E-DRUG: Drug Development Costs

---note from the E-drug moderator:
The following article is long, but the data are very revealing, so we
thought you might all want to see the full article. Let me know if
you don't want this type of long articles.

Wilbert Bannenberg
Email: 73377.3055@compuserve.com
---

Dear E-druggers,

The following is an article titled "Call for More Reliable Costs Data on
Clinical Trials," Published in the January 13, 1997 issue of the
Marketletter, on pages 24 and 25. The article examines evidence from the
US Orphan.Drug Tax Credit, from 1983 to 1993, as well as data from 58 NIH
funded human-use clinical trials. These data are then compared to the
estimates of the costs of human-use clinical trials presented by DiMasi,
Lasagna, Grabowski and Hansen, in a series of well known papers, and used
in the 1993 OTA study on drug development costs. The highpoints include:

** In 1995 dollars, DiMasi et al used a confidential industry survey to
     estimate the average out of pocket costs of Phase I, II and III
     clinical trials at $24.5 million. After adjustments for the risk of
     failure, DiMasi et al say the "expected" cost per approved drug is
     $54.8 million.

** Using a sample of 58 NIH funded clinical trials, the average out-of-
     pocket costs of Phase I, II and III clinical trails was $7 million,
     and the risk adjusted "expected" cost (using the same hazard rates as
     DiMasi, et al) was $16.1 million -- less than 30 percent of the
     DiMasi et al numbers.

** Over the last five years of the US Orphan Drug Tax Credit,
     pharmaceutical companies reported spending only $3.2 million (in
     1995 dollars) on human-use clinical trials, per Orphan Drug approved
     for marketing. This was less than 6 percent of the amount predicted
     by the DiMasi/OTA estimates.

** These data suggest industry reports of drug development costs may be
     biased or inflated, and that the taxpayer role in the development of
     Orphan Drugs is extensive. They also underscore the need for more
     reliable data on drug development costs.

  jamie

The paper follows:
-----------------------------------------------------------

            Call for More Reliable Costs
               Data on Clinical Trials

                 January 13, 1997
                  by James Love

In February 1993, the now defunct US Office of Technology
Assessment issued a report on pharmaceutical R&D,
commissioned to provide lawmakers with an independent
analysis of the cost of developing a new drug (OTA-H-522).
While the OTA report is full of numbers on countless topics,
most people are aware of just one. The OTA said $359
million was the "upper bound on the full cost of bringing
New Chemical Entities to market." This figure has been used
by the multinational pharmaceutical companies to justify the
ever-increasingly prices for new drugs.

However, many readers of the report were struck by the
paucity of independent data collection, and the reliance
upon pharmaceutical company consultants for the core
findings. Stripped to the core, the 1993 OTA report was
simply a restatement of a 1991 paper from the Journal of
Health Economics, by four economists with well known ties to
the industry.

In that paper, Joseph DiMasi and Louis Lasagna from Tufts
University, Henry Grabowski from Duke and Ronald Hansen from
the University of Rochester put the cost of developing a new
drug was $231 million, in 1987 dollars. Because of the
industry's close ties to the report's authors, and the
because the Pharmaceutical Manufacturing Association (now
the Pharmaceutical Research and Manufacturers of America)
published a version of the 1991 study under a PMA cover, the
study was widely seen as an industry estimate. This paper,
often referred to as the "Tufts" study, was controversial,
in part because the figure was far higher than earlier
estimates, and also because it relied upon data from an
unaudited and confidential industry questionnaire.

