The opportunity cost of capital: development of new pharmaceuticals.
The opportunity cost of the capital invested in pharmaceutical research and development (R&D) to bring a new drug to market makes up as much as half the total cost. However, the literature on the cost of pharmaceutical R&D is mixed on how, exactly, one should calculate this "hidden" cost. Some authors attempt to adopt models from the field of finance, whereas other prominent authors dismiss this practice as biased, arguing that it artificially inflates the R&D cost to justify higher prices for pharmaceuticals. In this article, we examine the arguments made by both sides of the debate and then explain the cost of capital concept and describe in detail how this value is calculated. Given the significant contribution of the cost of capital to the overall cost of new drug R&D, a clear understanding of the concept is critical for policy makers, investors, and those involved directly in the R&D.
Sanofi Pasteur, Toronto, Ontario, Canada University of Toronto, Ontario, Canada ayman.chit@sanofipasteur.com.
Ayman
A
Chit
Deloitte Touche Tohmatsu Limited, Canada.
Ahmad
A
Chit
University of Toronto, Ontario, Canada Eli Lilly and Company, Canada.
Manny
M
Papadimitropoulos
University of Toronto, Ontario, Canada.
Murray
M
Krahn
University of Toronto, Ontario, Canada.
Jayson
J
Parker
University of Toronto, Ontario, Canada.
Paul
P
Grootendorst
D003132:Commerce / Q000191:economics; D004059:Diffusion of Innovation; D017277:Drug Approval / Q000191:economics*; D004345:Drug Industry / Q000191:economics*; D004465:Economic Competition; D006801:Humans; D012106:Research / Q000191:economics*
cost of capital; development; opportunity cost; pharmaceutical