Drug Development and the Cost of Capital

  • Kraig F. SchulzEmail author
  • Sarah T. Bobulsky
  • Frank S. David
  • Nitin R. Patel
  • Zoran Antonijevic


In the pharmaceutical industry today, R & D often struggles to generate returns on capital above its cost of capital, leading to low to no creation of financial value for investors. Declining returns on R & D investment is a trend that has been unfolding for years given increasingly expensive, long, risky development programs required by regulators and payers for new therapeutics. Once they reach the market, new products face increasingly competitive pressures and decreasing willingness to pay by commercial and government-sponsored insurers. Given these difficulties, funding, particularly of early-stage drugs, has slowed and large pharmaceutical companies and financial sponsors of biotechnology companies have begun questioning the sustainability of the current R & D model. The industry is looking for alternative development and funding options to ensure much-needed new therapies can be brought to market efficiently.

These new development and funding models require pharmaceutical companies to manage the value equation more effectively—i.e., increasing the return on capital and decreasing the cost of capital. This article outlines a method that more closely and explicitly ties the way R & D teams pursue the science to how these efforts are financed. This proposed approach includes four distinct steps:
  1. 1.

    Optimize trial design by changing specifications along the four key drivers of value: trial costs, development risk, duration of program and revenue potential of the asset.

  2. 2.

    Create investment vehicles (options, insurance, etc.) around the trial design with varying risk–reward profiles to attract different types of investors.

  3. 3.

    At the portfolio level, develop a more real-time capital allocation program to continually reassess where capital will be most productive and generate the most value.

  4. 4.

    Communicate this enhanced financial profile (i.e., improved value) of the pipeline to internal and external investors.


Working with a global pharmaceutical company, we demonstrate how taking just this first step (linking trial design to value via adaptive trials) could substantially increase the value of a development-stage program. The company redesigned the development plan for an early stage oncology asset to incorporate several approaches to decrease time and risk relative to their status quo, including a Phase 2/3 hybrid design and two interim analyses. This approach ultimately led to a significant increase in the program’s risk-adjusted NPV, from $5.1 M to $34.9 M.


Pharmaceutical industry Adaptive trial Clinical trial design Portfolio management Research and development R & D funding Capital allocation Cost of capital 

Copyright information

© Springer International Publishing Switzerland 2015

Authors and Affiliations

  • Kraig F. Schulz
    • 1
    Email author
  • Sarah T. Bobulsky
    • 2
  • Frank S. David
    • 3
  • Nitin R. Patel
    • 4
    • 5
  • Zoran Antonijevic
    • 4
  1. 1.Ernst and Young, LLCBridgeportUSA
  2. 2.Ernst and Young, LLCNew YorkUSA
  3. 3.Pharmagellan, LLCMiltonUSA
  4. 4.Cytel Inc.CambridgeUSA
  5. 5.Center for Biomedical InnovationMassachusetts Institute of TechnologyCambridgeUSA

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