The Cost of Biopharmaceutical R&D: Is Biotech Different?
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MANAGERIAL AND DECISION ECONOMICS Manage. Decis. Econ. 28: 469–479 (2007) Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/mde.1360 The Cost of Biopharmaceutical R&D: Is Biotech Different? Joseph A. DiMasia,* and Henry G. Grabowskib a Tufts Center for the Study of Drug Development, Tufts University, USA b Department of Economics, Duke University, USA The costs of developing the types of new drugs that have been pursued by traditional pharmaceutical firms have been estimated in a number of studies. However, similar analyses have not been published on the costs of developing the types of molecules on which biotech firms have focused. This study represents a first attempt to get a sense for the magnitude of the R&D costs associated with the discovery and development of new therapeutic biopharmaceu- ticals (specifically, recombinant proteins and monoclonal antibodies [mAbs]). We utilize drug-specific data on cash outlays, development times, and success in obtaining regulatory marketing approval to estimate the average pre-tax R&D resource cost for biopharmaceuticals up to the point of initial US marketing approval (in year 2005 dollars). We found average out-of-pocket (cash outlay) cost estimates per approved biopharmaceutical of $198 million, $361 million, and $559 million for the preclinical period, the clinical period, and in total, respectively. Including the time costs associated with biopharmaceutical R&D, we found average capitalized cost estimates per approved biopharmaceutical of $615 million, $626 million, and $1241 million for the preclinical period, the clinical period, and in total, respectively. Adjusting previously published estimates of R&D costs for traditional pharmaceutical firms by using past growth rates for pharmaceutical company costs to correspond to the more recent period to which our biopharmaceutical data apply, we found that total out-of-pocket cost per approved biopharmaceutical was somewhat lower than for the pharmaceutical company data ($559 million vs $672 million). However, estimated total capitalized cost per approved new molecule was nearly the same for biopharmaceuticals as for the adjusted pharmaceutical company data ($1241 million versus $1318 million). The results should be viewed with some caution for now given a limited number of biopharmaceutical molecules with data on cash outlays, different therapeutic class distributions for biopharmaceuticals and for pharmaceutical company drugs, and uncertainty about whether recent growth rates in pharmaceutical company costs are different from immediate past growth rates. Copyright # 2007 John Wiley & Sons, Ltd. INTRODUCTION examine approaches that could reduce those costs. If the productivity of new drug development can The financial viability of new drug and biophar- be improved, then more innovations may be maceutical development depends on the expected pursued and eventually reach the patient. The costs of, as well as the returns to, R&D. When Food and Drug Administration (FDA), through R&D costs are substantial it is important to its Critical Path Initiative, has initiated a process to, in part, explore how the agency, industry, and *Correspondence to: Tufts Center for the Study of Drug Development, Tufts University, 192 South Street, Suite 550, academia can establish methods that would lower Boston, MA 02111, USA. E-mail: [email protected] development costs (FDA, 2004). Copyright # 2007 John Wiley & Sons, Ltd. 470 J.A. DiMASI AND H.G. GRABOWSKI R&D costs for new drugs (including the costs of project-level and aggregate annual expenditure failures and time costs) have been estimated to data for a consulting project for a biotech firm.2 average in excess of $800 million (in year 2000 We combined data by period and type of dollars) for development that led to approvals in compound from these two sources. We focus on the 1990s, with a marked upward trend relative to therapeutic recombinant proteins and monoclonal earlier decades (DiMasi et al., 2003). These R&D antibodies (mAbs), which are overwhelmingly the cost estimates have used data on new drugs two most prevalent compound types in the biotech developed by traditional pharmaceutical firms sector. The consulting project focused on compounds (primarily new chemical entities). No study to that first entered clinical testing from 1990 to 2003. date has focused on the types of molecules that are With compound type and period of initial clinical developed by biotech firms. One might conjecture testing as study criteria, we utilized data on four that biopharmaceuticals are less costly to develop biologics from three companies used in the earlier because biotech firms need to be more nimble and study and 13 compounds from the biotech firm.3 creative or that fewer safety issues arise for many While the data on cash outlays are limited to the biopharmaceuticals because they replace sub- 17 compounds noted above, we are able to use a stances that exist naturally in the body. However, much larger data set to estimate average develop- some industry insiders