Drug development costs when financial risk is measured using the Fama-French three-factor model.
In a widely cited article, DiMasi, Hansen, and Grabowski (2003) estimate the average pre-tax cost of bringing a new molecular entity to market. Their base case estimate, excluding post-marketing studies, was $802 million (in $US 2000). Strikingly, almost half of this cost (or $399 million) is the cost of capital (COC) used to fund clinical development expenses to the point of FDA marketing approval. The authors used an 11% real COC computed using the capital asset pricing model (CAPM). But the CAPM is a single factor risk model, and multi-factor risk models are the current state of the art in finance. Using the Fama-French three factor model we find that the cost of drug development to be higher than the earlier estimate.
Vernon
John A
JA
Department of Health Policy and Management, University of North Carolina at Chapel Hill, Chapel Hill, NC, USA. vernon@email.unc.edu
Golec
Joseph H
JH
Dimasi
Joseph A
JA
D002202:Capital Financing / Q000191:economics*; D003365:Costs and Cost Analysis / Q000379:methods* / Q000706:statistics & numerical data; D017277:Drug Approval / Q000191:economics*; D055808:Drug Discovery / Q000191:economics*; D004341:Drug Evaluation / Q000191:economics*; D004345:Drug Industry / Q000191:economics; D006801:Humans; D017059:Models, Econometric; D012306:Risk; D014481:United States