The FDA is the regulating agency for pharmaceuticals, and each potential drug is required to undergo three phases of testing and certification after basic research and pre-clinical (biological testing). Phase I of testing assesses the safety and tolerability of the drug, Phase II tests the efficacy of the drug, and Phase III tests the effects from long-term use of the drug and builds on the findings in the previous two phases to further evaluate safety and effectiveness. These three processes are long and grueling, and tremendous resources of both time and money go into these trials. In fact, for each drug entering the pharmaceutical market, a firm is estimated to spend anywhere from $230 million to nearly $360 million and nearly 15 years from the beginning stage of basic research to the final hurdle of FDA review. Consequently, pharmaceutical firms would like to ensure that as many of their drugs enter the market as possible, in order not to waste the resources that they have already incurred. Unfortunately, there is a high attrition rate for drugs going through the entire process. Out of 10,000 initial promising compounds, 40 will pass through the basic research stage. One in four will pass pre-clinical screening and begin clinical trials as "Investigational New Drugs," or "INDs." Approximately one in three of those will pass through Phases I and II, and only one in four INDs will pass all three Phases. Finally, only one in ten INDs will ultimately be sold to consumers after FDA review (i.e. 40% of drugs that pass Phase III will make it to the market). As one can see, there are great uncertainties in drug development, and to a great extent, a company and its investors are betting on the success of this inexact trial-and-error approach.
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