Measuring Trends in the Development of
New Drugs: Time, Costs, Risks and
Returns
Joseph A. DiMasi, Ph.D.
Director of Economic Analysis
Tufts Center for the Study of Drug Development
Tufts University
SLA Pharmaceutical & Health Technology
Division Spring Meeting
Boston, MA, March 19, 2007

Agenda
 New Drug development times
 Risks in new drug development
 R&D costs and returns for new drugs
 Pace of competitive development
 Impact of improvements to the R&D process
 Trends in new drug pipelines

Mean U.S. Approval and Clinical Phases for
U.S. New Drug Approvals, 1963-2004
12
10
Total Phase
8
6
4
IND Phase
Approval Phase
2
0
1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004
Year of NDA Approval
Source: Tufts CSDD, 2006
Points are 3-year moving averages

Clinical and Approval Times Vary
Across Therapeutic Classes, 2002-04
Neuropharmacologic
Antineoplastic
Antiinfectives
Endocrine
AIDS Antivirals
Gastrointestinal
Anesthetic/Analgesic
Cardiovascular
0
5.6
5.2
6.3
6.3
4.8
6.6
10.4
9.0
0.8
9.8
1.5
1.9
1.3
7.6
0.6
6.9
1.9
7.5
2.8
8.0
8.5
6.3
1.7
Clinical Phase
Years
Approval Phase
12.1
14
Source: Tufts CSDD, 2006

Approval Success Rates for NCEs
Also Vary by Therapeutic Class
40.4% Antiinfective
Oncology/Immunology
Respiratory
Cardiovascular
CNS
GI/Metabolism
0
27.2%
19.9%
15.2%
10.9%
14.4%
Approval Success Rate
Source: Tufts CSDD Impact Report, 8(3): May/June 2006
45

New Drug Approvals Are Not Keeping
Pace with Rising R&D Spending
60 40
R&D Expenditures
45
30
15
New Drug Approvals
20
0
1963 1968 1973 1978 1983 1988
R&D expenditures are adjusted for inflation
Source: Tufts CSDD Approved NCE Database, PhRMA, 2005
1993 1998 2003
0

Recent Productivity Decline in the Drug
Industry: Is this a Unique Phenomenon?
“In 1960 the trade press of the U.S. drug industry began to refer to the last few years as constituting a “research gap,” commenting that the flow of important new drug discoveries has for some inexplicable reason diminished.”
Source: U.S. Senate, Report of the Subcommittee on Antitrust and Monopoly, 87 th Congress,
1 st Session, “Study of Administered Prices in the Drug Industry,” June 27, 1961, p.136

Opportunity Cost for Investments
 Consider two investment projects, A and B
 Both projects require the same out-ofpocket expenditure (say, $400 million)
 However, returns to A are realized immediately, but investors must wait 10 years before returns to B are realized
 Rational investors would conclude that B is effectively much costlier than A

Out-of-Pocket and Capitalized
Costs per Approved Drug
900
800
700
600
500
400
300
200
100
0
121
336
282
466
Preclinical Clinical
Out-of-Pocket Capitalized
Source: DiMasi et al., J Health Economics 2003;22(2):151-185
403
802
Total

Pre-approval and Post-approval
R&D Costs per Approved Drug
1200
1000
800
600
400
200
0
140
403
543
95
802
897
Out-of-Pocket Capitalized
Post-approval Pre-approval Total
Source: DiMasi et al., J Health Economics 2003;22(2):151-185

Annual Growth Rates for Out-of-Pocket R&D Costs
11.8%
7.8%
7.0%
7.6%
6.1%
2.3%
Preclinical Clinical Total
1970s to 1980s approvals 1980s to 1990s approvals
Source: DiMasi et al., J Health Economics 2003;22(2):151-185

Mean Number of Subjects in NDAs for NMEs
5,621
5,507
3,233
3,567
1,576
1,321
1977-80 1981-84 1985-88 1990-92 1994-95 1998-01
Approval Period
Sources: Boston Consulting Group, 1993; Peck,
Food and Drug Law J, 1997; PAREXEL, 2002

Clinical Trial Complexity Index (Phases I-III)
150
140
130
120
110
100
90
1992 1993 1994 1995 1996 1997 1998 1999 2000
Source: DataEdge, 2002

Summary for R&D Costs
 R&D costs have grown substantially, even in inflation-adjusted terms
 The growth rate for discovery and preclinical development costs has decreased substantially
 Conversely, clinical costs have grown at a much more rapid rate
 New discovery and development technologies
(e.g., genomics) hold the promise of lower costs in the long-run (but perhaps higher costs in the short-run)

Summary for R&D Costs (cont.)
 Evidence and conjectures regarding factors affecting growth in clinical costs
 More clinical trial subjects
 Increased complexity: more procedures per patient
 Patient recruitment and retention
 Treatments associated with chronic and degenerative diseases
 Testing against comparator drugs

Present Values of Net Sales and R&D Cost for New Drugs by Sales Decile (millions of 2000 $)
3000
2500
2000
1500
1000
500
0
After-tax average R&D Cost
1 2 3 4 5
Deciles
6 7 8 9 10
Source: Grabowski et al., PharmacoEconomics 2002; 20(Suppl 3):11-29

