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`ZICUIIIIII I \I‘
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`LUPIN V. SENJU IPR2015-01100
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`Page 1 of 17
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`SENJU EXHIBIT 2314
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`Page 1 of 17
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`SENJU EXHIBIT 2314
`LUPIN v. SENJU
`IPR2015-01100
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`Edited by
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`PATRICIA M. DANZON
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`AND
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`SEAN NICHOLSON
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`OXFORD
`UNIVERSITY PRESS
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`CONSULTING EDITORS
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`MICHAEL SZENBERG
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`Lu BIN SCHOOL osr Busmass, PACE UNlVERSI‘I'Y
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`L
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`ALL RA M run--raw
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`UNIVERSITY or C
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`ALIFORNIA. BERKELEY Ex1:ENs1oN
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`CONTENTS
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`Contributors
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`1.
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`Introduction
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`PATRICIA M. DANzoN AND SEAN NICHOLSON
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`PART I PHARMACEUTICAL INNOVATION
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`2. RSID Costs and Returns to New Drug Development:
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`A Review of the Evidence
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`IOSEPH A. DIMASI AND HENRY G. GRABOwsK:
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`3. Financing Research and Development
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`SEAN NICHOLSON
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`4. Cost of Capital for Pharmaceutical. Biotechnology,
`and Medical Device Firms
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`SCOTT E. HARRINGTON
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`5. The Regulation of Medical Products
`ANUP MALANI AND ToMAs PHu.u>soN
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`6.
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`Incentives to Innovate
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`DARIUS LAt<nAwAu.A AND NEERAJ Soon
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`7. Patents and Regulatory Exclusivity
`RBBECCA S. EISENBERG
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`OXJFO RD
`IINIVIEJISITY PRESS
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`Copyright 823 2012 by Oxford University Press
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`Published by Oxford University Press, Inc.
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`Oxford is a registered Iradeinark offlxford University Press
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`All rights reserved. No part ofthis publication may he reprncluced.
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`stoml in B retrieval systein, or transmitted, in any form or by any means.
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`electronic. mechanical. photocopying. recording, or otherwise.
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`willmitl the prior permission offlxford University Press.
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`Lihmry nl Congress Calalflgillg-ll1~I'I1l)llCaIiDn Data
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`The 0:: font handbook of lhe economics of Ilia biopharmnceuliral Industry!
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`edited by Patricia M. Danzon and Sean Nicholson.
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`p. cm.
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`Includes bibliographical references and indexes.
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`ISBN 978-0-19-9742951-8 {cloth : iilk. paper)
`I. Pharmaizetltical industry.
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`1. Biopharrn:ieeulics—Economic aspects.
`1.
`|‘.|anv.on, Patricia Munch. 1946-v
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`II. Nicholson. Scan.
`Ill. 'l'it|c: [Economics oftlte hiophartnaceulical industry.
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`IIDg665.5.09.1. 201:
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`338.4'76i5y—dc23
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`zoncmosis
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`ISBN 9?Ii-0-19-9?4299-S
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`PART II THE MARKET FOR PHARMACEUTICALS
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`20:
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`8. Pricing and Reimbursement in US Pharmaceutical Markets
`ERNST R. BERNDT AND ]osi3PH P. Nnwnousn
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`9. Regulation of Price and Reimbursement for Pharmaceuticals
`PATRICIA M. DANzoN
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`'3' _"lI_oulc analyses of research and development (R8113) costs and returns in
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`' 5 aceuticals have received prominent attention by scholars and policy
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`filters. Investment cycles in pharmaceuticals span several decades. Trends in
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`- R&D costs and returns shape the incentives for companies to pursue 118:1)
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`opportunities for new medicines. Economic studies provide a basis for evaluat-
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`-nll the factors affecting R8rD costs and returns and can be useful in assessing
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`ductivity changes in the pharmaceutical and biopharrnaceutical industries
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`This chapter reviews the extensive literature on R8tI) costs and returns. The
`"section focuses on R&D costs and the various factors that have affected the
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`ads in real R8:D costs over time. The second section considers economic stud-
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`On the distribution of returns in pharmaceuticals for different cohorts of new
`introductions. It also reviews the use of these studies to analyze the impact
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`CHAPTER 2.
