throbber
Tufts Center for the Study
`of Drug Development
`
`Briefing
`Cost of Developing a New Drug
`November 18, 2014
`
`E-mail: csdd@tufts.edu
`Twitter: @TuftsCSDD
`#TuftsCostStudy
`Phone: 617-636-2170
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 1
`
`

`
`Innovation in the
`Pharmaceutical Industry:
`New Estimates of R&D Costs
`
`Joseph A. DiMasi, Ph.D.
`Director of Economic Analysis,
`Tufts Center for the Study of Drug Development
`
`R&D Cost Study Briefing
`Boston, MA, November 18, 2014
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 2
`
`

`
`Study Coauthors
`
`Henry G. Grabowski, Ph.D.
`Professor Emeritus, Department of Economics
`Director, Program on Pharmaceutical and Health Economics
`Duke University
`
`Ronald W. Hansen, Ph.D.
`William H. Meckling Professor of Business Administration
`Senior Associate Dean for Program Development
`Simon Business School
`University of Rochester
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 3
`
`

`
`Agenda
`
`• Main Finding
`• Data and Methods
`• Clinical approval rates, phase transition rates, and out-of-
`pocket costs per approved compound
`• Development times, the discount rate, and capitalized costs
`per approved compound
`• Post-approval cost estimates
`• R&D cost growth rates
`• Cost drivers
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 4
`
`

`
`Main Finding:
`
`The estimated average pre-tax
`industry cost per new prescription
`drug approval (inclusive of failures
`and capital costs) is:
`
`$2,558 million
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 5
`
`

`
`COPYRIGHT PROTECTED
`
`New Drug and Biologics Approvals and R&D Spending
`
`R&D Expenditures
`
`New Compound
`Approvals
`
`R&D expenditures are adjusted for inflation; curve is a 3-year moving average for NME/NBEs
`Sources: Tufts CSDD; PhRMA, 2014 Industry Profile
`
`© 2014 Tufts University. All rights reserved. May not be reproduced, transmitted, or
`distributed by any means, mechanical or electronic, in whole or in part, without
`written permission from the Tufts Center for the Study of Drug Development.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 6
`
`

`
`Data and Methods
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 7
`
`

`
`Outline of Study Cost Dataset
`
`• 106 investigational new drugs and biologics from 10 firms first tested in
`humans anywhere in the world, 1995-2007
`
`• Clinical period development cost data up to 2013
`
`• Five compounds still active at the time of data collection.
`
`• Compounds that lasted late in development oversampled to increase
`the amount of information for late development stages. Results then
`weighted to reflect the population distribution.
`
`• Annual company biopharmaceutical R&D expenditures from 1990 to
`2010 broken down in various ways (used to estimate pre-human R&D
`costs).
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 8
`
`

`
`Elements Used to Determine Fully Allocated
`New Compound R&D Costs
`
`• Out-of-pocket clinical costs (all indications, long-term
`animal testing, overhead, CMC during clinical testing and
`prior to first approval)
`
`• Out-of-pocket discovery research and preclinical
`development costs
`
`• Clinical approval success and phase attrition rates
`
`• Development times
`
`• Cost of capital
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 9
`
`

`
`Out-of-Pocket Clinical Costs
`
`• Survey data on costs by phase and year for a sample of
`investigational compounds.
`
`• Oversampled compounds that proceeded to late-stage testing:
`stratified random sample.
`
`• Weight survey response to reflect actual population distribution
`for strata.
`
`• Calculate weighted average phase costs.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 10
`
`

`
`Out-of-Pocket Discovery and Preclinical
`Development Costs
`• Cannot attribute all pre-human R&D costs to specific
`compounds.
`
`• Use time series data on company annual aggregate spending
`on pre-human and clinical R&D.
`
`• Apply lag structure on data based on gap between pre-human
`and clinical expenditures (difference in median phase times).
`
`• Determine ratio of pre-human to clinical expenditures from
`lagged data.
`
`• Apply ratio to clinical phase cost estimate to obtain a pre-
`human cost estimate.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 11
`
`

