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Drug development costs when financial risk is measured using the Fama–French three‐factor model

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  • John A. Vernon
  • Joseph H. Golec
  • Joseph A. Dimasi

Abstract

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. Copyright © 2009 John Wiley & Sons, Ltd.

Suggested Citation

  • John A. Vernon & Joseph H. Golec & Joseph A. Dimasi, 2010. "Drug development costs when financial risk is measured using the Fama–French three‐factor model," Health Economics, John Wiley & Sons, Ltd., vol. 19(8), pages 1002-1005, August.
  • Handle: RePEc:wly:hlthec:v:19:y:2010:i:8:p:1002-1005
    DOI: 10.1002/hec.1538
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    References listed on IDEAS

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    1. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    2. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    3. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
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    Cited by:

    1. Swarn Chatterjee & Amy Hubble, 2016. "Day-Of-The-Week Effect In Us Biotechnology Stocks — Do Policy Changes And Economic Cycles Matter?," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(02), pages 1-17, June.
    2. Fraenkel, Stefan & Haftor, Darek M. & Pashkevich, Natallia, 2016. "Salesforce management factors for successful new product launch," Journal of Business Research, Elsevier, vol. 69(11), pages 5053-5058.
    3. Ming Liu & Sumner LaCroix, 2011. "The Impact of Stronger Property Rights in Pharmaceuticals on Innovation in Developed and Developing Countries," Working Papers 201116, University of Hawaii at Manoa, Department of Economics.
    4. Fossett, Sarah J. & Wunnava, Phanindra V., 2017. "Active Ingredients: Exploring the Key Factors Affecting the Rising Cost of Developing New Drugs," IZA Discussion Papers 10817, Institute of Labor Economics (IZA).
    5. Joseph P. Cook & Joseph Golec, 2017. "How excluding some benefits from value assessment of new drugs impacts innovation," Health Economics, John Wiley & Sons, Ltd., vol. 26(12), pages 1813-1825, December.
    6. Ye, Liping & Geng, Jiang-Bo, 2021. "Measuring the connectedness of global health sector stock markets," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    7. Joseph P Cook, 2014. "Real Option Value and Path Dependence in Oncology Innovation," Seminar Briefing 000077, Office of Health Economics.
    8. Tobias Basse & Christoph Schwarzbach & J.-Matthias Schulenburg, 2023. "Dividend policy issues in the European pharmaceutical industry: new empirical evidence," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 24(5), pages 803-816, July.
    9. John Vernon & Joseph Golec & J. Stevens, 2010. "Comparative Effectiveness Regulations and Pharmaceutical Innovation," PharmacoEconomics, Springer, vol. 28(10), pages 877-887, October.

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