KEI comment on the new Tufts Study on Drug Development Costs
The Tuft Center for Study of Drug Development (CSDD) has just concluded a press conference, and issued a press release about their new study of drug development costs. The key number is $2.558 billion.
First impression: the study, which is part of a public relations campaign by the drug companies to justify high prices, is long on propaganda, and short of details. The drug companies that fund the CSDD are hoping people will just take the number and quote it for several years until a new one is needed. If Tufts or PhRMA thought it was needed, they would have provided more transparency of the data in the sample. They don't think they need to.
How high is the number? Really big. The most recent industry funded study was in 2012: "The R&D Cost Of A New Medicine," by Jorge Mestre-Ferrandiz, Jon Sussex And Adrian Towse, December 2012, Office of Health Economics (OHE), and it came in at $1.506 billion. Note the OHE study was funded by AstraZeneca.
DiMasi's new study came in more than a billion higher, just 23 months later. The new number is 70 percent higher than the 2012 OHE study, and 3.1 times the $802 estimate published by DiMasi in 2003.
The press release and the slides used at the press conference did not give much in the way of details. We don't know how many patients were in the trials, or how much money was claimed to have been spent per patient in the trials. Since the entire estimate was based upon the costs of the trials, we don't have any idea of what the sample looked like. This is particularly relevant when cancer trials are 1/4th to 1/5th the size of trials for all drugs, and the study will be used to justify high prices for cancer drugs, or when you consider than in 2010, just two drugs represented more than half of all patients in clinical testing. It is strategic for Tufts to suppress many of the key details, since they could be compared to actual data on drug development. The only area where details were forthcoming were for the general risks associated with each stage of testing, and this data is already well known from public sources, although who knows how it fits into the still secret sample.
The study assumes a role of ZERO for the NIH in funding the pre-clinical development of drugs. What DiMasi did was assume that 44.5 percent of the risk adjusted clinical costs were incurred for pre-clinical development -- for every drug. (He assumed pre-clincial outlays were 30.8 percent of risk adjusted clinical testing so the calculation is 30.8/69.2 = .445). This is not based upon data on outlays on the drugs in the sample, but based only on this assumed constant ratio of expenses between clinical and pre-clinical, and it applies even when pre-clinicial research is funded by a government agency.
There is actually a lot of evidence about drug development costs from the orphan drug tax credit. Since 2005, 57 percent of new cancer drugs have been registered first for orphan indications, and 78 percent have benefited from the Orphan designation. Yet in the press conference, DiMasi acted as if these drugs were not important. Through 2010, the amount of money claimed for the Orphan Drug tax credit, which covers 50 percent of the costs of clinical testing, was less than $650 million --- for all drugs being tested in that year! Hard to get from $650 million for 14 approvals to $2.6 billion for one approval.
DiMasi estimates an "Average out-of-pocket cost of $1,395 million" but what this figure represents is an estimate of the risk adjusted outlays on drug development, including the actual out of pocket costs claimed for his secret sample of drugs, adjusted for risk, then automatically adding 44.5 percent of the risk adjusted number of pre-clinical expenses. To this he adds "time costs (expected returns that investors forego while a drug is in development) of $1,163 million".
How do you get to $2.6 billion?
The words "average out-of-pocket" are misleading, for the following reason. They give the impression that a company actually spent $1.4 billion on some drug, and it was risky. But no company spent $1.4 billion a drug. The number is a combination of what they spent on the drug that was approved, and money spent on projects that failed, at least in theory. Here is my guess for what the elements of the $1.4 billion look like, based upon the slides that DiMasi presented today. I believe a reported outlay of $1 on clinical testing was adjusted for risk, so it is now counted as $3.5.(*see explanation below) To this, DiMasi adds an automatic 44.5 percent more, or $1.57, for pre-clinical spending. Now the $1 in clinical testing is counted as $5.06, to reflect the risk adjusted outlays on both clinical and pre-clinical testing. So, the $1.395 billion in "out-of-pocket" expenses probably looks something like $276 million for clinical trial expenses, $690 million is risk adjustments for the clinical investment, bringing the total to $966 million. Add in 44.5 percent, or $430 million for pre-clinical expenses, which may or may not have been incurred, and you have $276+$690+$430 = $1.395 billion (rounding suppressed)
So which number sounds more impressive? "$276 million, plus adjustments for risk?" Or $1,395 billion in "average out of pocket" expenses? This is one way that the study was designed to confuse people who do not have the capacity or time to unpack the numbers.
