLUSIONS: Relative to the total NIH budget, the estimated replacement cost of private sector drug R&D is substantially larger. We found no empirical evidence for efficiency improvement associated with a shift from private to public funding. Public and private roles are both important and not likely substitutable without some unknown degree of welfare change. Economic literature points to several concerns, including adverse selection, yardstick competition, hold-up, political rent-seeking and under-rewarding of incremental innovation.