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`R&D COSTS AND
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`RETURNS TO NEW
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`DRUG DEVELOPMENT:
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`A REVIEW OF THE
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`EVIDENCE
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`IOSEPH A. DIMASI AND
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`HENRY G. GRABOWSKI
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`22
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`Pl-l:‘\Rl\-'U\CEU"l‘ICAL INNOVATION
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`'1;-an cosrs AND RETURNS TO NEW DRUG onv1=.1.oP1v11sN'r
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`and preclinical development costs, and time costs) was that of Hansen (1979). The
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`study used Tufts Center for the Study of Drug Development {Tufts CSDDi survey
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`data from a dozen pharmaceutical firms to obtain a random sample (-.'If|tl‘1t3tt' inves-
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`figmiona] drugs and aggregate annual data on their R8<l.3‘expend1tures brolcen
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`down by development phase and compound source (self—or1g1nated or l1censed—1n).
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`Hansen found an average capitalized cost of $54 million in 1976 dollars for develop-
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`ment that occurred in the 1960s and up to the mid—197os. As with most subsequent
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`studies, Hansen estimated the R&D cost per approved drug, taking into consider-
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`ation costs incurred on failed drugs and adjusting historical costs to take account
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`of the opportunity costs of time.
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`Following the Hansen (1979) study, Wiggins (1987) applied a regression analysis
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`using industry- reported aggregate annual R3(D expenditure data combined with
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`the development time profile used by Hansen. Wiggins found a capitalized cost per
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`approved new drug of $125 million in 1936 dollars for drugs approved from 1970
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`to 1985. However, implicit in the analysis was the assumption of a fixed lag rela-
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`tionship for the time between R3(D expenditures and ultimate new drug approval.
`This was not a shortcoming with the Hansen approach.
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`Since Hansen's (1979) study, the survey approach has been dorninant, with
`similar studies from DiMasi and associates that found increasingly higher R3<D
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`-cost estimates for later periods. Specifically, DiMasi et al. (1991) reported an aver-
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`age R8zD cost ofs231 million in year 1987 dollars ($318 million in year 2000 doi-
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`lars), and DiMasi et al. (2003) reported an average R&D cost of $802 million in
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`year 2000 dollars. Companion studies to these two survey—based articles exam-
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`-ined how R&D costs varied by therapeutic category (DiMasi et al. 1995; DiMasi
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`et al. 21004). Gilbert et al. {2oo3}, using an internal Bain Consulting develop-
`ment model, found an estimate of $1.1 billion for 1995 to 2000 approvals. but
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`the methodology was 11ot described in any great detail and the results included
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`launch costs. in two recent papers, Adams and Brantner (2006, 2010) attempted
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`to validate the results reported by DiMasi et al. in 2oo3 using public data and
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`found general support for them. Earlier, the Congressional Office of Technology
`Assessment concluded that the results in the 1991 DiMasi et al. study were rea-
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`sonable (U.S. Congress, OTA 1993).
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`The highest estimate to date in the literature of the expected, fully capital-
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`ized cost of developing a single approved drug was $1.8 billion in year 2008 doi-
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`lars {Paul et al. 2010). The authors obtained this result by using a mathematical
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`model, some recent industry benchmark data on part of the process, and some
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`internal data from a single firm. The most recent full capitalized R&D cost esti-
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`mates based on industry survey data were reported by DiMasi and Grabowski
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`(2007), although they focused on “biotech” drug development. The DiMasi et
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`al. (2003) and DiMasi and Grabowski (2007) findings are discussed in some
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`detail later in this chapter, along with some comparisons to the earlier findings
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`to illustrate the extent to which pharmaceutical R&I) costs have changed over
`time.
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`of policy actions on R&D costs and returns. The final section concludes and dis-
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`cusses open questions for further research.
