The Economics of New Drug Development: Costs, Risks, and Returns Joseph A. DiMasi, Ph.D. Tufts Center for the Study of Drug Development Tufts University The New England Drug Metabolism Group Spring Meeting Cambridge, MA, March 12, 2008
Agenda Drug development times Risks in new drug development R&D costs per approved new drug Returns to new drug development Improvements to the R&D process Development of breakthrough and me-too drugs Trends in new drug pipelines
Current Realities for Pharmaceutical Developers Drug development process is long, risky, expensive, and complex Industry is highly regulated Marketplace is competitive Market exclusivity periods have declined dramatically Public support has declined
FDA Amendments Act of 2007 Main Provisions Reauthorizes PDUFA and BPCA Drug safety: FDA authorized to Require post-approval studies Require companies to develop REMs Order changes to drug labels Demand clinical transparency Levy substantial fines Other provisions PMS, AERs, clinical trial registries, DTC advertising Creation of Reagan-Udall Foundation (promote CPI)
Drug Development and Approval Times
Mean U.S. Approval and Clinical Phases for U.S. New Drug Approvals, 1963-2006 12.0 Years 10.0 8.0 6.0 4.0 2.0 Total Phase Clinical Phase Approval Phase 0.0 1966 1963 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 Year of NDA Approval Points are 3-year moving averages Source: Tufts CSDD, 2007
Clinical and Approval Times Vary Across Therapeutic Classes, 2000-06 CNS 8.6 1.9 10.5 Antineoplastic Endocrine 7.7 0.9 6.5 1.6 8.1 8.6 Antiinfective Gastrointestinal 6.2 1.5 5.9 2.1 7.7 8.0 AIDS Antivirals 5.5 0.5 6.0 Cardiovascular Anesthetic/Analgesic 5.2 1.5 4.7 1.9 6.7 6.6 0 14 Years U.S. Clinical Phase U.S. Approval Phase Source: Tufts CSDD, 2007
Pharmaceutical R&D Risks
Approval Success Rates for NCEs Also Vary by Therapeutic Class Antiinfective 40.4% Oncology/Immunology 27.2% Respiratory 19.9% Cardiovascular 15.2% Neuropharmacologic 14.4% GI/Metabolism 10.9% 0 45 Approval Success Rate Source: Tufts CSDD Impact Report, 8(3): May/June 2006
Pharmaceutical R&D Costs
New Drug Approvals Are Not Keeping Pace with Rising R&D Spending 60 R&D Expenditures 45 45 NME Approvals 30 15 New Drug Approvals 30 15 R&D Expenditures (Billions of 2006$) 0 1963 1968 1973 1978 1983 1988 1993 1998 2003 0 R&D expenditures are adjusted for inflation; curve is 3-year moving average for NMEs Source: Tufts CSDD, PhRMA, 2007
Recent Productivity Decline in the Drug Industry: Is this a Unique Phenomenon? In 1960 the trade press of the U.S. drug industry began to refer to the last few years as constituting a research gap, commenting that the flow of important new drug discoveries has for some inexplicable reason diminished. Source: U.S. Senate, Report of the Subcommittee on Antitrust and Monopoly, 87 th Congress, 1 st Session, Study of Administered Prices in the Drug Industry, June 27, 1961, p.136
Opportunity Cost for Investments Consider two investment projects, A and B Both projects require the same out-ofpocket expenditure (say, $400 million) However, returns to A are realized immediately, but investors must wait 10 years before returns to B are realized Rational investors would conclude that B is effectively much costlier than A
Out-of-Pocket and Capitalized Costs per Approved Drug Millions of 2000 $ 900 800 700 600 500 400 300 200 100 0 802 466 403 336 282 121 Preclinical Clinical Total Out-of-Pocket Capitalized Source: DiMasi et al., J Health Economics 2003;22(2):151-185
Pre-approval and Post-approval R&D Costs per Approved Drug Millions of 2000 $ 1200 1000 800 600 400 200 140 403 543 95 802 897 0 Out-of-Pocket Capitalized Post-approval Pre-approval Total Source: DiMasi et al., J Health Economics 2003;22(2):151-185
