R&D Productivity and Costs in Today’s Health Care Arena

Dr Pat AudetChair and ProfessorDepartment of Pharmaceutical and Healthcare Business11 Jan 2011

2C&EN, 1/10/11

3

What is a Service Worth?

http://www.youtube.com/watch?v=7_qwjcxwUqw

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Challenges

• Increased health care spending and political environment

• Decrease in approved products with more post approval requirements

• More difficulty in achieving blockbusters

• Increased generic utilization

• Decreased R&D productivity

5

Health Care Reform

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$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

$2,000,000

'65 '70 '75 '80 '85 '90 '95 '00 '04

Do

llars

(in

Mill

ion

s)

Note: Total health care expenditures for 2004 were $1.9 trillion.

* Now revised to Structures and Equipment** Now revised to Government Public Health Activities

Data source: U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, Office of the Actuary6

Research and Construction*

Personal Medical Equipment and Nonprescription Drugs

Nursing Home and Home Health Care

Net Cost of Private Health Insurance, Administrative Costs, and Public Health Programs**

Hospital Care

Prescription Drugs

Doctors, Dentists, and Other Professional Services

Health Care Costs: 1965–2004

7

7

8

Spending on Prescription Drugs as % of Total Spending on Health Services and Supplies, 1980-2007

Pharmaceutical R&D and the Evolving Market for Prescription DrugsCBO, 10/26/09

9

Changing Demographics of the U.S. Population (2000–2100)

Data source: U.S. Census Bureau2

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Po

pu

lati

on

(in

Th

ou

sa

nd

s)

65 Years and Older

85 Years and Older

4

10

5.76

17.7

30.3

0

5

10

15

20

25

30

35

1980 2000 2030

U.S

. Pre

va

len

ce

(in

Mill

ion

s)

Prevalence of Diabetes Is Projected to Nearly Double 2000–2030

Data sources: Wild et al.4; Centers for Disease Control and Prevention5

Chronic Diseases Projected to Become More Prevalent

6

11

Using Newer Medicines Results in Savings of $111 per Treated Condition

$18

-$129

-$111

-$140

-$120

-$100

-$80

-$60

-$40

-$20

$0

$20

$40C

os

t P

er

Tre

ate

d C

on

dit

ion

Extra Cost of NewDrugs

Non-drug Medical CostsSavings

Overall Health CareSavings

Data source: Lichtenberg35

Net Savings of $111

36

12

13

14

15

D Long. Resilience, Respite, Reset: US Pharma. Market in Review and Preview, 3/9/10

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Year Rx Filled

(B)

Mkt share generics (%)

Avg/Rx

($)

Total RX

($ B)

Avg p.a. Incr in Rx Total (%)

2000 2.9 42 56 178 n.a.

2002 3.1 42 65 215 10.4

2004 3.3 48 70 246 7.2

2006 3.4 53 70 263 3.5

2008 3.5 58^(2007)

72 265^(2007)

0.8

Changes in Components of Demand for Prescription Drugs (2000-2008)

CBO, 10/26/2009; adjusted for inflation, excludes mail order

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Average Copayment for a Prescription Drug by Tier (2000, 2004, 2008)

Pharmaceutical R&D and the Evolving Market for Prescription DrugsCBO, 10/26/09

18

19D Long. Resilience, Respite, Reset: US Pharma. Market in Review and Preview, 3/9/10

20D Long, Biologics, Biosimilars and Follow on Biologics, IMS, NJ PA BIO, 10/27/10

21

D Long, Biologics, Biosimilars and Follow on Biologics, IMS, NJ PA BIO, 10/27/10

22D Long. Resilience, Respite, Reset: US Pharma. Market in Review and Preview, 3/9/10

23D Long. Resilience, Respite, Reset: US Pharma. Market in Review and Preview, 3/9/10

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Biopharmaceutical Companies’ Investment in R&D Increasing Steadily

$47.9 $47.4$45.8

$65.3$63.7

$47.60$51.80

$63.2$56.1

$37.0$39.9

$34.5

$29.8

$22.7$19.0

$15.2

$31.0

$26.0

$21.0$16.9

$43.4

$0

$10

$20

$30

$40

$50

$60

$70

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009(est)

Exp

end

itu

res

(Bil

lio

ns

of

Do

llar

s)

Entire Pharma Sector PhRMA Member Companies' R&D Expenditures

Total Biopharmaceutical Company R&D and PhRMA Member R&D: 1995–20091

Sources: 1Burrill & Company, analysis for PhRMA, 2005–2010 (Includes PhRMA research associates and nonmembers) in PhRMA, “Profile 2010, Pharmaceutical Industry;” PhRMA, “PhRMA Annual Membership Survey,” 1996-2010; 2CBO, Research and Development in the Pharmaceutical Industry, 2006.

The pharmaceutical industry is one of the most research-intensive industries in the United States. Pharmaceutical firms invest as much as five times more in research and development, relative to their sales, than the average U.S. manufacturing firm.2

— Congressional Budget Office

““

25

Grabowski H. Pharmacoeconomics 22 (suppl 2): 15-24, 2004

Trends in Fully Capitalized Cost Per Drug

Munos B. Lessons from 60 years of pharmaceutical innovation Nature Reviews/Drug Discovery 8:959-967, 2009

Cost per NME ($B)

27

$701

$434

$299

$162$87

$39 $21 $6 ($1)

$1,880

$0

$500

$1,000

$1,500

$2,000

1 2 3 4 5 6 7 8 9 10

After-Tax Average R&D Costs

Note: Drug development costs represent after-tax out-of-pocket costs in 2000 dollars for drugs introduced from 1990–94. The same analysis found that the total cost of developing a new drug was $1.3 billion in 2006. Average R&D Costs include the cost of the approved medicines as well as those that fail to reach approval.