`
`Clinical Approval Success Rates
`
`• Since many compounds fail in testing, phase costs must be
`weighted by the probability of entering the phase (expected
`costs) to obtain costs per investigational compound.
`
`• Overall clinical approval success rates used to translate cost
`per investigational compound to cost per approved compound.
`
`• Tufts CSDD database of investigational compounds used to
`estimate these probabilities (subset relevant to cost study
`sample period).
`
`• Other interesting results obtained: attrition rates and distribution
`of failures by phase.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 12
`
`

`
`Phase Development Times
`
`• Use survey data to find average time in phase (across
`indications).
`
`• Use survey data to find average time between start of one
`phase and beginning of the next phase.
`
`• Average phase-to-phase times used to establish a
`representative development time profile from synthesis to
`approval.
`
`• Representative time profile, along with average phase lengths,
`used to determine how expenditures are distributed over time.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 13
`
`

`
`Cost of Capital and Capitalization
`
`• Cost of capital is the expected return required by investors to
`get them to invest in drug development.
`
`• Capital Asset Pricing Model (CAPM) applied to data on
`biopharmaceutical firms over relevant period to determine an
`industry cost of capital.
`
`• Estimate is based on data on stock market returns and debt-
`equity ratios for a sample of biopharmaceutical firms.
`
`• Used as the discount (interest) rate to capitalize R&D
`expenditures to marketing approval according to the
`estimated development timeline.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 14
`
`

`
`Results
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 15
`
`

`
`Data for Phase Transition and Approval
`Success Rate Estimates
`• Dataset of investigational compounds in the portfolios of top 50
`firms (several commercial pipeline databases, published
`company pipelines, clinicaltrials.gov, web searches).
`
`• Subset of self-originated compounds first tested in humans
`anywhere in the world from 1995 to 2007.
`
`• 1,442 compounds met study inclusion criteria.
`
`• Development status checked through end of 2013.
`
`• For this set of compounds, 7.1% were approved, 80.3% had
`been discontinued in some phase, and 12.6% were still active in
`some phase.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 16
`
`

`
`COPYRIGHT PROTECTED
`
`Clinical Phase Transition Probabilities and Overall
`Clinical Approval Success Rate*
`90.35%
`
`59.52%
`
`61.95%
`
`35.52%
`
`11.83%
`
`Phase I-II
`
`Phase II-III
`
`Phase III-NDA/BLA Sub
`
`NDA/BLA Sub-
`NDA/BLA App
`
`Phase I - NDA/BLA
`App
`
`*Therapeutic new molecular entities and new therapeutically significant biologic
`entities first tested in humans, 1995-2007
`
`© 2014 Tufts University. All rights reserved. May not be reproduced, transmitted, or
`distributed by any means, mechanical or electronic, in whole or in part, without
`written permission from the Tufts Center for the Study of Drug Development.
`
`Transition Probability
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 17
`
`

`
`COPYRIGHT PROTECTED
`
`Representative Development and Regulatory Review
`Time Profile (synthesis to approval)
`
`128.0
`
`96.8
`
`Synthesis ─ Approval
`
`Clinical Start ─ Approval
`
`Synthesis ─ Phase I
`
`Phase I ─ II
`
`Phase II ─ III
`
`Phase III ─ NDA/BLA Submission
`
`19.8
`
`31.2
`
`30.3
`
`30.7
`
`NDA/BLA Submission ─ Approval
`
`16.0
`
`Months
`
`© 2014 Tufts University. All rights reserved. May not be reproduced, transmitted, or
`distributed by any means, mechanical or electronic, in whole or in part, without
`written permission from the Tufts Center for the Study of Drug Development.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 18
`
`

`
`Pre-human Cost Estimates
`• Annual data on pre-human and clinical period company R&D
`expenditures on self-originated investigational compounds aggregated
`across companies.
`
`• Need to impose a lag structure between pre-human and clinical
`expenditures.
`
`• Based on development time data, we used a 5-year lag between
`median pre-human and median clinical expenditures .
`
`•
`
`Implies that pre-human expenditures are 30.8% of costs per approved
`compound.
`
`• Results are not very sensitive to assumed lag within reason (4 and 6-
`year lags applied in sensitivity analysis)
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 19
`
`

