The R&D Cost of a New MedicineJorge Mestre-FerrandizOffice of Health EconomicsUniversity College London • VISION SeminarLondon • 29 January 2013
The R&D Cost of a New MedicineDownload orread online atwww.ohe.org2
The R&D Cost of a New Medicine1. Up to date overview of the literature estimatingpharmaceutical R&D costs and the factors driving them2. Present a new estimate from original data of theaverage R&D cost per new successful medicineObjectives of the OHE Study3
The R&D Cost of a New MedicineStructure of the Book4Factors driving R&D costsMean cost of an NME(S2 & S3)Development times(S2.4)Out-of-pocket costs(S2.2)Success rates(S2.3)Cost of capital(S2.5)Explaining differences from the meanTherapy areas(S4)Compound origin(S5)Firm size(S6)Biologicals(S7)Drivers of Trends in R&D Costs (S8)
The R&D Cost of a New Medicine• Published estimates of the mean (average) cost of R&D pernew medicine that is launched on the market suggest anincrease in cost over the last decade -- from the estimateof US$1.0bn (£600m) by DiMasi et al. (2003), expressed in2011 price terms, to US$1.9bn (£1.2bn) by Paul et al. 2010)• Our new estimate is US$1.5bn (£900m) and therefore liesbetween the DiMasi and Paul estimates• Estimates of mean R&D costs per new medicine, andcomparisons between such estimates, must be treatedwith caution: studies differ in both methodology and datausedKey Findings5
The R&D Cost of a New Medicine• How much it costs to research and develop a successfulnew medicine has been an important policy issue atleast since the 1960s• Cost estimates matter not just because of intellectualcuriosity or for industry understanding of itsperformance, but because they are a key aspect of theinternational debate about the reasonableness ofpharmaceutical prices and the magnitude of the long-term investments involved• Moreover, a related debate continues about whether theresearch and development (R&D) productivity of thebiopharmaceutical industry has fallenContext6
The R&D Cost of a New Medicine7REGULATIONTIME (YEARS)PHASES OFDRUGDEVELOPMENTPhase IIIDevelopment researchFinal patentapplicationMarketingapplicationPost-mktgresearch*PhaseIV2002-7Discovery researchInvestigational newdrug application (US)1999Phase I Phase IISynthesisBiological testing &pharmacologicscreening2008Marketingapproval/product launch2010RegulatoryreviewBasicresearchShort-term animal testingLong-term animal testingToxicology and pharmacokinetic studiesChemical developmentPharmaceutical developmentFig 2.1. The R&D Process*Phase IV is not part of the R&D process, although data collected during that time may affect how the drug is used.Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics
The R&D Cost of a New MedicineKey Studies9Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
The R&D Cost of a New Medicine• Four main variables determine the capitalisedcost of a new drug estimate• Out-of-pocket costs• Success rates• Development times and• Cost of capitalKey Components of R&D Costs10
The R&D Cost of a New MedicineOut-of-pocket costs• Out-of-pocketdevelopmentcosts, beforeadjusting forfailures, appearto have increasedover time. Similarestimates fortotal out-of-pocket devel-opment costs butless consistentacross clinicaltrial phasesSuccess rates• Cumulativeclinical successrates appear tohave decreasedover time. Theprobability isshrinking that acandidateentering Phase Iclinical trials willin due course beauthorised to belaunched ontothe marketDevelopment times• The total timetaken to progressthrough allphases of clinicaltrials and marketauthorisationappears to haveremained rela-tively unchangedsince the early2000sCost of capital• The long time-scales of pharma-ceutical R&Dmean that thecost of capital hasa major impacton the final costper drug and sothe estimateddevelopment costper successfuldrug is highlysensitive to thecost of capitalapplied. An 11%real annual cost iscommonly used.Key Components of R&D Costs11
The R&D Cost of a New Medicine• Out-of-pocket development costs, before adjusting forfailures, appear to have increased over time since thefirst DiMasi et al. (1991) article• The most recent estimates, by Paul et al. (2010) andAdams and Brantner (2010), are very similar for out-of-pocket development costs (from Phase I to III) at aroundUS$215-220m (2011 US$)• The studies are less consistent in their estimates of themagnitude of the cost of the different clinical trial phasesOut-of-Pocket Costs12
The R&D Cost of a New MedicineOut-of-Pocket Costs13Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
The R&D Cost of a New Medicine• The most recent estimates of probability of successfor Phase I, Phase II and Phase III are between 49%and 75%, 30% and 48%, and 50% and 71%,respectively• Overall, cumulative clinical success rates appear tohave decreased over time• Pammolli et al. (2011) find significant decreases insuccess rates, especially in Phases II and III• But analyses by DiMasi and colleagues since the early1990s suggest that success rates across the differentphases have changed littleSuccess Rates14
The R&D Cost of a New MedicineSuccess Rates15Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
The R&D Cost of a New Medicine• Commercial reasons have been increasingly importantfor discontinuing projects• Since 2000, companies have been focusing more on highrisk, high premium areas with a lower “expectedprobability of success” (POS), such as:• Chronic diseases (Alzheimer’s disease, diabetes, obesity,rheumatoid arthritis) compared to acute diseases (6.9% vs8.8%)• Potentially lethal diseases, mostly cancer and someinfectious diseases (5.5% vs. 9.7%) [Pammolli, Magazzini andRiccaboni (2011)]Attrition Rates: Reasons for Failure16