Lifetime Sales Compared to Average R&D Costs

New Rx Drugs Introduced Between 1990 and 1994, Grouped by Tenths, by Lifetime Sales

Aft

er-

Ta

x P

res

en

t V

alu

e o

f S

ale

s

(Mil

lio

ns

of

20

00

Do

lla

rs)

Even After Approval, Few Medicines Are a Commercial Success

Sources: J. A. Vernon, J. H. Golec, and J.A. DiMasi, "Drug development costs when financial risk is measured using the Fama-French three-factor model." Health Economics, (2009). ; J. DiMasi and H. Grabowski, “The Cost of Biopharmaceutical R&D: Is Biotech Different?,” Managerial and Decision Economics, 2007.

28CMR International 2009 Pharmaceutical R&D Factbook

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Increasing Complexity of Clinical Trials

1999 2005 Percentage change

Unique Procedures per Trial Protocol (Median)

24 35 46%

Total Procedures per Trial Protocol (Median)

96 158 65%

Clinical-Trial Staff Work Burden (Measured in Work-effort Units)

21 35 67%

Length of Clinical Trial (Days) 460 780 70%

Clinical-Trial-Participant Enrollment Rate

75% 59% -21%

Clinical-Trial-Participant Retention Rate

69% 48% -30%

Source: Tufts Center for the Study of Drug Development, “Growing Protocol Design Complexity Stresses

Investigators, Volunteers,” Impact Report, 2008.

30

CMR International 2009 Pharmaceutical R&D Factbook

31Gudiksen M, Fleming E, Furstenthal L, Ma P, What Drives Success for Specialty Pharmaceuticals. Nature Reviews/Drug Discovery, 7:563-567, 2008

32 Kola I, Landis J. Can the Pharmaceutical Industry Reduce Attrition Rates Nature Review/Drug Discovery 3:711-715, 2004

33Source: 1Tufts Center for the Study of Drug Development, “New drugs entering clinical testing in top 10 firms jumped 52% in 2003-05,” Impact Report, 2006.

Probability of Success for Investigational Drugs Is SmallApproximately 20% of self-originated new drugs that enter clinical testing will

receive U.S. marketing approval.1

Clinical Approval Success Rates by Therapeutic Class1

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Response to Challenges“R&D productivity is the #1 challenge” JP Garnier, HBR 5/08

• Mergers & acquisition, deals and alliances – other sources of innovation• Focus on emerging markets• Reduce infrastructure, overhead and personnel

– R&D, sales, manufacturing• Change in portfolio management – need for innovative products

– Better decisions – earlier failures– More biologics, specialty products– Less reliance on blockbusters

• Reduce attrition• Reduce R&D costs

– Personnel reduction and infrastructure costs– Reduce development times and costs

• Clinical trial recruitment and site management• Off-shoring• Outsourcing• Use of technology – control clinical supplies, randomization, personalized medicines

– Change in clinical trial design – adaptive trial design– Manage data collection

Munos B. Lessons from 60 years of pharmaceutical innovation Nature Reviews/Drug Discovery 8:959-967, 2009

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Business Development Strategies: Alliances by Stage

McCully M. Trends in Biopharm Dealmaking, 5/26/10

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Top 10 Pharma Layoffs in 2010

1. AZ = 8,550

2. Pfizer = 8480

3. GSK = 5201

4. Roche = 4800

5. Bayer = 4500

6. Abbott = 3000

7. SA = 2500

8. Takeda = 1400

9. Novartis = 1400

10.BMS = 840

www.fiercepharma.com , 12/7/10

David E et al Pharmaceutical R&D: the road to positive returns. Nature Reviews DD 8:609-610

NPV for Small and Large Molecules

39 Gudiksen M, Fleming E, Furstenthal L, Ma P, What Drives Success for Specialty Pharmaceuticals. Nature Reviews/Drug Discovery, 7:563-567, 2008

40CMR International 2009 Pharmaceutical R&D Factbook

41

CMR International 2009 Pharmaceutical R&D Factbook

43

CMR International 2009 Pharmaceutical R&D Factbook

David E et al Pharmaceutical R&D: the road to positive returns. Nature Reviews DD 8:609-610

Improving the Return on Small Molecule R&D

A Novel Model for Clinical Development

J Orloff et al. The future of drug development improving clinical trial design. Nature Reviews Drug Discovery 8, 949-957 (December 2009)

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Impact of Combined POC and Dose Ranging: Use of Adaptive Design

J Orloff et al. The future of drug development improving clinical trial design. Nature Reviews Drug Discovery 8, 949-957 (December 2009)

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Too Many Procedures in Clinical Trials?

The Pursuit of High Performance through R&D:Understanding Pharmaceutical Research and Development Cost Drivers. Accenture, 2007.

48 CMR International 2009 Pharmaceutical R&D Factbook

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CONCLUSIONS

• Increasing elderly population with improved prescription coverage

• Importance of developing medicines of value to payers and patients

• Need improved success and efficiency of R&D process

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Kaiser Family Foundation. Prescription Drug Trends. May 2010

51D Long. Resilience, Respite, Reset: US Pharma. Market in Review and Preview, 3/9/10