`
`COPYRIGHT PROTECTED
`
`Nominal and Real Cost of Capital (COC) for the
`Biopharmaceutical Industry, 1994-2010
`
`1994
`
`2000
`
`2005
`
`2010
`
`Nominal COC
`
`14.2%
`
`Inflation Rate
`
`Real COC
`
`3.1%
`
`11.1%
`
`14.9%
`
`3.1%
`
`11.8%
`
`13.3%
`
`2.5%
`
`10.8%
`
`11.4%
`
`2.0%
`
`9.4%
`
`Implication: R&D costs were capitalized at a 10.5% real COC
`
`© 2014 Tufts University. All rights reserved. May not be reproduced, transmitted, or
`distributed by any means, mechanical or electronic, in whole or in part, without
`written permission from the Tufts Center for the Study of Drug Development.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 20
`
`

`
`COPYRIGHT PROTECTED
`
`Out-of-Pocket and Capitalized Cost per Approved New
`Compound
`
`2,558
`
`1,460
`
`1,395
`
`1,098
`
`965
`
`430
`
`Millions of 2013 $
`
`Pre-human
`
`Clinical
`Out-of-Pocket
`
`Capitalized
`
`Total
`
`© 2014 Tufts University. All rights reserved. May not be reproduced, transmitted, or
`distributed by any means, mechanical or electronic, in whole or in part, without
`written permission from the Tufts Center for the Study of Drug Development.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 21
`
`

`
`COPYRIGHT PROTECTED
`
`Pre-approval, Post-approval and Total Lifecycle Cost
`per Approved New Compound
`2,870
`
`2,558
`
`1,861
`
`1,395
`
`Millions of 2013 $
`
`466
`
`312
`
`Out-of-Pocket
`Total
`
`Pre-approval
`
`Capitalized
`Post-approval
`
`© 2014 Tufts University. All rights reserved. May not be reproduced, transmitted, or
`distributed by any means, mechanical or electronic, in whole or in part, without
`written permission from the Tufts Center for the Study of Drug Development.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 22
`
`

`
`COPYRIGHT PROTECTED
`
`Growth in Capitalized R&D Costs
`per Approved New Compound
`
`2,558
`
`1,098
`
`1,044
`
`1,460
`
`436
`
`278
`
`109
`
`608
`
`70
`
`135
`
`413
`
`179
`
`Pre-human
`
`Clinical
`
`Total
`
`1970s
`
`1980s
`
`1990s-early 2000s
`
`2000s-early 2010s
`
`Millions of 2013 $
`
`Sources: 1970s, Hansen (1979); 1980s, DiMasi et al. (1991); 1990s-early 2000s, DiMasi et
`al. (2003); 2000s-early 2010s, Current Study
`
`© 2014 Tufts University. All rights reserved. May not be reproduced, transmitted, or
`distributed by any means, mechanical or electronic, in whole or in part, without
`written permission from the Tufts Center for the Study of Drug Development.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 23
`
`

`
`COPYRIGHT PROTECTED
`
`Compound Annual Inflation-Adjusted Growth Rates
`for Out-of-Pocket R&D Costs
`
`11.8%
`
`6.1%
`
`9.2%
`
`9.3%
`
`7.6%
`
`7.0%
`
`9.6%
`
`7.8%
`
`2.3%
`
`Pre-human
`1970s to 1980s
`
`Clinical
`1980s to 1990s
`
`Total
`1990s to early 2010s
`
`© 2014 Tufts University. All rights reserved. May not be reproduced, transmitted, or
`distributed by any means, mechanical or electronic, in whole or in part, without
`written permission from the Tufts Center for the Study of Drug Development.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 24
`
`