Annual Growth Rates for Out-of-Pocket R&D Costs 11.8% 7.8% 6.1% 7.0% 7.6% 2.3% Preclinical Clinical Total 1970s to 1980s approvals 1980s to 1990s approvals Source: DiMasi et al., J Health Economics 2003;22(2):151-185
Clinical Cost per Approved New Drug Vary by Therapeutic Category CNS Antiinfective All Cardiovascular 273 254 362 130 282 184 277 183 527 492 466 460 Analg/Anesth 252 123 375 0 100 200 300 400 500 600 Millions of 2000 Dollars Out-of-Pocket Time Source: DiMasi et al., Drug Information Journal, 2004;38(3):211-23
Mean Number of Subjects in NDAs for NMEs 5,507 5,621 Subjects 1,576 1,321 3,233 3,567 1977-80 1981-84 1985-88 1990-92 1994-95 1998-01 Approval Period Sources: Boston Consulting Group, 1993; Peck, Food and Drug Law J, 1997; PAREXEL, 2002
Clinical Trial Complexity Index (Phases I-III) 150 140 130 120 110 100 90 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: DataEdge, 2002
Change in Protocol Eligibility Criteria Mean Number of Criteria 30 25 20 15 10 5 0 26 23 21 10 N=22 N=29 N=22 N=29 Inclusion Exclusion 1999-2002 2003-2006 Source: Tufts CSDD Impact Report, 10(1): Jan/Feb 2008
Procedures per Protocol Median Number (2005) 1999-2005 Annual Growth Rate Phase I Unique Procedures 40 6.1% Total Procedures* 217 9.5% Phase II Unique Procedures 35 5.8% Total Procedures 195 12.1% Phase III Unique Procedures 33 5.5% Total Procedures 132 6.1% Phase IV Unique Procedures 32 9.1% Total Procedures 99 11.0% * Defined as the number of unique procedures multiplied by their frequency during the duration of the study Source: Tufts CSDD Impact Report, 10(1): Jan/Feb 2008
Summary for R&D Costs R&D costs have grown substantially, even in inflation-adjusted terms The growth rate for discovery and preclinical development costs has decreased substantially Conversely, clinical costs have grown at a much more rapid rate New discovery and development technologies (e.g., genomics) hold the promise of lower costs in the long-run (but perhaps higher costs in the short-run)
Summary for R&D Costs (cont.) Evidence and conjectures regarding factors affecting growth in clinical costs More clinical trial subjects Increased complexity: more procedures per patient Patient recruitment and retention Treatments associated with chronic and degenerative diseases Testing against comparator drugs
Biopharmaceutical R&D Costs
Pre-Approval Out-of-Pocket (cash outlay) and Time Costs per Approved New Biopharmaceutical* 1,241 Millions (2005$) 198 417 615 626 361 265 559 682 Preclinical** Clinical Total Out-of-pocket Time Capitalized * Based on a 30.2% clinical approval success rate ** All R&D costs (basic research and preclinical development) prior to initiation of clinical testing Source: DiMasi and Grabowski, Managerial and Dec Econ 2007;28(4-5):469-479
Biopharmaceutical and Pharma R&D Costs Compared
Why Might Biopharma Cost Differ? Biotech firms may be more nimble and creative (different corporate culture) Replacement therapies may confront fewer safety issues (more relevant to early biotech era development) However, biotech firms have less experience in clinical development and in interacting with regulatory authorities Manufacturing process R&D and production of clinical supplies much more expensive for biopharmaceuticals
Pre-Approval Cash Outlays (out-of-pocket cost) per Approved New Molecule 672 Millions (2005$) 198 136 150 361 316 522 559 437 Preclinical* Clinical Total Biotech Pharma Pharma (time-adjusted)** * All R&D costs (basic research and preclinical development) prior to initiation of clinical testing ** Based on a 5-year shift and prior growth rates for the preclinical and clinical periods Source: DiMasi and Grabowski, Managerial and Dec Econ 2007;28(4-5):469-479
