Joseph A. DiMasi, Ph.D. Director of Economic Analysis Tufts Center for the Study of Drug Development Tufts University SLA Pharmaceutical & Health Technology.

Joseph A. DiMasi, Ph.D. Director of Economic Analysis

Tufts Center for the Study of Drug DevelopmentTufts University

SLA Pharmaceutical & Health TechnologyDivision Spring Meeting

Boston, MA, March 19, 2007

Measuring Trends in the Development of New Drugs: Time, Costs, Risks and

Returns

Agenda New Drug development times

Risks in new drug development

R&D costs and returns for new drugs

Pace of competitive development

Impact of improvements to the R&D process

Trends in new drug pipelines

New Drug Development Times

0

2

4

6

8

10

12

Year of NDA Approval

Yea

rs

Total Phase

IND Phase

Approval Phase

Points are 3-year moving averages

Mean U.S. Approval and Clinical Phases for

U.S. New Drug Approvals, 1963-2004

Source: Tufts CSDD, 2006

Clinical and Approval Times Vary Across Therapeutic

Classes, 2002-04

Clinical and Approval Times Vary Across Therapeutic

Classes, 2002-04

4.8 1.5

5.2 2.8

5.6 1.9

6.3 0.6

6.3 1.3

6.6 1.9

9.0 0.8

10.4 1.7

0 14Years

Cardiovascular

Anesthetic/Analgesic

Gastrointestinal

AIDS Antivirals

Endocrine

Antiinfectives

Antineoplastic

Neuropharmacologic

Clinical Phase Approval Phase

12.1

7.6

8.5

7.5

8.0

6.3

9.8

Source: Tufts CSDD, 2006

6.9

New Drug Development Risk

Approval Success Rates for NCEs Also Vary by Therapeutic Class

Approval Success Rates for NCEs Also Vary by Therapeutic Class

10.9%

14.4%

15.2%

19.9%

27.2%

40.4%

0 45Approval Success Rate

GI/Metabolism

CNS

Cardiovascular

Respiratory

Oncology/Immunology

Antiinfective

Source: Tufts CSDD Impact Report, 8(3): May/June 2006

Pharmaceutical R&D Productivity

New Drug Approvals Are Not Keeping Pace with Rising

R&D Spending

New Drug Approvals Are Not Keeping Pace with Rising

R&D Spending

0

15

30

45

60

1963 1968 1973 1978 1983 1988 1993 1998 2003

NC

E A

pp

rovals

0

20

40

R&

D E

xp

en

ditu

res

(Billio

ns o

f 2004$)

Source: Tufts CSDD Approved NCE Database, PhRMA, 2005R&D expenditures are adjusted for inflation

R&D Expenditures

New Drug Approvals

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, 87th Congress,1st Session, “Study of Administered Prices in the Drug Industry,” June 27, 1961, p.136

Pharmaceutical R&D Costs and Returns

Opportunity Cost for Investments

Consider two investment projects, A and B

Both projects require the same out-of-pocket 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

121

336 282

466403

802

0

100

200

300

400

500

600

700

800

900

Mil

lio

ns

of

2000

$

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

140

403543

95

802897

0

200

400

600

800

1000

1200

Mil

lio

ns

of

2000

$

Out-of-Pocket Capitalized

Post-approval Pre-approval Total

Source: DiMasi et al., J Health Economics 2003;22(2):151-185

Annual Growth Ratesfor Out-of-Pocket R&D

Costs

7.8%

2.3%

6.1%

11.8%

7.0% 7.6%

Preclinical Clinical Total

1970s to 1980s approvals 1980s to 1990s approvals

Source: DiMasi et al., J Health Economics 2003;22(2):151-185

5,6215,507

3,5673,233

1,3211,576

1977-80 1981-84 1985-88 1990-92 1994-95 1998-01

Approval Period

Su

bje

cts

Mean Number of Subjects in NDAs for NMEs

Sources: Boston Consulting Group, 1993; Peck, Food and Drug Law J, 1997; PAREXEL, 2002

Clinical Trial Complexity Index (Phases I-III)

90

100

110

120

130

140

150

1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: DataEdge, 2002

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

Returns to New Drug Development

Present Values of Net Sales and R&D Cost

for New Drugs by Sales Decile (millions of 2000 $)

0

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10

Deciles

Aft

er-t

ax n

et s

ales

After-tax average R&D Cost

Source: Grabowski et al., PharmacoEconomics 2002; 20(Suppl 3):11-29

Biopharmaceutical R&D Costs

71.0%

44.2%

68.5%

21.5%

83.7%

56.3%64.2%

30.2%

Phase I-II Phase II-III Phase III-Approval

Phase I -Approval

Tra

nsit

ion

Pro

babi

lity

Biotech Pharma

Transition Probabilities for Clinical Phases

Source: DiMasi and Grabowski, Managerial and Dec Econ 2007, in press

12.3

19.5

26.0

29.3

33.8

32.9

18.2

16

0 120

Pharma

Biotech

Months

Phase I Phase II Phase III RR

Clinical Development and Approval Times

97.7

90.3

Source: DiMasi and Grabowski, Managerial and Dec Econ 2007, in press

417

265

682615 626

1,241

198

361

559

Preclinical** Clinical Total

Mil

lion

s (2

005$

)