The OTA did not have access to its own data on R&D outlays,
and Congress never issued a subpoena for the data. Faced
with this lack of information, the OTA hired Mr. DiMasi to
recalculate his early estimates using 1990 dollars, and
using a range of industry "discount rates" to measure the
cost of capital. The $359 million "upper bound" figure was
simply the 1991 Tufts study with the numbers adjusted to
1990 dollars, and using a 14% real rate of capital - up from
the 9.5% used in the 1991 report. The basis for the Tufts
study and the OTA report was a data set which consisted of
expenditures on human-use clinical trials and animal testing
for 93 NCEs. DiMasi et al reported that for the sample, the
average total out-of-pocket costs of Phase I, II and III
clinical trials were $18.9 million, plus $2.8 million for
research using animals, or $21.7 million. The $21.7 million
was then adjusted for the risk of failure, given an
"expected" cost of clinical tests of $48.1 million per
approved drug.

The authors then made some heroic assumptions about the
costs of preclinical research, for which they had no project
level data, and assigned $65.5 million in "expected" outlays
for preclinical research. Both of these numbers were then
increased to reflect the opportunity costs of capital, to
obtain the $231 million and later $359 million figures so
widely used today.

How reasonable are these numbers, given what is known today?
There are several areas where skeptics have questioned the
PhRMA/Tufts/OTA numbers. First, critics say it is
troublesome to apply so much of the industry data, since
industry trade associations have incentives to exaggerate
costs of all aspects of R&D. Secondly, the assumptions
regarding preclinical expenditures are not supported by any
project level data. Thirdly, critics say that much of the
costs of preclinical and clinical research is paid for by
taxpayers.

In an effort to get an handle on this issue, we looked at
two sources of public data on drug development costs. The
US National Institutes of Health provided my offices with
data from 58 clinical trials funded in the 1996 and 1997
financial year budget. We also obtained from the US
Treasury Department 11 years of data on the now-defunct
Orphan Drug Tax Credit. Data from these sources suggest
direct industry outlays on R&D for many drugs may be far
less than has been imagined.

Orphan Drug Tax Credit

From 1983 until 1994, the US government offered a tax credit

to support the development of Orphan Drugs. The tax credit
was for 50% of the direct expenditures on human-use clinical
trials. From 1983 to 1993, some 93 orphan drugs were
approved for marketing. During that same period, companies
receive $106.9 million in tax credits. In order to obtain
these credits, companies reported direct expenditure on
clinical trials of $213.8 million, or $2.3 million per
approved drug.

One expects some lag time between the beginning of the tax
credit and the drug approvals, so we looked at the results
beginning in 1989, the seventh year of the tax credit
program, until 1993. During this five-year period, 60
orphan drugs were approved, while tax credits of $86.6
million were taken, or about $2.9 million per approved drug.
This amount was fairly consistent from year to year. In
1995 dollars, the amount expended on human-use clinical
trials was $3.2 million per approved drug, from 1989 to
1993.

What are we to make of these data (table below)? DiMasi et
al say that the average out-of-pocket cost of human-use
clinical trials is $18.9 million in 1987 dollars, or $24.5
million in 1995 dollars. With these numbers of adjusted for
failures, they calculated the average "expected cost" of
human-use clinical trials (per approved drug) at $42.3
million in 1987 dollars, or $54.8 million in 1995 dollars.
In the study, the average was significantly higher than the
median, and for the median the expected cost of human-use
clinical trials would be $23.7 and $30.7 million. But no
matter how you slice it, it is hard to reconcile the DiMasi
data with the data from the Orphan Drug Tax Credit. The
differences are very large.

[formatted in 10 point courier]

              U.S. Orphan Drug Credit (`000 dollars)

Year Credit Approvals Expenditure $/Drug Expenditure $/Drug
                        <-----Nominal-----> <--1995 dollars--->

1983 236 2 472 236 695 348
1984 105 3 210 70 297 99
1985 204 6 408 68 559 93
1986 6,530 5 13,060 2,612 17,447 3,489
1987 5,154 9 10,308 1,145 13,352 1,484
1988 8,053 8 16,106 2,013 20,117 2,515
1989 14,190 10 28,380 2,838 34,016 3,402
1990 15,637 12 31,274 2,606 35,953 2,996
1991 18,475 12 36,950 3,079 40,841 3,403
1992 17,826 13 35,652 2,742 38,353 2,950
1993 20,486 13 40,972 3,152 42,959 3,305