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`PHARMACEUTICAL INDUSTRY R&D Cosrs
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`Estimates of the cost of developing new drugs have varied methodologically and
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`in terms ofcoverage. but taken together, they paint a picture ofsubstantially rising
`costs for more than halfa century. The resource cost increases are dramatic, even
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`after adjusting for inflation. This section briefly reviews the literature on pharma-
`ceutical R&D costs and then describes some of the more recent results.
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`Approaches to Estimating Pharmaceutical
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`Industry R8tD Costs
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`Early attempts to examine at least some of the costs of new drug development were
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`quite limited in that they did not account for important aspects of the drug devel-
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`opment process. such as r1on—drug—specific R810. expenditures on drug failures,
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`and the length of the development process and its relationship to opportunity
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`costs. DiMasi et al. [1991] referenced and discussed the early economic literature
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`on the 11810 costs of new drug development. One of the earliest of these studies
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`(Schnee 19;r2) examined data on 17 new chemical entities (NCEs) from the 19503
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`and 196os for a single firm. However, only out—0f-pocket (cash outlay) costs were
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`considered {i.e., the time costs of R&D investments were 11ot evaluated), and nei-
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`ther fixed discovery costs 11or the costs of drug faiiu res were counted. T‘his was fol-
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`lowed by several studies that also focused on individual drug out-of-pocket costs;
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`taken together with the Schnee estimate ofan average cost of$o.5 million per NCE,
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`these studies suggested that R3cD costs increased substantially from the 1950s to
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`the late 1960s (Mund 1970; Baily 1972; Sarett 1974; Clymer 19;r0).
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`The early literature also included two attempts to develop R&D cost estimates
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`from published aggregate industry data on R&D expenditures and lists ofapproved
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`NCEs (Mund 1970; Baily 1972). These studies assumed fixed lag times between
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`industry R&D expenditures and new drug approvals. Although these approaches
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`implicitly accounted for the costs ofdrug failures, neither of them included cap-
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`italization of costs or accounted for varying lag times between expenditures and
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`The first study that attempted to capture the full costs of drug development
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`(cash outlays for investigational drug failures as well as successes, fixed discovery
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`34
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`PHARl\-'l1\CEU'l‘|C.l\L [NN0\1"A'I‘ION
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`33,13 costs AND ‘RETURNS to NEW DRUG oi-:veLoP1vn-:N‘1'
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`25
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`Risks, Times, and Costs for Traditional
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`Pharmaceutical Industry R8(D
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`indicates how inl'|ation—adjusted aggregate industry pharmaceutical
`Figure 2.:
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`R3zD expenditures have changed over a long period, measured against cha nges over
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`the same period in the number of US new drug approvals (new chemical entities.
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`or NCEs}. Given that drug development phases are lengthy, spreading over many
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`years (DiMasi et al. 1991). there is a substantial lag between when R&D expendi-
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`tures are made and when new drugs get approved. Nonetheless, the data in Figure
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`1.1 strongly suggest that average R&D costs have risen at a rapid rate over time. A
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`more rigorous analysis is needed to assessjust how high pharmaceutical R3<D costs
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`have been during any period and how rapidly they have risen over time. It is also
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`instructive to look beneath an overall estimate of drug development cost to impor-
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`tant aspects of the drug development process that contribute to that cost.
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`Technical Risks
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`One ofthe most important contributors to cost ofdrug development is the amount
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`of resources that are devoted to drugs that fail in testing at some point in the devel-
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`opment process. The series of studies begun with Hansen (1979) involved esti-
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`mates of the likelihood that a drug that enters the clinical testing pipeline (i.e.,
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`phase 1) will eventually be approved for marketing by the US Food and Drug
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`Administration (FDA) and estimates of attrition rates for drugs during the three
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`clinical phases of development. Hansen used a clinical approval success rate of one
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`in eight (12.5 percent). 'I‘he second study in the series, DiMasi et al. (1.991), found
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`that the clinical approval success rate between the two study periods had increased
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`substantially, to between one in Five and one in four (2.3 percent). If nothing else
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`had changed from one study period to the next, the estimated cost per approved
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`Rfltl) Iiitpendilures
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`Gill
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`-53#-='J|
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`sainnpuadxg
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`(jig-5 ii
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`NMEApprovals
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`1963
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`n
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`3“; drug inclusive of the cost of failures, would have declined significantly. This‘
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`did not happen because, as described later, out-of-pocket preclinical and clinical
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`I 3;; also increased substantially as did average development times and the cost of
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`capital. The result was a much higher full average cost estimate.
