The Opportunity Cost of Capital
The opportunity cost of the capital invested in pharmaceutical research and development (R&D) to bring a new drug to market makes up as much as half the total cost. However, the literature on the cost of pharmaceutical R&D is mixed on how, exactly, one sho...
| Main Authors: | , , , , , |
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| Format: | Article |
| Language: | English |
| Published: |
SAGE Publishing
2015-04-01
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| Series: | Inquiry: The Journal of Health Care Organization, Provision, and Financing |
| Online Access: | http://inq.sagepub.com/content/52/0046958015584641.full.pdf |
| Summary: | The opportunity cost of the capital invested in pharmaceutical
research and development (R&D) to bring a new drug to market makes up as much as
half the total cost. However, the literature on the cost of pharmaceutical R&D is
mixed on how, exactly, one should calculate this “hidden” cost. Some authors attempt to
adopt models from the field of finance, whereas other prominent authors dismiss this
practice as biased, arguing that it artificially inflates the R&D cost to justify
higher prices for pharmaceuticals. In this article, we examine the arguments made by
both sides of the debate and then explain the cost of capital concept and describe in
detail how this value is calculated. Given the significant contribution of the cost of
capital to the overall cost of new drug R&D, a clear understanding of the concept is
critical for policy makers, investors, and those involved directly in the
R&D. |
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| ISSN: | 0046-9580 1945-7243 |