Rough Seas Ahead
As the New Year progresses, drug manufacturers are seeking to navigate changing—and increasingly stringent—governmental, financial, and commercial environments. Several recent studies and reports provide useful data and insights.
Looking back over the previous four decades, Britain’s Office of Health Economics (OHE), an industry-funded think tank, found that the average cost of developing a new drug has jumped tenfold, from $199 million during the 1970s to $1.9 billion during the 2000s (both in 2011 dollars). Reasons for the increase include greater regulatory hurdles, demands for larger returns on equity, longer development times, and lower success rates. These findings confirm results of earlier academic studies, including those performed by the Tufts University Center for the Study of Drug Development and others.
Using previously unpublished information from confidential interviews conducted by the Certified Medical Representatives Institute, a nonprofit healthcare educational organization in the United Kingdom, OHE places the average fully capitalized cost of a new drug at closer to $1.5 billion (in 2011 dollars). Time costs, including the cost of capital, represent about one-third of this total.
“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,” says the OHE report, “The R&D Cost of a New Medicine.”
It cites four major factors as behind these increasing costs:
• Out-of-pocket R&D costs have surged nearly 600% since the 1970s. Recent estimates place these at $215 million to $220 million for Phases 1 through 3, although the amounts per phase vary depending on the source of the estimate.
• Success rates for clinical development have been cut in half as tougher therapeutic areas are tackled. These areas include neurology (such as Alzheimer’s), autoimmune diseases (arthritis), and oncology. Success rates halved from 1 in 5 during the 1980s to 1 in 10 in the 2000s.
• R&D times have more than doubled as regulation and science have become more complex. The average time spent in clinical studies increased from 6 years during the 1970s to 13.5 years in the 2000s.
• The cost of capital, namely providing returns to funders that reflect the high risks of investing in pharmaceutical R&D, increased from 8% during the 1970s to 11% in the 2000s.
In response, companies are taking steps to improve the efficiency of their R&D activities. These steps include making decisions about the commercial prospects of a drug candidate earlier in the process and by more tightly managing clinical trial costs, often by outsourcing aspects or performing trials in lower-cost locations. And as R&D technology evolves, wider ranges of expertise and more data are needed. Because of this, drug companies are forging new collaborations among themselves and with nonprofits and universities with the goal of sharing risks and rewards.
Not all the news is bad. In their 2012 annual report, Deloitte and Thomson Reuters gave Big Pharma mixed grades in late-stage drug development. The number of new product approvals increased by a third from 32 in 2010-2011 to 41 in 2011-2012. But the value of these products fell by about 30%, from $309 billion to $211 billion during the same time period.
Ten of the 12 Big Pharmas studied improved the replenishment of their late-stage pipelines, with the number of new compounds more than doubling from 35 to 78. The forecasted product value also doubled from $193 billion to $378 billion while the average cost of bringing a product to market held steady at $1.1 billion, said the report, “Measuring the Return from Pharmaceutical Innovation 2012.”
“This uplift in replenishment of the late-stage pipeline is promising,” said John Cole, solutions director, business practice at Thomson Reuters. “A variety of factors—including an increased acceptance of novel innovation models, sharing of precompetitive data and assets, and the expanding scientific knowledge base to determine new patient populations and disease indications for drug development—is starting to pay dividends by increasing the breadth, depth, and potentially quality of the late-stage pipeline.”
However, the companies also struggled to reduce the impact of late-stage terminations, which remained relatively static at 19 in 2010-11 and 22 in 2011-12. Revenue lost to these late-stage terminations was $73 billion and $77 billion, respectively. “Once a compound proceeds to late-stage development, the cost of failure increases significantly,” said Julian Remnant, head of Deloitte’s European R&D advisory practice. “Repositioning or repurposing is one avenue that could be used to recoup a proportion of R&D costs from failed compounds.”
A ‘Golden Era’
Despite the travails, PricewaterhouseCoopers (PWC) foresees a “golden era” for pharmas that are able to shed excess baggage and innovate. By 2020, PWC says, the worldwide drug market may hit $1.6 trillion, ushering in a “golden era of renewed productivity and prosperity” for those companies able to adapt.
PWC predicts that major scientific and technological advances, coupled with sociodemographic changes (such as aging populations and rising consumer expectations), increasing demand for medicines, and trade liberalization will revive pharma’s fortunes 10 years from now. But the industry has to survive long enough to get there, PWC says in its report, “From Vision to Decision: Pharma 2020.” While some of the recommended actions for drug companies may sound like common sense, taken together they offer a prescription for success:
• Provide “real-world” data on drug outcomes, which requires the necessary infrastructure to do so.
• Decide how much (if anything) to invest in foreign growth markets and the strategies to pursue in them.
• Become more selective about which diseases to address. Consider the implications of investing in new treatment types, such as vaccines and regenerative medicines.
• Invest more heavily in genetics and genomics and revise R&D processes to improve scientific productivity.
• Collaborate with academia, governmental, nongovernmental organizations, and other life sciences companies and stakeholders—such as regulators and patient groups—to access the best science and eliminate wasteful activities.
• Become more discriminating about drug candidates and drop potentially unprofitable ones before incurring big expenses.
• Behave ethically at all times.
• Transform corporate culture to foster innovations and address the needs of patients, payers, and providers.
About the Author
Contributing editor Ted Agres, MBA, is a veteran science writer in Washington, DC. He writes frequently about the policy, politics, and business aspects of life sciences.