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`The most recent study in the series. DiMasi et al. (2003), found that the success
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`mtg had worsened for drugs tested in hu mans between 1933 and E394 l'3lflllV3 lo
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`drugs tested on humans between 1970 and 1932, but only modestly. The estimate of
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`the clinical approval success rate was 21.5 percent. The effect offai lu res on costs was
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`modified somewhat by estimates showing that firms had terminated their clinical
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`failures earlier. However, as discussed later, other factors contributed to produce a
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`much higher full cost per approved drug for the most recent period.
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`Development Times
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`when the R&D process for pharmaceuticals is lengthy, development cycles will
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`bear: important indirect determinant of costs if cash flows are capitalized to the
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`point at which revenues from the investment could be earned. As development
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`times increase. so do capitalized cost estimates, other things equal. The time from
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`synthesis of a new compound to first testing in humans increased by 6.6 months,
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`"on average, between the Hansen (1979) study and the ]_)iMas.i et al. (1991) 5l'-ldY-
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`The time from first human testing to regulatory approval increased by almost 21
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`months, on average, between the study periods. The extra 2.3 years in average total
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`time from discovery to approval for the second study period accounted for approx-
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`imately 24 percent of the increase in average costs between the studies.
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`In contrast, changes in development times had little impact on the increase in
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`average cost between the DiMasi et al. (1991) study and the most recent study in
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`the series, DiMasi et al. (2003). Although the time from first testing in humans to
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`regulatory approval declined by an average of 8.6 months between the two study
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`periods, the total time from discovery to approval remained, on average, virtually
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`identical at 11.8 years. The increase in the cost of capital had a much greater impact
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`on total capitalized costs than did changes in development times.
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`Opportunity Costs
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`Industrial R3lD expenditures are investments. and there are potentially long lags
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`between when the expenditures are made and when any potential returns can be
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`earned. The three survey—based studies we focus on here attempted to capture
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`these time costs, which, together with the out-of-pocket costs ofdevelopment, yield
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`a measure of the opportunity costs of bringing drugs from discovery to marketing
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`approval. The approach is to capitalize costs to the point of first US approval using
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`‘an appropriate discount rate. The discount rates used were estimates of the cost of
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`-capital for the pharmaceutical industry over the respective study periods. Average
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`‘out-of-pocket costs by development phase were spread over average development
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`times for each phase and capitalized to the point of marketing approval at the dis-
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`-count rate used For the study.
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`I96?
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`I9?!
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`[935
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`Figure 2.1 New drug approvals and RBd) spending.
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`Source: Courtesly oI"l‘ut'ls Center for the Study of Drug Development (CSDU) and
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`l’|iarrnaceutical Research and Maniihiclurcrs ofmnerica (PIIRMA). ztiog.
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`Page 6 of 17
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`Page 6 of 17
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`PHARMACEUTICAL INNOVATION
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`COSTS £ND RETURNS TO NEW DRUG DEVELOPMENT
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`The real (i.e_, inflation-adjusted) costs of capital used for the first two studies
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`were 8 percent and 9 percent. respectively. The increase of one percentage point
`accounted for 13 percent of the increase in costs between the first two studies. The
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`combination of longer development times and a higher discount rate for the sec-
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`ond study accounted for 37 percent of the increase in average costs. As mentioned
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`earlier. although there were some differences in development times between the
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`second and third studies. the total development time was constant. Nonetheless.
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`the estimated discount rate applied to the cash flows over the representative time
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`profile was 2 percentage points higher for the third study (11 percent versus 9 per-
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`cent}. However, out—of—pocket costs increased enough that the time cost share of
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`total capitalized cost remained virtually the same [50 percent for the third study,
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`compared with 51 percent for the second).