Out-of-pocket Time Capitalized

** All R&D costs (basic research and preclinical development) prior to initiation of clinical testing

Pre-Approval Out-of-Pocket (cash outlay) and Time Costs per Approved New

Biopharmaceutical*

* Based on a 30.2% clinical approval success rate

Source: DiMasi and Grabowski, Managerial and Dec Econ 2007, in press

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

Biopharmaceutical and Pharma R&D Costs Compared

136

316

452

150

522

672

559

361

198

Preclinical* Clinical Total

Mil

lio

ns

(20

05

$)

Biotech Pharma Pharma (time-adjusted)**

* All R&D costs (basic research and preclinical development) prior to initiation of clinical testing

Pre-Approval Out-of-Pocket Costper Approved New Molecule

** 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, in press

615 626

1,241

376

523

899

439

879

1,318

Preclinical* Clinical Total

Mil

lion

s (2

005$

)

Biotech Pharma Pharma (time-adjusted)**

* All R&D costs (basic research and preclinical development) prior to initiation of clinical testing

Pre-Approval Capitalized Costper Approved New Molecule

** 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, in press

The Pace of Competitive Development

Market Exclusivity for First-in-Class has Declined: Mean

Time to First Follow-on Approval

Market Exclusivity for First-in-Class has Declined: Mean

Time to First Follow-on Approval

1.8

2.8

5.1

5.9

8.2

0 9Years

1995-98

1990-94

1985-89

1980-84

1970s

Per

iod

of

Fir

st-i

n-C

lass

Ap

pro

val

Source: DiMasi and Paquette, PharmacoEconomics 2004;22(Suppl 2):1-14

Percent of Follow-on Drugs Reaching Clinical Milestone Prior to First-in-Class Drug Reaching Same Milestone

Percent of Follow-on Drugs Reaching Clinical Milestone Prior to First-in-Class Drug Reaching Same Milestone

14%

10%

27%

42%

35% 36%

0

50

1985-1989 1990-1994 1995-1998

Period of First-in-Class Approval

IND Filed 1st Human Test

Source: DiMasi, Paquette, PharmacoEconomics 2004;22(Suppl 2):1-14

Follow-on Approvals Create Competition Resulting in Price

Discounts

Follow-on Approvals Create Competition Resulting in Price

Discounts

2

0

5 5

6

5 5

3

2

7

0

8

Nu

mb

er o

f N

ew D

rug

s

-10% to -3% -3% to3% 3% to 15% 15% to 40% >40%

Relative Price Discount

Mean Price for Existing Drugs Price Leader

Source: DiMasi, 2000 [http://aspe.hhs.gov/health/reports/drug-papers/dimassi/dimasi-final.htm]

* Analysis based on FYs 1995-1999.

Impact of Improvements in Drug Development Productivity

0%

5%

10%

15%

20%

25%

30%

35%

Success Rate

Cos

t red

uctio

n

Average phase cost Phase cost adjusted for cost of failures

Cost Reductions from Higher Clinical Success Rates

Source: DiMasi, PharmacoEconomics 2002; 20(Suppl 3):1-10

0%

5%

10%

15%

20%

25%

30%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Phase time reduction

Cos

t red

uctio

n

Clinical cost Total cost

Cost Reductions from Simultaneous Percentage

Decreases in All Phase Lengths

Source: DiMasi, PharmacoEconomics 2002; 20(Suppl 3):1-10

Trends in Drug Development Pipelines

0

20

40

60

80

100

1993-1997 1998-2002 2003-2005

Clinical Testing Pipelines for Large Pharmaceutical Firms* Have Grown in Recent

Years (Phase I Starts per year)

Source: Tufts CSDD Impact Report, 8(3): May/June 2006

* Ten largest pharmaceutical firms

Trends in New Drug Development Pipelines* by

Therapeutic Class

Trends in New Drug Development Pipelines* by

Therapeutic Class

4.8%

20.5%

4.3%

21.9%

14.3%

13.7%

6.5%

27.2%

8.3%

19.6%

9.1%

11.6%

9.1%

20.2%

10.7%

20.6%

8.7%

7.9%

0% 30%

Respiratory

Oncology/Immunologic

GI/Metabolism

CNS

Cardiovascular

Antiinfective

Percent of Phase I Pipeline

1993-97 1998-02 2003-05

Source: Tufts CSDD Impact Report, 8(3): May/June 2006

* Ten largest pharmaceutical firms

Large Pharmaceutical Firms* are Increasingly Licensing-in

New Drugs

77.870.3 71.8

14.823.6 25.0

7.4 6.23.2

0

20

40

60

80

100

Per

cent

Self-originated Licensed-in Licensed-out

1993-97 1998-02 2003-05

Source: Tufts CSDD Impact Report, 8(3): May/June 2006 * Ten largest pharmaceutical firms

Conclusions Drug development has been and still is costly,

risky, and lengthy

Periods of market exclusivity have shrunk for first-in-class drugs

The potential payoffs for improvements in the development process are substantial

After a period of decline, more new drugs are now entering clinical testing pipelines