The Process and Costs of Drug Development

pills cash process costs drug development ftloscience

The total cost of developing a new drug averages $2 billion USD. In addition, the process of taking a synthesized compound to the market as a drug can take years, even decades. With such high risk and no promise of reward, companies and institutions continue to work toward developing new drugs to save and improve lives. We take a look at the process and costs involved in getting a new drug from the lab bench to the pharmacy shelf.

An Introduction to Drugs

What’s often lost on people is how incredible it is that we find any human medicines at all. Every human being is 40 trillion cells, working together. I tell our people, you have to think every medicine we find is a miracle that fits in the palm of your hand. We’ve unlocked, in a sense, a billion years of evolution of the eukaryotic cell and human biology and somehow we found something able to move the needle in this incredibly complex system.

Vasant Narasimhan – CEO, Novartis

What are Drugs?

The U.S. Food and Drug Administration (FDA) recognizes any substance used in the diagnosis, cure, mitigation, treatment or prevention of disease as a drug. Drugs must be able to provide patients with real, tangible benefits against diseases.

This might sound simple, but developing a safe and effective medicine is a difficult and expensive process. Rigorous scientific study and science-based evidence is the foundation of drug development, separating modern medicine from ‘treatments’ such as aromatherapy and alkaline water.

In order to be effective, a drug must interact with a biological target such that it causes a beneficial change (such as binding to a receptor on a cell). Since our body is made up of tiny molecules, it was found that the proper dose of a specific molecule can exert these therapeutic effects.

Such compounds can either arise from nature, through chemical synthesis, or any combination of the two. Contrary to popular belief, a compound made in nature is not ‘better’ or ‘safer’ than one made in a lab. A molecule will behave like a molecule, regardless of origin.

Billions of years of evolution have enabled nature to produce compounds with extremely complex structures, while lab-synthesized compounds are usually much simpler due to the limitations of the techniques available to us today.

Irrespective of their origin, these compounds have undoubtedly improved the standard of living in our species, protecting us from a variety of otherwise deadly diseases. In recent times, research on therapies against Ebola and vaccines against the coronavirus are great examples of the impacts of drug development.

chemical structure of paclitaxel and aspirin
Left: The naturally occurring paclitaxel from the Pacific yew tree is used as a chemotherapy medication for several types of cancer
Right: Aspirin is a synthetic over-the-counter treatment for pain, fever and inflammation

Biologics in Medicine

Although the majority of medicines available today are ‘small molecule’ compounds, other substances such as therapeutic proteins, monoclonal antibodies, immunotherapies, and even whole bacterial cells can fall under the category of ‘biologic‘ drugs.

These biologics present new and novel ways to tackle diseases. Complex treatments such as engineered immune cells that can safely be infused into a patient, so that they can supplement the immune system to fight diseases such as cancer.

Further improvements in screening technologies are enabling the biologics sector to reach new heights, inevitably eclipsing the small molecule market in the near future. Gene therapy and gene engineering sectors are also seeing huge growth, with groundbreaking techniques like CRISPR fueling a year-on-year increase in the number of gene therapy drugs such as Luxturna.

small molecules biologic graph comparison FDA drug approvals
The focus on small molecule drug development is slowly shifting toward peptide-based therapies, or ‘biologics’

How do Drugs Work?

In a drug, the compound that actually provides therapeutic benefit is known as the active ingredient, or active pharmaceutical ingredient (API). A traditional pill, taken orally, usually contains both the API as well as excipients. Excipients are inert components that help to support API release in the body, also making up the bulk of the drug by mass.

The API affects biological targets inside the body, resulting in changes to a particular disease or process. The actual chemical interaction is known as the mechanism of action, which can be complex. Even today, we do not have a complete understanding of many of the drugs on the market.

The effectiveness of a drug is measured by how well it exerts biological changes in the body, these signals are known as biomarkers. Choosing reliable biomarkers is important as they need to reflect the state of a disease in an observable manner.

In an anti-diabetic drug, for example, a good biomarker might be blood glucose levels in the patient. The drug is then only deemed to be effective if it causes blood glucose to drop by a certain amount, relative to a placebo. However, many drugs work through a secondary action, such as controlling insulin levels in the body, which in turn affects blood glucose levels.

