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NEW CHEMICAL ENTITY R&D COSTS PUT AT $231 MIL. IN TUFTS STUDY, WITH ABOUT HALF ATTRIBUTED TO "TIME COSTS"; DEVELOPMENT TIME ESTIMATED AT 12 YEARS

Executive Summary

"New chemical entity R&D takes 12 years from synthesis of a compound to marketing approval and costs $231 mil. in [pre-tax] 1987 dollars," according to a study conducted by the Center for the Study of Drug Development at Tufts University. The time it takes to move a product from the research lab through trials and regulatory approval is a key factor in the escalating costs of drug research. Nearly one-half of the new figure is calculated to represent time costs and lost investment opportunities. Results of the two-year study were announced at a joint press conference with the Pharmaceutical Manufacturers Association in Washington, D.C. on April 19. The principal author of the study is Joseph DiMasi, PhD, a research associate at the center. Other authors are University of Rochester William E. Simon Business School Dean Ronald Hansen, PhD; Duke University economics professor Henry Grabowski, PhD; and Louis Lasagna, MD, director of the Tufts center. Grabowski previewed results of the study at an Institute of Medicine meeting in December ("The Pink Sheet" Jan. 1, p. 3). The study does not provide a precise figure on the outlay costs for taking a single drug to market. The closest number provided is an estimated $114 mil. (in 1987 dollars) in spending per approved NCE, which includes the expense of failed projects. * Tufts arrived at the $231 mil. figure by adding out-of-pocket costs to what the study describes as "time costs," or calculation of interest lost on funds that might have been otherwise invested. Data for the study were obtained from a confidential survey of 12 U.S.-owned drug firms covering 93 new chemical entities (NCEs) that first entered clinicals during the period 1970-1982. Each NCE in the sample is "self-originated," or discovered and developed by one of the survey firms. The drugs were selected from a database maintained by the Tufts center. The authors of the study would not release the names of either the drugs or the firms in the survey. The center is releasing only the executive summary of the study; the complete manuscript will be submitted to a professional journal for publication, which should strengthen the study's credentials in the continually shifting cost-of-research debate. The firms surveyed "include a number of the largest in the U.S. pharmaceutical industry, as well as some that are small in size," the summary states. "In 1986, these firms accounted for approximately 40% of U.S. industry R&D expenditures on ethical pharmaceuticals." The new Tufts' estimate is substantially above that made 10 years ago by the center (then at Rochester University) and is nearly double the figure PMA has been using in recent years. The 1979 study, conducted under Hansen's direction, concluded that the average cost of new drug development was $54 mil. in 1976 dollars. PMA upped the figure in recent years to $125 mil. to account for inflation. The time to market estimate has also increased by 20% since the Hansen study, which put the time at 10 years. * Time costs in the new Tufts study were accounted for by capitalizing R&D expenditures using an interest rate of 9%. Roughly half the total is attributable to time costs. The Hansen study also figured time costs at about 50% of the total cost of drug development although his study used an 8% interest rate instead of 9%. Hansen noted that if the lower rate were used in the more recent study, the total would be down to about $214 mil. from $231 mil. The out-of-pocket cost figure is a construct extrapolated from "the average out-of-pocket clinical period cost per NCE tested in humans." That figure was calculated to be $11 mil. in 1987 dollars. "Using an estimated clinical period success rate of 23% for the survey firms," the Tufts study says, "this translates into an average out-of-pocket clinical period cost per approved NCE of $48 mil. in 1987 dollars." Tufts added a figure a third larger than clinical expenses to account for preclinical research. "Adding estimated preclinical costs yields an estimate of the average out-of-pocket cost per approved NCE of $114 mil. 1987 dollars." PMA estimated that new drug development direct cash outlays were $65 mil. per approved new drug in a study released in the summer of 1987 ("The Pink Sheet" July 13, 1987, T&G-1). The study was conducted by Texas A&M professor Steven Wiggins and was based on FDA approval data from 1970 through 1985. The outlay figure was calculated with a formula that factors in new chemical entity approval rates, levels of research spending, the stringency of regulation and levels of research opportunities. Discussing the inclusion of costs for failed projects, DiMasi pointed out: "the fate of a project cannot be known with certainty at the onset. Yet the costs of new drug projects that are terminated without marketing approval are real and substantial. They should be included in any estimate of the average cost of new drug development." On capitalizing expenditures, he said: "it is appropriate...to view R&D as an investment, and to capitalize expenditures. That is, we should account for the cost of having funds tied up for a period of time." Addressing the significant increase in the estimates vis-a-vis the Hansen study, DiMasi suggested: "one reason why this has happened may be that, on average, more patients are being used in clinical trials. Another is that the testing itself may have become more complex. Firms may be concentrating more on developing treatments for chronic and degenerative diseases, which typically require longer and more extensive testing." The executive summary notes that "this study is the only one to date that has reflected in its estimates some of the sharp increases in pharmaceutical R&D expenditures that have occurred throughout the 1980s." U.S. drug industry R&D expenditures have increased at about an 11% compound annual rate since 1979, the center estimates. Release of the new R&D numbers comes while PMA is fighting state and Congressional efforts to control Medicaid drug costs by mandated price bargaining (see related stories). In battles with Congress over rising drug prices, the association has maintained that higher prices are necessary to defray the substantial and increasing costs of R&D. * PMA President Gerald Mossinghoff, who appeared at the press briefing to present an update of PMA annual surveys on biotechnology drugs in development and biotechnology patents, said the association decided to combine its presentation with the one by Tufts because the subject of both announcements focused on new drug development. PMA did not participate in the Tufts study. Mossinghoff said that the pharmaceutical industry is spending $8.2 bil. on R&D this year and that 80% of the spending is directed to new chemical entities. Grabowski, who was also present at the briefing, estimated that three-tenths of drugs marketed earn back R&D spending and more, while the other seven-tenths do not recoup all R&D costs. Congress has been skeptical of R&D cost estimates in the past and to counterbalance industry figures, Rep. Waxman (D-Calif.) and Sen. Kennedy (D-Mass.) have requested a separate study by the congressional Office of Technology Assessment. The OTA study on drug R&D costs is underway ("The Pink Sheet" Jan. 8, T&G-1) and staff are collecting current cost estimates for review. The first year of the project is devoted to collecting and "critiquing" current literature on R&D costs as well as designing a follow-up study for further analysis of R&D cost data. The first phase is scheduled to be completed in December and a report is expected shortly thereafter.
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