Pre-Approval Capitalized Cost per Approved New Molecule 1,241 1,318 Millions (2005$) 615 626 376 439 523 879 899 Preclinical* Clinical Total Biotech Pharma Pharma (time-adjusted)** * All R&D costs (basic research and preclinical development) prior to initiation of clinical testing ** Based on a 5-year shift and prior growth rates for the preclinical and clinical periods Source: DiMasi and Grabowski, Managerial and Dec Econ 2007;28(4-5):469-479
Returns to New Drug Development
Present Values of Net Sales and R&D Cost for New Drugs by Sales Decile (millions of 2000 $) 3000 After-tax net sales 2500 2000 1500 1000 500 0 After-tax average R&D Cost 1 2 3 4 5 6 7 8 9 10 Deciles Source: Grabowski et al., PharmacoEconomics 2002; 20(Suppl 3):11-29
Productivity Improvements
Cost reduction Cost Reductions from Higher Clinical 35% 30% 25% 20% 15% 10% 5% 0% Success Rates 34.5% 33.5% 32.5% 31.5% 30.5% 29.5% 28.5% 27.5% 26.5% 25.5% 24.5% 23.5% 22.5% 21.5% Success Rate Average phase cost Phase cost adjusted for cost of failures Source: DiMasi, PharmacoEconomics 2002; 20(Suppl 3):1-10
Cost Reductions from Simultaneous Percentage Decreases in All Phase Lengths 30% Cost reduction 25% 20% 15% 10% 5% 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Phase time reduction Clinical cost Total cost Source: DiMasi, PharmacoEconomics 2002; 20(Suppl 3):1-10
The Pace of Competitive Development
Market Exclusivity for First-in-Class has Declined: Mean Time to First Follow-on Approval Period of First-in-Class Approval 1970s 1980-84 1985-89 1990-94 1995-98 1.8 2.8 5.1 5.9 8.2 0 9 Years Source: DiMasi and Paquette, PharmacoEconomics 2004;22(Suppl 2):1-14
Percent of Me-too Drugs Reaching Clinical Milestone Prior to First-in- Class Drug Reaching Same Milestone 50 42% 35% 36% 27% 14% 10% 0 1985-1989 1990-1994 1995-1998 Period of First-in-Class Approval IND Filed 1st Human Test Source: DiMasi and Paquette, PharmacoEconomics 2004;22(Suppl 2):1-14
Clinical Options: Safety, Efficacy, and Convenience Trade-offs Example: beta interferons to treat multiple sclerosis (Betaseron, Avonex, and Rebif ) Therapies differ in relapse rates, injection site reactions, elevated liver function tests, leukopenia, rates at which neutralizing antibodies are developed, and frequency of injections Diversity in outcomes offers individual choices that patients can make in consultation with their physicians
Trends in Drug Development Pipelines
Clinical Testing Pipelines for Large Pharmaceutical Firms* Have Grown in Recent Years (Phase I Starts per year) 100 80 60 40 20 0 1993-1997 1998-2002 2003-2005 * Ten largest pharmaceutical firms Source: Tufts CSDD Impact Report, 8(3): May/June 2006
Trends in New Drug Development Pipelines* by Therapeutic Class Antiinfective Cardiovascular CNS GI/Metabolism Oncology/Immunologic Respiratory 7.9% 11.6% 13.7% 8.7% 9.1% 14.3% 10.7% 8.3% 4.3% 9.1% 6.5% 4.8% 20.6% 19.6% 21.9% 20.2% 20.5% 27.2% 0% 30% Percent of Phase I Pipeline 1993-97 1998-02 2003-05 * Ten largest pharmaceutical firms Source: Tufts CSDD Impact Report, 8(3): May/June 2006
Large Pharmaceutical Firms* are Increasingly Licensing-in New Drugs 100 80 77.8 70.3 71.8 Percent 60 40 20 0 23.6 25.0 14.8 7.4 6.2 3.2 Self-originated Licensed-in Licensed-out 1993-97 1998-02 2003-05 * Ten largest pharmaceutical firms Source: Tufts CSDD Impact Report, 8(3): May/June 2006
Summary Drug development has been and still is costly, risky, and lengthy R&D costs have increased, but so have the returns to successful projects The potential payoffs for improvements in the development process are substantial Periods of marketing exclusivity have been shrinking for first-in-class drugs After a period of decline, more new drugs are now entering clinical testing pipelines