Due to the sheer number of similar processes in the body, drugs can also cause indirect and sometimes unrelated effects. A good clinical study will include the actual biological target as the primary biomarker, with indirect and adverse effects forming part of the observations.

Drug Discovery: The Hit Compound

The drug industry harbors a dirty secret. New drugs are small organic molecules and small organic molecules are made by chemists.

Peter Goodfellow, Senior Vice President of Discovery Research at GlaxoSmithKline (Retired)

Rational Drug Design

As the effects of a drug on the body boils down to chemical interactions, the relationship between its structure and physiological effects is key. Structure-activity relationships are used to predict the chemical structure of the substance that is most likely to provide the desired effect, providing a starting point for rational drug design.

In the past, drug discovery was limited by the lack of structure elucidation techniques – many drugs were the result of pure luck. Nowadays, visualization technologies such as X-ray crystallography, atomic force microscopy and mass spectrometry give us a better chance of rational drug design.

After a physiological target is identified, rational drug design begins by screening existing compound libraries for potential drug candidates. With the aid of high-throughput assays and computer programs, thousands of compounds can be screened for safety and activity quickly.

This saves time as previously synthesized substances can be used as starting points, also known as the ‘me-too‘ approach to drug design. The process identifies several lead compounds (also known as ‘hits’) that are moved on to the next stage.

Typically, companies identify and study a large number of hits, as it is a relatively inexpensive process. In vitro assays provide preliminary data, such as how the drug might work inside a human body.

From there, small modifications are made to the chemical structure of an existing compound to fine-tune its activity (lead optimization). One by one, hits are studied, compared, and discarded. The cycle repeats until only a single promising compound remains – the drug candidate.

Costly Chemistry

Before the pharmaceutical company subjects the drug candidate to costly pre-clinical and clinical trials, there is one more step to consider. Developing the drug must be feasible from a chemical synthesis and manufacturing standpoint. Although not a necessity, a good drug candidate can reduce development costs by fulfilling several criteria:

  1. Have a well-defined pharmacophore – the active functional group(s) of the molecule. This can provide evidence for mechanism of action studies, which are key to the regulatory process. Furthermore, defining the pharmacophore enables tweaking of other secondary components to optimize safety and efficacy, essentially ‘future-proofing’ the drug by providing a pathway for subsequent discovery chemistry.
  2. Be safe and feasible during scale-up. The initial route of synthesis uses small-scale techniques in a laboratory. In order for a drug to be viable, it needs to be suitable for large-scale manufacturing. But you wouldn’t want your trusty but deadly reducing agent – lithium aluminum hydride – hanging out in large vats, surely?
  3. Have simple reaction mechanisms. Chemists may be fond of expensive reagents and novel reactions, but from a manufacturing standpoint, the best chemistry is simple chemistry. In addition, highly specialized reagents generally equate to costs in terms of their production. Well-established reactions with high yields and cheap catalysts are preferred.
  4. Adhere to green chemistry principles. Certain good practices have improved the safety and reduced the environmental impact of chemical reactions – both in small benchtop experiments and at larger, industrial scales. These are explicitly stated in the 12 Principles of Green Chemistry.

Drug Development: Clinical Trials

There are two simple but strict requirements for a drug candidate to be marketed as a drug: it has to be safe, and it has to be effective. It is up to pharmaceutical companies and regulatory agencies to ensure that drugs fulfill these criteria, stopping those that do not from entering the market. Clinical trials present the most rigorous way for us to put potential drugs to the test.

Pre-Clinical Trials

Pre-clinical trials are the first step in the process, where qualified drug candidates are put to the test by studying their effects on animals. Lab rats are the model of choice; in addition to their ease of handling and anatomical similarity to humans, they are also relatively inexpensive.

Statistics show that our little rodent friends are test subjects in 95% of medical and pre-clinical studies1. They provide preliminary data on the safety and efficacy of the drug, as well as its mechanism of action and potential side effects.