The R&D Cost of a New Medicine• Overall, development times (Phases I-III) appear to haveremained relatively constant over time, at around 6.5years (75‒79 months) on average. Phase III trials tend tobe the longest development phase, although the mostrecent work suggests that development times for PhasesII and III now are similarDevelopment Times17
The R&D Cost of a New MedicineDevelopment Times18Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
The R&D Cost of a New Medicine• The long timescales of pharmaceutical R&D mean thatthe cost of capital has a major impact on the final costper successful drug• The cost of capital should be measured as the expectedreturn that is foregone, i.e. the return that would beexpected from investing in an equally risky portfolio ofother investments• The estimated cost per successful drug is highly sensitiveto the cost of capital applied• The more recent studies use a real annual cost of capitalof 11%, up from the 9% used by DiMasi et al. (1991)Cost of Capital19
The R&D Cost of a New Medicine• Two main issues arise with respect to the cost ofcapital invested in pharmaceutical R&D• The magnitude of the cost of capital• Whether the cost of capital is assumed constant orinstead is assumed to fall as an R&D project progresses(if successful) through its various stages from discoverythrough development to launch – the so-called “staircase”approachCost of Capital20
The R&D Cost of a New MedicineCost of Capital21Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
The R&D Cost of a New MedicineCriticisms OHE BookData – confidential, comes from companiesdirectly and cannot be replicatedOther recent studies have either used publiclyavailable information or have used differentconfidential data (like ours)Only self-originated compounds are included andthese represent a small proportion of new drugs –and the most expensive onesDecreasing importance of self-originatedcompounds relative to licensed-in compounds isvalid, but has become so perhaps only recently.More recent estimates cannot differentiate soapply also to a wider universe of compounds, notjust self-originated compoundsEstimates should not be capitalised, given thatcompanies are not investment houses and have nochoice but to spend money on R&DOut-of-pocket costs are merely one part of thetotal cost. Capitalised costs are real costs.Investors require a return that reflects alternativepotential uses of their investmentEstimates are pre-tax, so they do not reflect thefact that R&D expenses are deductibleSocietal perspective when thinking about the costsof R&D of new medicines: total cost of developinga new drug will be the same no matter who pays --tax rebates affect who bears the costs, but not thetotal amountPolicy Discussions Around the Cost Estimates22
The R&D Cost of a New Medicine• New estimate for mean R&D costs per NME, based onpreviously unpublished information collected by CMRI inconfidential surveysA New Estimate of R&D Costs23Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
The R&D Cost of a New Medicine 24Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
The R&D Cost of a New Medicine 25Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
The R&D Cost of a New Medicine 26Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A.(2012) The R&D Cost of a New Medicine. London: Officeof Health Economics.
The R&D Cost of a New Medicine 27Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
The R&D Cost of a New Medicine• Our overall probability of success estimates for Phase I, Phase IIand Phase III are lower than those reported by DiMasi et al. (2003)and Paul et al. (2010)• Overall, our study and those by DiMasi et al. (2003) and Paul et al.(2010) report similar development times. For Phase I, our datareport the longest development times, but slightly shorter times forPhase III. Phase II times from the CMRI data fall between thosereported by DiMasi et al. (2003) and Paul et al. (2010)• Total out-of-pockets costs for Phases I, II and III are very similar inour study and that of Paul et al. (around US$230m at 2011 prices)and slightly lower than found by DiMasi et al (2003). Our out-of-pocket cost estimate lies between the other two estimates forPhase III. For Phase I and Phase II, our estimates are the highestComparison with Previous Studies28
The R&D Cost of a New Medicine• Published estimates, including ours, that refer to themean cost of R&D per new medicine are just that:averages• The literature shows that the costs of R&D vary withthe subgroup of drugs included in the analysis• Costs vary according to therapeutic area, firm sizeand whether the molecule is a “traditional” chemicalcompound or a biologicWarning: Mean Costs May Hide Important Differences29
The R&D Cost of a New Medicine• R&D costs vary substantially across therapeutic areasbecause of considerable variation in three key variables:success rates, development cycle times and out-of-pocket costs.• The most recent analyses suggest that the most expensivetherapeutic areas in terms of drug R&D costs areneurology, respiratory and oncology. This is because drugsin these categories experience lower success rates andlonger development times.• By comparison, anti-parasitics and drugs to treat HIV/AIDShave the lowest drug R&D costs because of higher successrates and shorter development timesTherapeutic Areas30