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`Figure 2.2 shows the primary results for the DiMasi et al. (2003) study. in year
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`2000 dollars. the estimated preapproval capitalized cost per approved new drug
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`was $802. million, with $403 million of that total accounted for by out-of—pocl<et
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`cash outlays. Pharmaceutical R&D does not end with the approval of an NCE.
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`Development often continues on new indications. new dosage strengths, and new
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`formulations. The DiMasi et al. (2003) study provided an estimate of postapproval
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`R&D costs. It found that approximately one-quarter of the total Rad) life—cycie
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`cash outlays per approved new drug were incurred after a drug product contain-
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`ing the active ingredient was first approved. Given that the analysis is focused on
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`the point of first marketing approval, the postapproval costs must be discounted
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`back in time to the date of marketing approval. Therefore, on a capitalized basis,
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`postapproval R3tD costs account for only 11 percent of the total life-cycle R8tD cost
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`per approved drug. $897 million.
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`Cost Trends
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`The three survey-based studies. taken together. demonstrate that pharmaceutical
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`industry R8zD costs increased dramatically over the first four decades of the mod-
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`ern era of drug development--that is. since enactment of the 1962 Amendments to
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`Millions(20005)
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`El Flatt-approval
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`Figure 2.2 Pharmaceutical life-cyde 88:!) costs.
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`Scum: From DiMasi el al. 1003.
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`Page 7 of 17
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`[|jHansen [l9’.?9)
`in Dlhlasl I.‘l al. (1991) u Dihdasict al. t2uo3)|
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`pas-an 1.3 Pharmaceutical R&D costs gave increased substantially over time.
`Source: From Dllvtasi el al. 21103.
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`_g1-,3 pond and Drug Cosmetic Act of 1938, which, for the first time in the United
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`"states, required proof of efficacy as well as safety. Figure 2.3 shows how preclini-
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`7.5.], clinical, and total preapproval average costs increased across the three studies.
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`‘fireclinical costs are all costs incurred prior to first human testing. This includes
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`flout-of-pocket discovery costs as well as the costs of preclinical development.
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`:-(Clinical costs include all R&D costs incurred from initial human testing to first
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`marketing approval.
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`In constant dollars. total capitalized preapproval cost per approved new drug
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`Increased by a factor of 2.3 between the Hansen (1979) 5l|1dY and the DlM35l '3‘ al-
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`(1991) study, and there was a similar increase of 2.5 between Diiviasi et al. (1991)
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`-and DiMasi et al. (2003). However. at a more disaggregated level. there were sub-
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`;-stantial differences. From the first to the second study, preclinical costs increased
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`': somewhat more than did clinical period costs. However, between the second and
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`-third studies. clinical cost per approved drug increased substantially more rapidly
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`than preclinical cost {an increase of 349 percent for the former. compared with 57
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`percent for the latter).
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`The length of time between the study periods was not identical. We can
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`“get a more precise estimate of the rate of increase in costs across the studies by
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`_estimating the average endpoint for analysis in each study. The endpoint is the
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`date of marketing approval. The first study roughly corresponded to develop-
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`ment that yielded approvals during the 19705. development for the second study
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`mostly resulted in approvals during the 19803, and development for the most
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`recent study was associated largely with 19905 approvals. DiMasl Bl al- (2003)
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`found an average difference in approval dates of 9.3 years between the first and
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`second studies and 13 years between the second and third studies. Using these
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`time differences. we can calculate average annual rates of increase between the
`studies.
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`Figure 1.4 indicates that the annual rate of increase in inflation-adjusted total
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`.0!-It-of-pocket costs was relatively constant across the studies (7.6 percent between
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`the first and second studies and 7.0 percent between the second and third studies).
