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R&D Cost of a New Medicine
1. The R&D Cost of a New Medicine
Jorge Mestre-Ferrandiz
Office of Health Economics
University College London • VISION Seminar
London • 29 January 2013
2. The R&D Cost of a New Medicine
Download or
read online at
www.ohe.org
2
3. The R&D Cost of a New Medicine
1. Up to date overview of the literature estimating
pharmaceutical R&D costs and the factors driving them
2. Present a new estimate from original data of the
average R&D cost per new successful medicine
Objectives of the OHE Study
3
4. The R&D Cost of a New Medicine
Structure of the Book
4
Factors driving R&D costs
Mean 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 mean
Therapy areas
(S4)
Compound origin
(S5)
Firm size
(S6)
Biologicals
(S7)
Drivers of Trends in R&D Costs (S8)
5. The R&D Cost of a New Medicine
• Published estimates of the mean (average) cost of R&D per
new medicine that is launched on the market suggest an
increase in cost over the last decade -- from the estimate
of US$1.0bn (£600m) by DiMasi et al. (2003), expressed in
2011 price terms, to US$1.9bn (£1.2bn) by Paul et al. 2010)
• Our new estimate is US$1.5bn (£900m) and therefore lies
between the DiMasi and Paul estimates
• Estimates of mean R&D costs per new medicine, and
comparisons between such estimates, must be treated
with caution: studies differ in both methodology and data
used
Key Findings
5
6. The R&D Cost of a New Medicine
• How much it costs to research and develop a successful
new medicine has been an important policy issue at
least since the 1960s
• Cost estimates matter not just because of intellectual
curiosity or for industry understanding of its
performance, but because they are a key aspect of the
international debate about the reasonableness of
pharmaceutical prices and the magnitude of the long-
term investments involved
• Moreover, a related debate continues about whether the
research and development (R&D) productivity of the
biopharmaceutical industry has fallen
Context
6
7. The R&D Cost of a New Medicine
7
REGULATION
TIME (YEARS)
PHASES OF
DRUG
DEVELOPMENT
Phase III
Development research
Final patent
application
Marketing
application
Post-mktg
research*
Phase
IV
2002-7
Discovery research
Investigational new
drug application (US)
1999
Phase I Phase IISynthesis
Biological testing &
pharmacologic
screening
2008
Marketing
approval/
product launch
2010
Regulatory
review
Basic
research
Short-term animal testing
Long-term animal testing
Toxicology and pharmacokinetic studies
Chemical development
Pharmaceutical development
Fig 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
9. The R&D Cost of a New Medicine
Key Studies
9
Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
10. The R&D Cost of a New Medicine
• Four main variables determine the capitalised
cost of a new drug estimate
• Out-of-pocket costs
• Success rates
• Development times and
• Cost of capital
Key Components of R&D Costs
10
11. The R&D Cost of a New Medicine
Out-of-pocket costs
• Out-of-pocket
development
costs, before
adjusting for
failures, appear
to have increased
over time. Similar
estimates for
total out-of-
pocket devel-
opment costs but
less consistent
across clinical
trial phases
Success rates
• Cumulative
clinical success
rates appear to
have decreased
over time. The
probability is
shrinking that a
candidate
entering Phase I
clinical trials will
in due course be
authorised to be
launched onto
the market
Development times
• The total time
taken to progress
through all
phases of clinical
trials and market
authorisation
appears to have
remained rela-
tively unchanged
since the early
2000s
Cost of capital
• The long time-
scales of pharma-
ceutical R&D
mean that the
cost of capital has
a major impact
on the final cost
per drug and so
the estimated
development cost
per successful
drug is highly
sensitive to the
cost of capital
applied. An 11%
real annual cost is
commonly used.
