Premium
Drug development costs when financial risk is measured using the Fama–French three‐factor model
Author(s) -
Ver John A.,
Golec Joseph H.,
Dimasi Joseph A.
Publication year - 2010
Publication title -
health economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.55
H-Index - 109
eISSN - 1099-1050
pISSN - 1057-9230
DOI - 10.1002/hec.1538
Subject(s) - capital asset pricing model , economics , cost of capital , actuarial science , risk factor , finance , business , medicine , microeconomics , profit (economics)
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.