However, precise data that is applicable to humans is best obtained through the current gold standard of drug research: placebo-controlled, double-blind, human clinical studies. In order to conduct such trials, health and regulatory authorities must approve the ethics and safety of such studies in humans.

In the U.S., companies submit an Investigational New Drug (IND) application, presenting all the existing data on the drug to the Food and Drug Administration (FDA) The FDA will review this before granting approval, after which clinical trials can proceed.

end to end process of drug discovery and development
The costs for each progressive stage increase exponentially. Hence, the pharmaceutical industry adopts a ‘fail fast, fail cheap’ approach to drug development of potential new medicines.

Phase One

Phase I trials can begin once the FDA approves the IND. In these trials, a small group of healthy volunteers (usually 20 to 80) are invited to take very low doses of the drug to assess its metabolism pathways and overall safety. Close monitoring for safety data and undesirable side effects is a must; there have been cases of phase I trials causing unpredictable deaths.

As a rule of thumb, Phase I clinical trials of potentially life-saving drugs such as cancer therapies are almost always performed on actual patients rather than the usual healthy volunteers.

Phase Two

Phase II trials continue with small-scale efficacy and dosing studies on a group of a hundred to a few hundred patients. The main goal of phase II trials is to determine the correct dosage that produces the desired therapeutic effect, with the dosing regimen finalized at this stage. Also collected is data concerning the safety and efficacy of the drug.

Phase Three

Phase III trials involve a large number of patients (usually in the thousands). This allows for the efficacy of the drug to be fully established and compared with similar drugs already on the market. To further ensure the drug’s viability, these studies usually encompass different populations and regions, different dosages, and even in combination with other drugs. Increasing the pool size enables the monitoring of side effects and adverse reactions under a range of different conditions.

Phase Four

But that’s not the end! Long-term studies – known as Phase IV trials – continue even after the drug is approved. This postmarketing surveillance allows longer-term safety and tolerability of the drug to be studied. Consequently, the FDA requires companies to present regular safety updates from these trials.

In the past, phase IV trials have uncovered dangerous side effects in drugs, causing their withdrawal from the market. On the other hand, these studies can also reveal new and novel indications for the treatment of other diseases.

overview drug discovery development process costs
Overview of the process of drug discovery and development, costs (time/money) estimated

From Discovery to Market

Following promising clinical data, the company then submits a New Drug Application (NDA). This dossier will include prior in vitro assays and in vivo animal studies, combined with human clinical trial data. Also submitted is new knowledge from the trials, such as information on drug metabolism and excretion.

Regulatory agencies like the FDA review every bit of information – from manufacturing facility standards to appropriate labeling on the box – before choosing to approve it for sale on the market. On average, only 13.8% of all drugs that enter clinical trials ever make it to an NDA submission2. Of these, only about half of them are approved.

Costs of Bringing a Drug to Market

While drug discovery already sounds long and tedious, let’s take a look at some of the staggering numbers involved3. The table below shows the costs of research and development for an average investigational drug, adjusted to a 2018 dollar value:

Cost of bringing a drug to market – blanketed to cover costs of failed research – based on a final success rate of ~10%.

In conclusion, the costs for a pharmaceutical company to bring a drug to market in 2018 approaches $2 billion and 12 years of development. Despite over $50 billion in yearly R&D spending by the larger pharmaceutical companies alone, the FDA only approves around 30 new chemical entities per year5.

Consequently, this severely impacts the industry and limits the potential for blue-sky discovery research. Uncertain returns on investment mean the pharmaceutical industry prefers to target already established markets.

However, the slow progress in discovering new and novel therapies is clearly not a problem of spending more. On average, the pharmaceutical industry invests more (% relative to sales) in research and development compared to any other manufacturing sector.

Compared to the sustained innovation of the semiconductor, electronics and even transportation industries, it is clear that pharmaceutical companies are somehow lagging behind despite huge R&D expenditure.

R&D expenditure relative to sales manufacturing industries
On average, the pharmaceutical industry spends 6 times more on R&D compared to all manufacturing sectors.

The current FDA approval rate for new drugs hovers at around 40 a year, and – in contrast to overall research expenditure – there doesn’t appear to be an upward trend. Despite advances in our knowledge and cutting-edge technologies, it seems that we still do not have a clear picture of how to design and develop new and effective therapeutics!