`
`COPYRIGHT PROTECTED
`
`Compound Annual Inflation-Adjusted Growth Rates
`for Capitalized R&D Costs
`12.2%
`
`10.6%
`
`8.8%
`
`3.5%
`
`7.3%
`
`7.4%
`
`9.4%
`
`8.5%
`
`7.4%
`
`Pre-human
`
`Clinical
`
`Total
`
`1970s to 1980s
`
`1980s to 1990s
`
`1990s to early 2010s
`
`© 2014 Tufts University. All rights reserved. May not be reproduced, transmitted, or
`distributed by any means, mechanical or electronic, in whole or in part, without
`written permission from the Tufts Center for the Study of Drug Development.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 25
`
`

`
`COPYRIGHT PROTECTED
`
`Cost Drivers: Change in Capitalized Cost per
`Approved Compound by Factor (direct cash outlays)*
`
`Factor Category
`
`Factor
`
`Percentage Change
`in Cost
`
`Cash Outlays
`
`Out-of-Pocket Clinical Phase Costs
`
`Pre-human/Clinical Cost Ratio
`
`Overall Out-of-Pocket Costs
`
`82.5%
`
`1.6%
`
`85.5%
`
`* Factor impact on current study cost relative to prior study cost ($1,044 million in 2013 dollars)
`
`© 2014 Tufts University. All rights reserved. May not be reproduced, transmitted, or
`distributed by any means, mechanical or electronic, in whole or in part, without
`written permission from the Tufts Center for the Study of Drug Development.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 26
`
`

`
`COPYRIGHT PROTECTED
`
`Cost Drivers: Change in Capitalized Cost per
`Approved Compound by Factor (development risk)*
`
`Factor
`Category
`
`Factor
`
`Percentage
`Change in Cost
`
`Risk
`
`Clinical Approval Success Rate with Prior Study
`Distribution of Failures
`
`Distribution of Failures with Prior Study Clinical
`Approval Success Rate
`
`Overall Risk Profile: Clinical Approval Success
`Rate plus Distribution of Failures
`
`57.3%
`
`-6.0%
`
`47.3%
`
`* Factor impact on current study cost relative to prior study cost ($1,044 million in 2013 dollars)
`
`© 2014 Tufts University. All rights reserved. May not be reproduced, transmitted, or
`distributed by any means, mechanical or electronic, in whole or in part, without
`written permission from the Tufts Center for the Study of Drug Development.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 27
`
`

`
`COPYRIGHT PROTECTED
`
`Cost Drivers: Change in Capitalized Cost per
`Approved Compound by Factor (time and cost of capital)*
`
`Factor Category
`
`Factor
`
`Time
`
`Pre-human Phase
`
`Clinical Phase
`
`Regulatory Review
`
`Overall Development Timeline
`
`Cost of Capital
`
`Discount Rate
`
`Percentage Change in
`Cost
`
`-4.9%
`
`0.2%
`
`-3.0%
`
`-5.6%
`
`-3.1%
`
`* Factor impact on current study cost relative to prior study cost ($1,044 million in 2013 dollars)
`
`© 2014 Tufts University. All rights reserved. May not be reproduced, transmitted, or
`distributed by any means, mechanical or electronic, in whole or in part, without
`written permission from the Tufts Center for the Study of Drug Development.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 28
`
`

`
`Summary
`
`• Total capitalized cost per approved new compound grew at an
`8.5% compound annual rate; out-of-pocket cost per approved
`new compound grew at a 9.3% annual rate.
`
`• Clinical approval success rates have declined significantly.
`
`•
`
`Increases in the cash outlays used to conduct clinical
`development and higher drug failure rates during clinical testing
`have contributed most to the estimated increase in R&D costs.
`
`• Changes in the time to develop and get new drugs approved
`and in the cost of capital had modest moderating effects on the
`increase in total R&D cost.
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 29
`
`

`
`Tufts Center for the Study
`of Drug Development
`
`Tufts University, Boston, Massachusetts, USA
`Joseph A. DiMasi, Ph.D.
`Director of Economic Analysis
`
`Website
`http://csdd.tufts.edu
`
`Email
`joseph.dimasi@tufts.edu
`
`Petitioner Mylan Pharmaceuticals Inc. - Exhibit 1065 - Page 30

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