A 15 to 25 pct reduction in expected returns for drugs in the top quintile of expected returns is associated with a 0.5 pct annual reduction in number of new drugs in the 1st decade, increasing to an 8 pct in the 3rd decade

Simulation Model of New Drug Development. CBO, Working Paper 2021-09. Aug 26 2021. https://www.cbo.gov/publication/57010

Summary: This paper presents the Congressional Budget Office’s simulation model for analyzing legislative proposals that may substantially affect new drug development. The model uses estimates of changes in expected future profits or development costs to estimate the percent change in the number of drug candidates entering the various stages of human clinical trials. Given changes in decisions to enter at each stage, the model estimates when and by how much the number of new drugs entering the market will change. To illustrate the implications of the model, the paper considers a legislative change that lowers expected returns for the top-earning drugs. A 15 percent to 25 percent reduction in expected returns for drugs in the top quintile of expected returns is associated with a 0.5 percent average annual reduction in the number of new drugs entering the market in the first decade under the policy, increasing to an 8 percent annual average reduction in the third decade. The analysis takes the estimated impact of the policy on expected returns as given. In CBO’s assessment, those estimates are in the middle of a wide distribution of potential effects. The effects could be smaller if expenditures in late-phase human trials are larger, for example. Alternatively, the effects could be larger if the cost of capital is larger.

Keywords: health care, prescription drugs, new drug development