The average cost of discovering and developing a new drug has risen to a staggering $802M. While $802M appears to be an astronomical amount, a recent study indicates that the current development costs for new medicine are very well justified. (Management Science, Feb-2002)
Penn State University Smeal College
of Business Administration
UNIVERSITY PARK, PA--The average cost of discovering and developing a new drug has risen to a staggering $802 million. While $802 million appears to be an astronomical amount, a recent study co-authored by Min Ding, assistant professor of marketing in Penn State's Smeal College of Business, indicates that pharmaceutical firms actually underspend on research and development. And, the study's analysis of the federal government's support for development of an HIV vaccine indicates that the government also is underspending and more money should be allocated to it.
The paper, "Structuring the New Product Development Pipeline," will appear in a forthcoming issue of Management Science and is co-authored with Jehoshua Eliashberg of the Wharton School at the University of Pennsylvania. In the paper, the researchers developed a decision support model that will help managers identify the optimal new product development pipelines for their products. They applied the model to a number of real-world scenarios in the pharmaceutical industry and comparing its normative pipeline recommendations against actual pipelines.
"Our results suggest, in general, that the pharmaceutical firms we studied employ narrower pipelines than they should for developing their new drugs, and thereby they underspend on research and development. This indicates that the current development costs for new medicine are very well justified. As a matter of fact, firms should spend more," says Ding.
In many new product development (NPD) situations, the development process is characterized by uncertainty, and no single development approach will necessarily lead to a successful product. In order to increase the likelihood of having at least one successful product, Ding notes that multiple approaches may be simultaneously funded at various NPD stages.
"The managerial challenge is to construct ex-ante an appropriate new product development pipeline by choosing the right number of approaches to be funded at each stage. This so-called pipeline problem is present in, among others, advertising copy selection, new products test markets and recruiting," says Ding.
In the paper, the researchers describe a normative model for structuring such pipelines. The structure of the optimal pipeline is driven by the cost of a development approach, its probability of survival, and the expected profitability. The researchers illustrate the workability and implications of the model by applying it to a number of real-world scenarios in the pharmaceutical industry, and by comparing its normative pipeline recommendations against actual pipelines.
Professor Ding is at 814-865-0622.
If you would like a copy of the paper he co-authored, contact Steve Infanti
of the Smeal College Media Relations' Office at 814-863-3798
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