83:93 106,896 93 213,792 2,299 2,630
89:93 86,614 60 173,228 2,887 3,202

There are three possible explanations. First, it is possible
that not all companies conducting human-use clinical trials
claimed the Orphan Drug Tax Credit on tax returns, for
example if the company was not profitable. However, this
cannot explain the entire disparity. In 1987, the OTA said
some six firms with assets greater than $250 million claimed
$4.7 million in orphan drug tax credits. This implied
expenditures of $9.4 million, or $1.6 million per firm. In
1987, nine orphan drugs were approved for marketing, and
over the next five years an average of 12 drugs were
approved for marketing every year. The amount of reported
expenditures, even from these six firms, seems low.

Another explanation is that the government, rather than the
companies, actually paid for the orphan drug human-use
clinical trials. Indeed, it would seem as though this must
be the case, since the reported expenditures under the
Orphan Drug tax credit are less than 8% of the expenditures
predicted by the PhRMA/Tufts/OTA data. Taken by itself,
this would suggest that 92% of the costs of human-use
clinical trials for orphan drugs is paid for by the
taxpayers, rather than the drug firms.

The third scenario is that the PhRMA/Tufts/OTA numbers are
too high. Based on clinical trial data from the NIH, we
calculated the expected costs, using the same "hazard rates"
for success that were used in the DiMasi study. Thus, for
example, a dollar spent on Phase I trials is multiplied by a
factor of 4.35 to reflect the risks of failure. The average
and median out-of-pocket costs for combined Phase I, II and
III trials were $7 and $4.6 million for the NIH-funded
trials, and using 1995 dollars, the PhRMA/Tufts/OTA figures
were $24.5 and $14.3 million, three times as high.

[formatted in 10 point courier]

                     Cost of NIH and Industry*
                   Clinical Trials (`000 dollars)

No of Observations NIH P/T/O(95 $)

                      Phase I 6 87
                      Phase II 12 70
                      Phase III 40 36

Average cost of trials 6,986 24,467
Average expected cost 16,106 54,816

Median cost 4,604 14,268
Median expected cost 11,490 30,675

*[Note, due to my own editing mistake, the original published version of
this table had reversed the figures for the NIH's average expected cost
and the median cost. The numbers in the text and in the revised table above are correct.]

One partial explanation for the differences between the
PhRMA/Tufts/OTA data and the NIH budget numbers could be the
treatment of overheads. The NIH numbers appear to reflect
direct expenditures on clinical trials, while the
PhRMA/Tufts/OTA may include generous overhead allowances.
In a small number of cases, the NIH trials involve
cooperative R&D agreements, which may involve some industry
cost sharing, such as with Taxol (paclitaxel), where
Bristol-Myers Squibb provided the NIH with 17 kilos of Taxol
for use in NIH-sponsored trials. This is an area for
further research. It is also possible that the
PhRMA/Tufts/OTA data was biased, given the incentives to the
industry to overestimate private-sector R&D costs.

Our initial view is that the huge disparities between the
Orphan Drug Tax Credit data and PhRMA/Tufts/OTA estimates of
drug development costs are explained by a combination of all
three factors -- some unclaimed tax credits, a large role
by the government in the development of orphan drugs, and
overstating of costs by the industry in the PhRMA/Tufts/OTA
study. The differences also point to the need for
disclosure to the public of more reliable data from the
industry, so policy makers can better evaluate industry R&D
costs.

James Love is director of economic studies at the Center for
Study of Responsive Law in Washington, USA.

Contact Information
Center for Study of Responsive Law
P.O. Box 19367, Washington, DC 20036
Voice 202.387-8030; Fax 202.234-5176
http://www.essential.org/cpt; love@tap.org