Public sector replacement of privately funded pharmaceutical R&D: cost and efficiency considerations

Economic studies have found that public support of basic medical research provides important long-term benefits. In response to suggestions that private pharmaceutical research and development (R&D) funding could be totally replaced by public funding, we investigate the economic implications of such a substitution in funding roles that maintain the recent pace of pharmaceutical innovation.

Total lifecycle R&D costs were estimated using the latest available R&D expenditures per novel molecule entering clinical trials, likelihood of approval, pre-clinical and post-approval expenditures, using a published survey and a review of publicly available financial accounts from US-listed multinational developers. This estimate was then stratified by the average number of annual FDA approvals to estimate total costs of R&D funding born by the private sector.

We find total lifecycle R&D costs were US$2.83 billion per approved medicine. Estimated uncapitalized costs to replace private R&D funding for one year of FDA approvals were $139.6 billion. These additional costs are equivalent to 302% of the entire National Institute for Health 2022 budget of $46.2 billion, and around 25 times NIH's estimated annual $5.6 billion currently dedicated to clinical research trials for pharmaceuticals. Further assessing the policy proposition through a literature review, we found little evidence for improvements in economic efficiency via public funding substitution, while there may be additional challenges including asymmetric information, adverse selection, yardstick competition, hold-up, under-rewarding of incremental innovation and political rent-seeking.

Our calculations may undervalue full replacement costs, by excluding non-R&D expenses for manufacturing, distribution, or financing.

The bulk of investment in R&D is underwritten by the private sector. Political discourse portraying the NIH as the central force in bringing a new drug to market may underappreciate the pivotal role of private at-risk capital. Replacing such investment while maintaining the current innovation output in terms of approved therapies would necessitate substantial increases in taxpayer financing.