Then there is the issue of the cost per patient. If the average number of patients in trials is 5,000, the average cost per-patient will be $55,200 per patient, a number that is not credible as an average, based upon data from third party sources. But now I'm guessing. Joe DiMasi knows what these numbers actually are. Eventually, we will see them, after the $2.6 billion number is burned into our brains. Tufts says the full study will be available, but not until some time next year.
But what else can I say about $276 million as an average for clinical testing? The entire IRS outlay for the orphan drug tax credit was less than $650 million in 2010, and that year the FDA gave 195 Orphan designations and 14 marketing approvals. If clinical testing outlays were really as high as DiMasi says, the IRS outlays, while growing, would have been nearly an order of magnitude larger.
And finally, there is the final boost in the numbers from the "time costs." This is $1.163 out of $2.558 billion. How does the cost estimate now look? Your $1 in clinical testing costs (at some huge per-patient costs that are secret for now) becoming $3.5, after adjustments for risk. Then you add in the $1.57 for automatically assumed pre-clinical costs (44.5 percent of the $1.57), which adds to $5.06. Then you add in $4.22, for finance charges (long estimated development times, financed at inflation PLUS 10.5 percent), and you get $9.28. That how you get to $2.6 billion, in 2014.
The next step will be for people to put some pressure on Tufts to provide more details of what the data looks like. The 2010 OHE report was 98 pages. So far, we have a press release of 579 words.
Here is the Tufts press release
November 18, 2014
Cost to Develop and Win Marketing Approval for a New Drug Is $2.6 Billion
BOSTON – Nov. 18, 2014 – Developing a new prescription medicine that gains marketing approval, a process often lasting longer than a decade, is estimated to cost $2,558 million, according to a new study by the Tufts Center for the Study of Drug Development.
The $2,558 million figure per approved compound is based on estimated:
Average out-of-pocket cost of $1,395 million
Time costs (expected returns that investors forego while a drug is in development) of $1,163 million
Estimated average cost of post-approval R&D—studies to test new indications, new formulations, new dosage strengths and regimens, and to monitor safety and long-term side effects in patients required by the U.S. Food and Drug Administration as a condition of approval—of $312 million boosts the full product lifecycle cost per approved drug to $2,870 million. All figures are expressed in 2013 dollars.
The new analysis, which updates similar Tufts CSDD analyses, was developed from information provided by 10 pharmaceutical companies on 106 randomly selected drugs that were first tested in human subjects anywhere in the world from 1995 to 2007.
“Drug development remains a costly undertaking despite ongoing efforts across the full spectrum of pharmaceutical and biotech companies to rein in growing R&D costs,” said Joseph A. DiMasi, director of economic analysis at Tufts CSDD and principal investigator for the study.
He added, “Because the R&D process is marked by substantial technical risks, with expenditures incurred for many development projects that fail to result in a marketed product, our estimate links the costs of unsuccessful projects to those that are successful in obtaining marketing approval from regulatory authorities.”
In a study published in 2003, Tufts CSDD estimated the cost per approved new drug to be $802 million (in 2000 dollars) for drugs first tested in human subjects from 1983 to 1994, based on average out-of-pocket costs of $403 million and capital costs of $401 million.
The $802 million, equal to $1,044 million in 2013 dollars, indicates that the cost to develop and win marketing approval for a new drug has increased by 145% between the two study periods, or at a compound annual growth rate of 8.5%.
According to DiMasi, rising drug development costs have been driven mainly by increases in out-of-pocket costs for individual drugs and higher failure rates for drugs tested in human subjects.
Factors that likely have boosted out-of-pocket clinical costs include increased clinical trial complexity, larger clinical trial sizes, higher cost of inputs from the medical sector used for development, greater focus on targeting chronic and degenerative diseases, changes in protocol design to include efforts to gather health technology assessment information, and testing on comparator drugs to accommodate payer demands for comparative effectiveness data.
Lengthening development and approval times were not responsible for driving up development costs, according to DiMasi.
“In fact,” DiMasi said, “changes in the overall time profile for development and regulatory approval phases had a modest moderating effect on the increase in R&D costs. As a result, the time cost share of total cost declined from approximately 50% in previous studies to 45% for this study.”
The study was authored by DiMasi, Henry G. Grabowski of the Duke University Department of Economics, and Ronald W. Hansen at the Simon Business School at the University of Rochester.
Attached also are backgrounder and the slides used at the presentation, both prepared by the Tufts CSDD.