Costs rose commensurately, or even more. A benchmark is provided through Mansfield's study of 17 drug development projects in an American company before the 1962 law took effect (MANSFIELD, 1970, p. 151). He found that on average, 37 per cent of the new chemical entities entered into human tests received an NDA from the FDA. Adding the cost of failed tests to those of successful projects, the average success cost $1.05 million. The research vice president of a large drug company estimated that in 1969, after the new regulations were well understood, clinically testing a successful NDA, again counting the cost of failures, cost approximately $10.5 million (CLYMER, 1970, pp. 125-138). For the 93 projects (mostly of 1970s and early 1980s vintage) whose times and attrition rates are summarized above, DIMASI et al. found the average cost, including clinical test failures, of a successful NDA to have risen further to $48 million (in 1987 dollars). When the costs of pre-clinical research and screening were added in, the average out-of-pocket cost for a successful NDA doubled - i.e., to $96 million10.
10 Cost estimates citing the DIMASI et al. study are typically more than twice this $98 million figure because the authors also account for the opportunity cost of invested funds, capitalizing out-of-pocket outlays to the date of product approval at an interest rate of 9 per cent. Pre-clinical outlays eight or more years before the NDA date escalate considerably with capitalization.
There has been much controversy over the extent to which the 1962 law and the FDA's implementing regulations were responsible for this 46-fold increase in drug testing costs. Plainly, there were other causes, such as inflation. Attempting to pinpoint the role of regulation, Grabowski and colleagues took advantage of a natural experiment (GRABOWSKI, VERNON and THOMAS, 1978, pp. 133-163). The British drug Industry had a research orientation similar to that of the United States, but U.K. regulations moved from reviewing safety to requiring proof of efficacy only in 1971. Between 1960-61 and 1966-70, inflation-adjusted drug development costs in Great Britain rose by a factor of three, while in the United States they increased six-fold. This suggested that more stringent regulation in the United States was responsible for a twofold cost increase, while other influences accounted for a threefold rise. Included among the other influences was the recognition by drug companies that more extensive testing was required to avoid repeating the thalidomide disaster, with its enormous tort liability losses (especially in Europe)11, and to accumulate evidence that will convince physicians of a new product's superiority over the numerous products already on the market. It is possible too that, in the wake of extensive prior searches, it became harder to find promising new chemical entities.
11 Issuance of a new drug approval by the FDA does not immunize firms from tort liability.
Whether rooted in regulation or other influences, the soaring costs of drug discovery were mirrored by a sharp decline in the number of new drugs approved for marketing. Figure 3 tells the basic story. The solid line with circles counts the number of new chemical entities approved as drugs by the FDA between 1940 and 1990. It reveals a precipitous decrease in the number of new drugs approved for marketing after 1960. Critics of the FDA blame regulation for the much lower plateau at which NCE approvals stabilized. Others insist that because the decline began before the new law's implementation in 1963, it reflected the increasing difficulty of finding good new drugs.
FIGURE 3. - Trends in U.S. new drug approvals, 1940-1990
In reply to its many critics, the FDA insisted that at least part of the decrease was intentional. What it had done by requiring more rigorous and costly testing, it asserted, was mainly to discourage companies from developing «me too» variants adding little or nothing beyond the therapeutic effects of already existing drugs. The lower (dotted) line in Figure 3 tracks the appearance of drugs classified by the FDA as offering important therapeutic gains. In the FDA's view, there was a surge of important discoveries as the drug-finding revolution took hold during the early 1950s. After that, however, the number of important new drug approvals was roughly constant, before and after the new law's bite. What had been weeded out by higher testing costs were mainly the drugs yielding little or no therapeutic gain.