Key Components of R&D Costs
11
12. The R&D Cost of a New Medicine
• Out-of-pocket development costs, before adjusting for
failures, appear to have increased over time since the
first DiMasi et al. (1991) article
• The most recent estimates, by Paul et al. (2010) and
Adams and Brantner (2010), are very similar for out-of-
pocket development costs (from Phase I to III) at around
US$215-220m (2011 US$)
• The studies are less consistent in their estimates of the
magnitude of the cost of the different clinical trial phases
Out-of-Pocket Costs
12
13. The R&D Cost of a New Medicine
Out-of-Pocket Costs
13
Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
14. The R&D Cost of a New Medicine
• The most recent estimates of probability of success
for 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 to
have decreased over time
• Pammolli et al. (2011) find significant decreases in
success rates, especially in Phases II and III
• But analyses by DiMasi and colleagues since the early
1990s suggest that success rates across the different
phases have changed little
Success Rates
14
15. The R&D Cost of a New Medicine
Success Rates
15
Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
16. The R&D Cost of a New Medicine
• Commercial reasons have been increasingly important
for discontinuing projects
• Since 2000, companies have been focusing more on high
risk, high premium areas with a lower “expected
probability of success” (POS), such as:
• Chronic diseases (Alzheimer’s disease, diabetes, obesity,
rheumatoid arthritis) compared to acute diseases (6.9% vs
8.8%)
• Potentially lethal diseases, mostly cancer and some
infectious diseases (5.5% vs. 9.7%) [Pammolli, Magazzini and
Riccaboni (2011)]
Attrition Rates: Reasons for Failure
16
17. The R&D Cost of a New Medicine
• Overall, development times (Phases I-III) appear to have
remained relatively constant over time, at around 6.5
years (75‒79 months) on average. Phase III trials tend to
be the longest development phase, although the most
recent work suggests that development times for Phases
II and III now are similar
Development Times
17
18. The R&D Cost of a New Medicine
Development Times
18
Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
19. The R&D Cost of a New Medicine
• The long timescales of pharmaceutical R&D mean that
the cost of capital has a major impact on the final cost
per successful drug
• The cost of capital should be measured as the expected
return that is foregone, i.e. the return that would be
expected from investing in an equally risky portfolio of
other investments
• The estimated cost per successful drug is highly sensitive
to the cost of capital applied
• The more recent studies use a real annual cost of capital
of 11%, up from the 9% used by DiMasi et al. (1991)
Cost of Capital
19
20. The R&D Cost of a New Medicine
• Two main issues arise with respect to the cost of
capital invested in pharmaceutical R&D
• The magnitude of the cost of capital
• Whether the cost of capital is assumed constant or
instead is assumed to fall as an R&D project progresses
(if successful) through its various stages from discovery
through development to launch – the so-called “staircase”
approach
Cost of Capital
20
21. The R&D Cost of a New Medicine
Cost of Capital
21
Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
22. The R&D Cost of a New Medicine
Criticisms OHE Book
Data – confidential, comes from companies
directly and cannot be replicated
Other recent studies have either used publicly
available information or have used different
confidential data (like ours)
Only self-originated compounds are included and
these represent a small proportion of new drugs –
and the most expensive ones
Decreasing importance of self-originated
compounds relative to licensed-in compounds is
valid, but has become so perhaps only recently.
More recent estimates cannot differentiate so
apply also to a wider universe of compounds, not
just self-originated compounds
Estimates should not be capitalised, given that
companies are not investment houses and have no
choice but to spend money on R&D
Out-of-pocket costs are merely one part of the
total cost. Capitalised costs are real costs.
Investors require a return that reflects alternative
potential uses of their investment
Estimates are pre-tax, so they do not reflect the
fact that R&D expenses are deductible
Societal perspective when thinking about the costs
of R&D of new medicines: total cost of developing
a new drug will be the same no matter who pays --
tax rebates affect who bears the costs, but not the
total amount
Policy Discussions Around the Cost Estimates
22
23. The R&D Cost of a New Medicine
• New estimate for mean R&D costs per NME, based on
previously unpublished information collected by CMRI in
confidential surveys
A New Estimate of R&D Costs
23
Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
24. The R&D Cost of a New Medicine 24
Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
25. The R&D Cost of a New Medicine 25
Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
26. The R&D Cost of a New Medicine 26
Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A.
(2012) The R&D Cost of a New Medicine. London: Office
of Health Economics.
27. The R&D Cost of a New Medicine 27
Source: Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
28. The R&D Cost of a New Medicine
• Our overall probability of success estimates for Phase I, Phase II
and 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 data
report the longest development times, but slightly shorter times for
Phase III. Phase II times from the CMRI data fall between those
reported by DiMasi et al. (2003) and Paul et al. (2010)
• Total out-of-pockets costs for Phases I, II and III are very similar in
our 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 for
Phase III. For Phase I and Phase II, our estimates are the highest
Comparison with Previous Studies
28
29. The R&D Cost of a New Medicine
• Published estimates, including ours, that refer to the
mean cost of R&D per new medicine are just that:
averages
• The literature shows that the costs of R&D vary with
the subgroup of drugs included in the analysis
• Costs vary according to therapeutic area, firm size
and whether the molecule is a “traditional” chemical
compound or a biologic
Warning: Mean Costs May Hide Important Differences
29
30. The R&D Cost of a New Medicine
• R&D costs vary substantially across therapeutic areas
because 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 expensive
therapeutic areas in terms of drug R&D costs are
neurology, respiratory and oncology. This is because drugs
in these categories experience lower success rates and
longer development times.