`However, the rates of increase in overall costs mask substantial differences in how
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`Page 7 of 17
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`. a
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`D C
`OSTS 5ND RETURNS To NEW DRUG Di‘-:\tI-:I.0PMI-‘.N't’
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`re
`---'—"—_—
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`PHARMACEUTICAL INNOVATION
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`V
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`Dfiiolech t'.Il‘harnu I1't1arrru ilinv:-ad'usted)"
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`Figure 2.5 Preapproval capitalized cost by new molecule type.
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`Soumc: I-"mm Iitlvtasi and Grabowski zoo?-
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`Preclin ical
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`Clinical
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`Total
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`Q [9305 lo [9905 approvals
`[E 1970.: to I93t!s iIp|mnrats
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`Figure 2.4 Annual growth rates for R8tI) out-olipocltet cost per approved new drug.
`Sriurre: From l)iMasi et al. zoo).
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`costs cha nged over time for components ofthe R&D process. Figu re 2.4 shows that,
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`whereas preclinical costs continued to increase in real terms between the second
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`and third studies, the rate ofincrease was less than one-third that between the first
`and second studies. On the other hand, the rate ofincrease in clinical period costs
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`was dramatic for the most recent study-—a|most twice as fast as that between the
`first and second studies.
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`Large-Molecule R8rD Cost Metrics
`Almost all prior research on pharmaceutical R&D costs has focused on synthetic,
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`so-called small-molecule drugs. as opposed to biologics. or large-molecule drugs.
`Although some of the molecules for the DiMasi et al. (2003) sample were biolog-
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`ics. the overwhelming majority of the drugs in the sample and in the pipelines of
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`the survey Finns at that time were small-molecule drugs. The study by Di Masi and
`Grabowslti (zoo?) was the first to focus on so-called biotech molecules. Specifically.
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`the sample they used consisted ofapproximately equal numbers of recombinant pro-
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`teins and monoclonal antibodies (mflths). Although out-otipocltet clinical costs were
`collected for a relatively small sample of large molecules (17), the other metrics used
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`for the cost analysis (development times and success and attrition rates) were deter-
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`mined from large samples. The same methodology used to estimate average costs
`for the three survey-based studies of traditional pharmaceutical firm development.
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`described earlier. was applied to the hiotech sample.
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`Figure 2.5 shows some of the main results from the DiMasi and Grabowslti
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`(2oo7} study. The average overall capitalized cost per approved new chemical
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`entity was 51.2 billion for large molecules. The study also compared develop-
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`ment costs for small and large molecules. First, the results from the Di Mast et al.
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`Page 8 of 17
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`u ts were
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`(2003) study were adjusted :l5\lT:.::l nl;l:]t;:3.Cl':):(E:t;‘:-3 (til: crzplsalluj din-
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`expressed m “Tam lloos t-othaltlwere :ignificantly lower for traditional small-
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`1ca1|Phalsc:I T10 Gilli: l:ll:v::\rer the molecules used for the biotech analysis were
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`3:0 .15“ E ‘eta epthan the sampldused for the 2oo3 study. The biotech sample was»
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`0 5 am wn gfv
`cars more recent. Consequently, the results from the DiM'-‘Si
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`in Slum sell”; :1 cube-re not only adjusted for inflation but also extrapolated out
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`at‘: -yfizifisfnlé gm gmmh rates implied by the differences between the second
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`and third survey—based studies of traditional pharmaceutical development {SB-‘3
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`Figure 2.4). This produced an overall capitalized cost per approved new chemical
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`entity for traditional pharmaceutical firm development similar to that for l.'JlOlEt|:3l‘l
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`development {$1.3 billion and $1.2 billion, respectivelyl'- l'l0W€“‘5 ll“-‘“-' ““'°"e 5“ ‘
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`stantial differences by development phase. Clinical pEI'10Cl costs were higher for
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`traditional pharmaceutical development. but preclinical phase costs were higher
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`for blotech development.
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`Recent Metrics and Implications for R8tD Costs
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`The studies in the academic literature on the costs of new drug development cover
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`the period from the 1950s to part of the first decade of the net century. HOWEVER ll
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`is interesting to at least consider the trends for R8:[) costs during more recent years
`and for the near Future. Wit