NEW YORK (Reuters) - The cost of bringing new prescription drugs to market has skyrocketed in recent years while the return for investors is significantly lower, according to a study released on Monday by Bain & Co. consulting firm.
The independent study, released on the day that a $400 billion Medicare overhaul was signed into law, says it now costs pharmaceutical companies nearly $1.7 billion to bring a new drug to market.
That figure includes not only the price tag for discovery, development and launch, or advertising and marketing, of a drug, but also factors in the cost of failed prospective drugs that never make it to market.
That represents a 55 percent increase over the average cost of new drugs for the five years from 1995 to 2000, according to the Bain study.
Recent surveys have pegged the cost of bringing a new drug to market at about $800 million. But that figure did not factor in the price of failed drugs.
The Bain study further says that based on forecasts of commercial performance and the rising costs of development, marketing and defending drugs from outside challenges, new drugs may deliver only a 5 percent return on investment. That is significantly lower than the average 9 percent return from 1995-2000, according to Bain.
Only one out of six new drug prospects will likely deliver returns above their cost of capital, the study says.
"If those data prove to be true, then the dollars invested in pharmaceutical R&D (research and development) are going to be substantially lower over time, because money chases returns," said Deutsche Bank analyst Barbara Ryan.
Among the factors Bain & Co. suggest may force major drug makers to rethink the business model that had brought them so much success in the past is a decline in research and development productivity.
Only one new compound now reaches the market for every 13 discovered and placed in preclinical trials, compared to one in eight from 1995 and 2000, the study said.
It also cited pricing pressures from insurance companies, aggressive patent challenges and shorter exclusivity periods before cheaper generics hit the market -- factors that combine to limit the total revenue potential of new drugs.
Deutsche Bank's Ryan said it remains to be seen what the actual payoffs down the road will be for drugs that have not yet come to market.
"But there's no question we are in a tough period for the industry," she said.
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