The R&D Cost of a New Medicine• Most of the published calculations of R&D costs todate focus on self-originated new compoundsbecause comprehensive data for licensed-in/acquired compounds are very difficult to collect• An increasing proportion of drugs now are licensedin; clinical success rates for such drugs are higherthan for self-originated drugsSelf-Originated versus Licensed-In31
The R&D Cost of a New Medicine• Greater success may be the results of a “screeningeffect” for licensed-in compounds:• Many licensed-in drugs already were shown to bepromising candidates before licensing• This difference also is apparent during early researchSelf-Originated versus Licensed-In32
The R&D Cost of a New Medicine• Limited evidence on biological medicines• DiMasi and Grabowski (2007b): overall clinical success rate forbiotech products is 30.2%, which is higher than the 21.5%estimate for traditional pharmaceutical products reported byDiMasi et al. (2003)• Total clinical and approval time is 8% longer for biopharma-ceuticals, with nearly all the difference being in Phase I• Capitalisation increases biopharma costs relative to traditionalR&D costs because of the longer development timeline and aslightly higher cost of capitalBiopharmaceuticals33
The R&D Cost of a New Medicine• Cost of clinical trials• Cost per patient and number of patients• Complexity• Two trends appearing to help control costs• Outsourcing to CROs – increased efficiency• Change in location• Some trials in emerging markets – lower local costs and fasterpatient recruitment• Still significant proportion of trails located in US and WesternEurope – regulatory conditions, relevant expertise andinfrastructureDrivers of Trends – Out-of-Pocket Costs34
The R&D Cost of a New MedicineIncrease infailure rates• Regulators becoming more risk averse• R&D is directed towards tougher challenges• Within companies, projects may advance prematurely to the laterstages of clinical development and then fail in Phase IIIReasons tocounterincrease• Better preclinical screening that ensures earlier project termination• Integrating HTA earlier in the process to encourage earlier decisionsabout discontinuing projects for commercial reasons• Developing biomarkers and companion diagnostics that can lead topersonalised or stratified medicine, with greater prospects forsuccess• Alliances between companies, increasingly common, also mayincrease success ratesDrivers of Trends – Failure Rates35In short run important technological challenges may lead to higher failure rates and costs asscience advances and while companies learn how to better develop biomarkers andcompanion diagnostics.But “learning by doing” could drive a more efficient R&D process in the longer term.
The R&D Cost of a New Medicine• Regulators may be more risk averse, leading to increasedregulatory stringency and longer regulatory reviews• Companies are directing efforts towards therapeuticareas that intrinsically are associated with very longclinical development times• Clinical trials are becoming increasingly complex and, asa result, take longer to complete• Trade offs between time and success rate, e.g. longerPhase II with higher success rate in Phase IIIDrivers of Trends – Development Times36
The R&D Cost of a New Medicine• Number of alternatives have been put forward to tryto make the R&D process more efficient andaffordable• The key suggestions include focusing on• The earlier phases reduce technical uncertainties beforeundertaking the more expensive trials in the laterdevelopment stages• Allowing for greater flexibilityA New Drug Development Paradigm?37
The R&D Cost of a New MedicineFour factors are increasing R&D costs:1. Higher out-of-pocket costs, up nearly 600% from the 1970sto the 2000s2. Lower success rates for clinical development as toughertherapeutic areas are tackled—e.g. neurology (Alzheimer’s),autoimmune diseases (arthritis), and oncology—from 1 in 5in the 1980s to 1 in 10 in the 2000s3. Increases in R&D times as both regulation and science havebecome more complex, from 6 years in the 1970s to 13.5years in the 2000s4. Increases in the cost of capital—i.e. providing returns tofunders that reflect the high risk of investing in medicinesR&D—from 8% in the 1970s to 11% in the 2000sConclusions38
The R&D Cost of a New Medicine• Important variations around the mean cost per NME fordifferent types of medicines are observable• Significant differences are evident in the cost of R&D for newmedicines across therapeutic areas – can be more thantwofold• Licensed-in compounds tend to be more successful than self-originated NMEs• Drugs with a more validated target and more objectiveendpoints are more successful than drugs with more novelmechanisms of action and less clear cut endpoints• Total capitalised costs for biologics appear to be higher thanfor other pharmaceuticalsConclusions39
The R&D Cost of a New MedicineTechnological challenges•Targeted diseases currently aremore complex•Companies need to adapt tonew personalised/stratifiedmedicines environmentFirms’ behaviour•Companies continue to workto improve the efficiency ofR&D decisions•Greater scrutiny in the earlyR&D stages•Integrating health economicsearlier in the process•Moving some trials to lowercost locations or usingspecialist contract researchorganisations to manageclinical trials•Alliances/collaborationsConclusions40R&D cost trends per NME are partly the result of strategic behaviour by firms,including adjustments to changes in requirements for licensing andmarketing, and partly the result of technological change