GOOD RETURNS MOTIVATE PHARMA TO DEVELOP NEW DRUGS
(Part 1 out of 2)
by Stephen D. Simpson, CFA
The cost of prescription drugs is a perennial subject of heated debate, as advocates on one side argue that drug companies make windfall profits and overcharge health care systems and advocates on the other side argue that higher drug prices simply reflect a higher cost of doing business and a need for companies to make a return commensurate with the risks they take on. Although I have no delusions that I'll change the minds of those who believe drugs are too expensive and that drug companies are abusing patients and insurance companies, the impact of rising costs of drug development can't be ignored.
Costs Keep Climbing
According to a study done by Tufts University, roughly 40 years ago (1975) it only cost $100 million in 2005 dollars to develop one drug from the lab to FDA approval. By 1987, that figure had tripled and by 2000 the cost was up to $800 million. In 2005, the per-drug cost of a successful approved drug had reached a whopping $1.3 billion.
It's not hard to see why costs are rising. Above and beyond the “everything's just more expensive now” argument, drug companies have had to significantly expand the size and complexity of their studies. The number of procedures performed as part of drug trial (that is, particular tests, treatments, and other such steps) has increased by 50% to 65% just in the last ten years, and as anyone who has seen a recent bill from a clinic or hospital can attest, every test comes at a cost. At the same time, drug trials have become larger and larger, and drug companies are required to study the effect of drugs in larger and more diverse populations than ever before.
There are at least three notable factors playing a role in these larger, more complex drug trials. First, the FDA has steadily increased its expectations and requirements for approval – over the last decade, for instance, it has become a nearly established requirement that companies looking for approval of new diabetes drugs must include a cardiovascular outcomes study. With a growing burden on establishing the safety of new drugs, then, there are more required tests throughout the clinical trial process.
On a related note, larger drug companies are increasingly looking to larger, more complex studies as a way of de-risking the approval process. In most cases it is cheaper to conduct a larger, more complex Phase 3 study than to face FDA rejection and a requirement to go back and do another study to address a perceived deficiency in the drug's data package. Last and not least, drug companies have seen more pressure from their insurers to conduct more thorough studies – with the cost of legal settlements also rapidly rising, insurance companies are demanding more thorough (and expensive) safety testing as a way of reducing product liability payouts.
Success Is Far From Assured
At its core, drug development is still a high-risk endeavor. Only about 19% to 21% of drugs in Phase 1 trials will ultimately see approval. Phase 1 studies are not particularly demanding, though, and roughly 70% of drugs go on to Phase 2 where the odds of ultimate approval are still quite low (roughly 28%).
Once a drug makes it into Phase 3 testing, the odds significantly improve (58% to 62% make it through to approval), but the costs also go up considerably – Phase 3 studies are about one-third more expensive on a per-patient basis and Phase 3 studies are almost always considerably larger (6x to 30x the number of patients versus Phase 2). Of those drugs that are ultimately approved, as much as 90% of the development spending can occur in Phase 3 (though 65% to 75% is likely a closer estimate for the typical drug).
Only about 32% of drugs put into human studies will it make it to Phase 3, and those failures (nearly seven out of every 10 drugs) will cost around $40 million each on a median basis, but with some pre-Phase 3 programs costing as much as $100 million. Once those drugs make it into Phase 3, trials can cost anywhere from hundreds of millions of dollars on average to more than $2 billion depending upon the disease in question (cardiovascular disease drugs, for instance, tend to require much larger phase 3 studies).
My calculations suggest that, on the basis of past company-reported surveys regarding per-patient trial costs and using data from ClinicalTrials.gov to estimate median trial sizes, for the two approved drugs out of 10, a drug company may spend around $800 million, while the cost of the eight failures will total to almost $750 million. Clearly these numbers are lower that the $1.3 billion/per drug figure cited earlier in the Tufts study, and at least some of this has to do with how to allocate expenses like preclinical development and “basic research”, licensing fees, and so on, and some of it also the difference between median and mean spending.
Costs Keep Climbing
According to a study done by Tufts University, roughly 40 years ago (1975) it only cost $100 million in 2005 dollars to develop one drug from the lab to FDA approval. By 1987, that figure had tripled and by 2000 the cost was up to $800 million. In 2005, the per-drug cost of a successful approved drug had reached a whopping $1.3 billion.
It's not hard to see why costs are rising. Above and beyond the “everything's just more expensive now” argument, drug companies have had to significantly expand the size and complexity of their studies. The number of procedures performed as part of drug trial (that is, particular tests, treatments, and other such steps) has increased by 50% to 65% just in the last ten years, and as anyone who has seen a recent bill from a clinic or hospital can attest, every test comes at a cost. At the same time, drug trials have become larger and larger, and drug companies are required to study the effect of drugs in larger and more diverse populations than ever before.
There are at least three notable factors playing a role in these larger, more complex drug trials. First, the FDA has steadily increased its expectations and requirements for approval – over the last decade, for instance, it has become a nearly established requirement that companies looking for approval of new diabetes drugs must include a cardiovascular outcomes study. With a growing burden on establishing the safety of new drugs, then, there are more required tests throughout the clinical trial process.
On a related note, larger drug companies are increasingly looking to larger, more complex studies as a way of de-risking the approval process. In most cases it is cheaper to conduct a larger, more complex Phase 3 study than to face FDA rejection and a requirement to go back and do another study to address a perceived deficiency in the drug's data package. Last and not least, drug companies have seen more pressure from their insurers to conduct more thorough studies – with the cost of legal settlements also rapidly rising, insurance companies are demanding more thorough (and expensive) safety testing as a way of reducing product liability payouts.
Success Is Far From Assured
At its core, drug development is still a high-risk endeavor. Only about 19% to 21% of drugs in Phase 1 trials will ultimately see approval. Phase 1 studies are not particularly demanding, though, and roughly 70% of drugs go on to Phase 2 where the odds of ultimate approval are still quite low (roughly 28%).
Once a drug makes it into Phase 3 testing, the odds significantly improve (58% to 62% make it through to approval), but the costs also go up considerably – Phase 3 studies are about one-third more expensive on a per-patient basis and Phase 3 studies are almost always considerably larger (6x to 30x the number of patients versus Phase 2). Of those drugs that are ultimately approved, as much as 90% of the development spending can occur in Phase 3 (though 65% to 75% is likely a closer estimate for the typical drug).
Only about 32% of drugs put into human studies will it make it to Phase 3, and those failures (nearly seven out of every 10 drugs) will cost around $40 million each on a median basis, but with some pre-Phase 3 programs costing as much as $100 million. Once those drugs make it into Phase 3, trials can cost anywhere from hundreds of millions of dollars on average to more than $2 billion depending upon the disease in question (cardiovascular disease drugs, for instance, tend to require much larger phase 3 studies).
My calculations suggest that, on the basis of past company-reported surveys regarding per-patient trial costs and using data from ClinicalTrials.gov to estimate median trial sizes, for the two approved drugs out of 10, a drug company may spend around $800 million, while the cost of the eight failures will total to almost $750 million. Clearly these numbers are lower that the $1.3 billion/per drug figure cited earlier in the Tufts study, and at least some of this has to do with how to allocate expenses like preclinical development and “basic research”, licensing fees, and so on, and some of it also the difference between median and mean spending.
Fuente: SmartBrief - INVESTOPEDIA
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