Drug Development: What Does It Cost, and Who Has The Capital?

By Caitlin Kramer, Research Analyst, LSN

Each phase of drug development offers its own unique challenges. The generation of lead compounds that may advance through the pipeline of FDA approval is a costly process, and new molecular entities that are advanced as leads through the process of FDA approval face abundant chances of failure: the likelihood of a given compound making it from Phase I through to approval is only 11.8%*.

Entrepreneurs and researchers developing drugs outside of big pharma will need to understand the costs facing an asset at every stage, and have a plan for how to efficiently structure their capital raises and outreach.

Figure 1 shows a breakdown of FDA-filing costs, estimated costs for each phase of FDA approval, and the likelihood of advancement between phases. The data portrayed in the figure come from the latest (published Feb 2016) in a series of research papers examining R&D costs in the pharmaceutical industry, authored by researchers at Tufts Center for the Study of Drug Development, the Department of Economics at Duke, and the Simon Business School at the University of Rochester. The data comes from a survey of 10 top multinational pharmaceutical firms which conducted in-house discovery and pre-clinical programs. The R&D costs incurred per approved drug in these settings were calculated to be $430 million, a figure which is likely larger than development costs incurred in academic settings. Once an IND is filed ($550,000), each subsequent phase of approval is more expensive. The estimated likelihood of advancement, or success in the phase, is lower in Phase II than other phases, making a Phase II success an important inflection point from an investment perspective.

Figure 1. Estimated non-capitalized costs for new drug development and advancement between phases of FDA approval.

The LSN Investor database contains data about the phases of development that firms have expressed interest in. A breakdown of this data is shown in Figure 2. Venture capital firms have expressed the most interest in funding pre-clinical and Phase I therapeutic leads. Private equity firms, being more risk averse, express increasing interest in later phase assets. Interestingly, large pharmaceutical and hedge fund firms step in for the riskier Phase II trials while their corporate venture arms are more interested in earlier phases of development. Family offices express similar levels of interest across all phases of development.

Knowing the distribution of capital amongst the different firms can help entrepreneurs plan their raises to bring them through the various phases and hurdles of development.

Distribution of capital amongst investor types at different phases of development

Figure 2. Data retrieved from LSN’s Investor Database on 27 July 2016. Representative of active mandates that are open to investment in the Therapeutics sector.