estimate that costs, even for ment times, clinical success rates, and phase biotech firms, exceed $1 billion.1 transition probabilities. These data are used to In this paper, we make a first attempt to account for time costs and the costs of develop- examine the magnitude of R&D costs associated ment failures.4 We used a Tufts Center for the with developing the types of molecules on which Study of Drug Development (CSDD) database of biotech firms focus. Specifically, we use drug- biopharmaceutical compounds. The Tufts CSDD specific cost, development time, and clinical database is constructed from information con- success rate data for therapeutic biopharmaceu- tained in a number of commercial business ticals to estimate pre-tax R&D resource costs. We intelligence databases (PharmaProjects, R&D then compare these results to those obtained for Focus, and iDdb3), trade press accounts, company development of new drugs by traditional pharma- reports and websites, and company surveys. For ceutical firms (DiMasi et al., 2003). Given that the our analyses of development times, clinical success biopharmaceutical data are, on average, more rates, and phase transition probabilities, we used a recent than the data used for DiMasi et al. (2003), subset of this database. The compounds included we estimate the difference in study periods. Our are therapeutic recombinant proteins and mAbs that results for biopharmaceutical development are were first tested in humans from 1990 through 2003. then also compared to those for traditional There are 522 such compounds, and they include pharmaceutical firms with costs extrapolated using molecules that were abandoned during develop- estimated past growth rates for pharma costs to ment, as well as those that have attained US Food coincide with the more recent biopharmaceutical and Drug Administration (FDA) approval.5 study period. We compare our results for biopharmaceuticals The rest of this paper is organized as follows. to our previously developed estimates of R&D The next section contains a description of the data costs for new drugs developed by traditional used for our analyses. Then, we describe the pharmaceutical firms. The data underlying the methods used to obtain our results. We further ‘pharma’ results are described in DiMasi et al. present our results. Finally, we summarize our (2003). These data included cash outlays for 68 conclusions and offer some discussion of the results. new drugs and development times, clinical ap- proval success rates, and transition probabilities for a larger data set of 534 new drugs. DATA Our data on project costs derive from two sources. METHODS First, the sample for our study of pharmaceutical R&D costs (DiMasi et al., 2003) contained a small The methodology used for the analysis here is number of biologic compounds developed by explained in detail in DiMasi et al. (2003). We pharmaceutical firms. Second, we obtained shall only briefly outline the methods here. Copyright # 2007 John Wiley & Sons, Ltd. Manage. Decis. Econ. 28: 469–479 (2007) DOI: 10.1002/mde THE COST OF BIOPHARMACEUTICAL R&D 471 Out-of-Pocket Costs: Phase Means, Success Rates, in the sample that have proceeded from one phase and Expected Costs to another among the set of drugs that entered the first phase and either proceeded to the next We refer to actual cash outlays of the firm as out- phase or were terminated in the first phase. of-pocket costs. We converted the data on clinical This approach should provide reasonable esti- period expenditures by phase and year to 2005 mates of phase transition probabilities since the dollars using the GDP Implicit Price Deflator. We lengths of individual phases are short relative to determined mean costs for these molecules for total development times. The implicit assumption phase I, phase II, and phase III. Long-term animal needed for such an approach is that those drugs testing costs incurred during clinical development, that are still active at the time of analysis will regulatory approval submission costs, and chem- proceed to later phases more or less in accordance istry, manufacturing and control costs related to with the estimated transition probabilities. The development and incurred during clinical develop- overall clinical success rate is then determined as ment are subsumed in the cost estimates for the the product of the phase transition probabilities. clinical phases. The expenditures considered in this Clinical success is defined as US regulatory report for the sample of 17 molecules are only approval for marketing. those that were incurred prior to original market- Expected out-of-pocket cost per investigational ing approval. drug is the weighted average of mean phase costs, To obtain a full R&D cost estimate that would where the weights are the estimated probabilities account for the costs of failures and the time cost that an investigational molecule will enter a given of new pharmaceutical development, we must phase. Finally, the out-of-pocket cost per ap- build up to one through analyses of the expected proved new molecule is obtained by dividing the costs for the clinical and preclinical periods.