Many ‘new’ therapies are simply improved versions of existing drugs, known as the ‘me-too’ approach to drug design. These are usually therapies for ‘Western’ diseases: coronary artery disease, stroke, lung cancers. There will always be a significant part of the population in need of a new cholesterol-lowering drug and more importantly, can afford to pay well for them.

So why not follow in the footsteps of previous successes, such as Lipitor – the world’s all-time best-selling drug? The current model of drug development – considering the costs involved – supports this approach.

The Future of Drug Development

From the early days of penicillin to the recent blockbuster success of novel biologics like Humira, the general public has always had a keen interest in drug discovery and development. Thanks to new classes of drugs such as statins, cardiovascular disease mortality rates have plummeted over the last 50 years8.

Once fatal, antiviral therapies have transformed HIV/AIDS into a now manageable (albeit chronic) disease. And since peaking in the 90s, cancer-related deaths have been on a steep decline as well. It is safe to say that drugs have played a big role in shaping society and humanity.

cardiovascular disease coronary heart disease stroke mortality rates
Mortality rates of cardiovascular diseases, coronary heart diseases and strokes.

New treatments with novel mechanisms continue to have bigger impacts and bigger improvements in our lives, but it is a risky and expensive business for companies. It is clear that the pharmaceutical industry and regulatory agencies must work together to promote drug discovery and development, incentivizing and rewarding those who dare to venture.

The scarcity of such innovation is already a cause for concern, especially in fields such as antibiotics and antifungals. Many pharmaceutical giants have pulled the plug on their antibiotics R&D programs, leaving us vulnerable to future antibiotic-resistant bacterial strains.

Additionally, research into treatments for rare and tropical diseases is often neglected; this has to change. Rare diseases, as well as diseases prevalent in developing countries, affect millions but often do not receive the attention required. The FDA does have incentives in place to promote research into neglected diseases, such as the priority review voucher program.

However, much more needs to be done to entice pharmaceutical companies into drug development outside of ‘Western’ diseases, for which approval almost guarantees healthy returns.


  1. The Essential Need for Animals in Medical Research. (n.d.). Washington DC: Foundation For Biomedical Research.
  2. Wong, C. H., Siah, K. W., & Lo, A. W. (2018). Estimation of clinical trial success rates and related parameters. Biostatistics, 2018.
  3. Mestre-Ferrandiz, J., Sussex, J., & Towse, A. (2012). The R&D cost of a new medicine. Monographs.
  4. Paul, S. M., Mytelka, D. S., Dunwiddie, C. T., Persinger, C. C., Munos, B. H., Lindborg, S. R., & Schacht, A. L. (2010). How to improve R&D productivity: the pharmaceutical industry’s grand challenge. Nature reviews Drug discovery, 9(3), 203.
  5. Adams, C. P., & Brantner, V. V. (2006). Estimating the cost of new drug development: is it really $802 million?. Health Affairs, 25(2), 420-428.
  6. Kola, I., & Landis, J. (2004). Can the pharmaceutical industry reduce attrition rates?. Nature reviews Drug discovery, 3(8), 711.
  7. Dickson, M., & Gagnon, J. P. (2004). Key factors in the rising cost of new drug discovery and development. Nature reviews Drug discovery, 3(5), 417.
  8. Mensah, G. A., Wei, G. S., Sorlie, P. D., Fine, L. J., Rosenberg, Y., Kaufmann, P. G., … & Gordon, D. (2017). Decline in cardiovascular mortality: possible causes and implications. Circulation Research, 120(2), 366-380.

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2 Responses

  1. Sean says:

    Thank you! Out of necessity, there are indeed very tight controls around the development and manufacturing of drug products. $2bn is based on my own research and calculations, the actual cost will of course, vary from drug to drug.

  2. I found it interesting that the FDA reviews every bit of information from manufacturing standards to labeling on the boxes. I’ve been reviewing the process of drug development and was very surprised to learn how much goes into it. I also liked that you mentioned the cost to bring a drug to market can be around $2 billion and around 12 years of development.

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