• By comparison, anti-parasitics and drugs to treat HIV/AIDS
have the lowest drug R&D costs because of higher success
rates and shorter development times
Therapeutic Areas
30
31. The R&D Cost of a New Medicine
• Most of the published calculations of R&D costs to
date focus on self-originated new compounds
because comprehensive data for licensed-
in/acquired compounds are very difficult to collect
• An increasing proportion of drugs now are licensed
in; clinical success rates for such drugs are higher
than for self-originated drugs
Self-Originated versus Licensed-In
31
32. The R&D Cost of a New Medicine
• Greater success may be the results of a “screening
effect” for licensed-in compounds:
• Many licensed-in drugs already were shown to be
promising candidates before licensing
• This difference also is apparent during early research
Self-Originated versus Licensed-In
32
33. The R&D Cost of a New Medicine
• Limited evidence on biological medicines
• DiMasi and Grabowski (2007b): overall clinical success rate for
biotech products is 30.2%, which is higher than the 21.5%
estimate for traditional pharmaceutical products reported by
DiMasi 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 traditional
R&D costs because of the longer development timeline and a
slightly higher cost of capital
Biopharmaceuticals
33
34. 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 faster
patient recruitment
• Still significant proportion of trails located in US and Western
Europe – regulatory conditions, relevant expertise and
infrastructure
Drivers of Trends – Out-of-Pocket Costs
34
35. The R&D Cost of a New Medicine
Increase in
failure rates
• Regulators becoming more risk averse
• R&D is directed towards tougher challenges
• Within companies, projects may advance prematurely to the later
stages of clinical development and then fail in Phase III
Reasons to
counter
increase
• Better preclinical screening that ensures earlier project termination
• Integrating HTA earlier in the process to encourage earlier decisions
about discontinuing projects for commercial reasons
• Developing biomarkers and companion diagnostics that can lead to
personalised or stratified medicine, with greater prospects for
success
• Alliances between companies, increasingly common, also may
increase success rates
Drivers of Trends – Failure Rates
35
In short run important technological challenges may lead to higher failure rates and costs as
science advances and while companies learn how to better develop biomarkers and
companion diagnostics.
But “learning by doing” could drive a more efficient R&D process in the longer term.
36. The R&D Cost of a New Medicine
• Regulators may be more risk averse, leading to increased
regulatory stringency and longer regulatory reviews
• Companies are directing efforts towards therapeutic
areas that intrinsically are associated with very long
clinical development times
• Clinical trials are becoming increasingly complex and, as
a result, take longer to complete
• Trade offs between time and success rate, e.g. longer
Phase II with higher success rate in Phase III
Drivers of Trends – Development Times
36
37. The R&D Cost of a New Medicine
• Number of alternatives have been put forward to try
to make the R&D process more efficient and
affordable
• The key suggestions include focusing on
• The earlier phases reduce technical uncertainties before
undertaking the more expensive trials in the later
development stages
• Allowing for greater flexibility
A New Drug Development Paradigm?
37
38. The R&D Cost of a New Medicine
Four factors are increasing R&D costs:
1. Higher out-of-pocket costs, up nearly 600% from the 1970s
to the 2000s
2. Lower success rates for clinical development as tougher
therapeutic areas are tackled—e.g. neurology (Alzheimer’s),
autoimmune diseases (arthritis), and oncology—from 1 in 5
in the 1980s to 1 in 10 in the 2000s
3. Increases in R&D times as both regulation and science have
become more complex, from 6 years in the 1970s to 13.5
years in the 2000s
4. Increases in the cost of capital—i.e. providing returns to
funders that reflect the high risk of investing in medicines
R&D—from 8% in the 1970s to 11% in the 2000s
Conclusions
38
39. The R&D Cost of a New Medicine
• Important variations around the mean cost per NME for
different types of medicines are observable
• Significant differences are evident in the cost of R&D for new
medicines across therapeutic areas – can be more than
twofold
• Licensed-in compounds tend to be more successful than self-
originated NMEs
• Drugs with a more validated target and more objective
endpoints are more successful than drugs with more novel
mechanisms of action and less clear cut endpoints
• Total capitalised costs for biologics appear to be higher than
for other pharmaceuticals
Conclusions
39
40. The R&D Cost of a New Medicine
Technological challenges
•Targeted diseases currently are
more complex
•Companies need to adapt to
new personalised/stratified
medicines environment
Firms’ behaviour
•Companies continue to work
to improve the efficiency of
R&D decisions
•Greater scrutiny in the early
R&D stages
•Integrating health economics
earlier in the process
•Moving some trials to lower
cost locations or using
specialist contract research
organisations to manage
clinical trials
•Alliances/collaborations
Conclusions
40
R&D cost trends per NME are partly the result of strategic behaviour by firms,
including adjustments to changes in requirements for licensing and
marketing, and partly the result of technological change