Transition Probabilities for Clinical Phases
83.7%
71.0%
64.2%
68.5%
56.3%
44.2%
30.2%
21.5%
Phase I-II Phase II-III Phase III-
Approval
Biotech Pharma
Source: DiMasi and Grabowski, Managerial and Dec Econ 2007, in press
Phase I -
Approval

Clinical Development and Approval Times
Biotech 19.5
29.3
32.9
16 97.7
Pharma 12.3
26.0
33.8
18.2
90.3
0
Months
Phase I Phase II Phase III RR
Source: DiMasi and Grabowski, Managerial and Dec Econ 2007, in press
120

Pre-Approval Out-of-Pocket (cash outlay) and Time
Costs per Approved New Biopharmaceutical*
1,241
417
615 626
559
682
361
265
198
Preclinical** Clinical Total
Out-of-pocket Time Capitalized
* Based on a 30.2% clinical approval success rate
** All R&D costs (basic research and preclinical development) prior to initiation of clinical testing
Source: DiMasi and Grabowski, Managerial and Dec Econ 2007, in press

Why Might Biopharma Cost Differ?
 Biotech firms may be more nimble and creative
(different corporate culture)
 Replacement therapies may confront fewer safety issues (more relevant to early biotech era development)
 However, biotech firms have less experience in clinical development and in interacting with regulatory authorities
 Manufacturing process R&D and production of clinical supplies much more expensive for biopharmaceuticals

Pre-Approval Out-of-Pocket Cost per Approved New Molecule
672
559
522
452
361
316
198
136
150
Preclinical* Clinical Total
Biotech Pharma Pharma (time-adjusted)**
* All R&D costs (basic research and preclinical development) prior to initiation of clinical testing
** Based on a 5-year shift and prior growth rates for the preclinical and clinical periods
Source: DiMasi and Grabowski, Managerial and Dec Econ 2007, in press

Pre-Approval Capitalized Cost per Approved New Molecule
1,241
879 899
1,318
615
376
439
626
523
Preclinical* Clinical
Biotech Pharma Pharma (time-adjusted)**
* All R&D costs (basic research and preclinical development) prior to initiation of clinical testing
** Based on a 5-year shift and prior growth rates for the preclinical and clinical periods
Source: DiMasi and Grabowski, Managerial and Dec Econ 2007, in press
Total

Market Exclusivity for First-in-Class has Declined: Mean Time to First
Follow-on Approval
8.2
1970s
1980-84
5.9
1985-89
1990-94
5.1
2.8
1995-98 1.8
0
Years
Source: DiMasi and Paquette, PharmacoEconomics 2004;22(Suppl 2):1-14
9

Percent of Follow-on Drugs Reaching
Clinical Milestone Prior to First-in-
Class Drug Reaching Same Milestone
50
42%
36%
35%
27%
14%
10%
0
1985-1989 1990-1994
Period of First-in-Class Approval
IND Filed 1st Human Test
1995-1998
Source: DiMasi, Paquette, PharmacoEconomics 2004;22(Suppl 2):1-14

Follow-on Approvals Create Competition
Resulting in Price Discounts
8
7
6
5 5 5 5
3
2 2
0
0
-10% to -3% -3% to3% 3% to 15% 15% to 40%
Relative Price Discount
>40%
Mean Price for Existing Drugs Price Leader
* Analysis based on FYs 1995-1999.
Source: DiMasi, 2000 [http://aspe.hhs.gov/health/reports/drugpapers/dimassi/dimasi-final.htm]

Cost Reductions from Higher Clinical
Success Rates
35%
30%
25%
20%
15%
10%
5%
0%
21
.5
%
22
.5
%
23
.5
%
24
.5
%
25
.5
%
26
.5
%
27
.5
%
28
.5
%
29
.5
%
30
.5
%
31
.5
%
32
.5
%
33
.5
%
34
.5
%
Success Rate
Average phase cost Phase cost adjusted for cost of failures
Source: DiMasi, PharmacoEconomics 2002; 20(Suppl 3):1-10

Cost Reductions from Simultaneous
Percentage Decreases in All Phase Lengths
30%
25%
20%
15%
10%
5%
0%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Phase time reduction
Clinical cost Total cost
Source: DiMasi, PharmacoEconomics 2002; 20(Suppl 3):1-10

Clinical Testing Pipelines for Large Pharmaceutical Firms*
Have Grown in Recent Years (Phase I Starts per year)
100
80
60
40
20
0
1993-1997 1998-2002
* Ten largest pharmaceutical firms
Source: Tufts CSDD Impact Report, 8(3): May/June 2006
2003-2005

Trends in New Drug Development
Pipelines* by Therapeutic Class
Antiinfective
Cardiovascular
7.9%
8.7%
9.1%
11.6%
13.7%
14.3%
CNS
20.6%
19.6%
21.9%
GI/Metabolism 8.3%
10.7%
4.3%
Oncology/Immunologic
Respiratory 6.5%
4.8%
9.1%
0%
Percent of Phase I Pipeline
1993-97 1998-02 2003-05
* Ten largest pharmaceutical firms
Source: Tufts CSDD Impact Report, 8(3): May/June 2006
20.2%
20.5%
27.2%
30%

Large Pharmaceutical Firms* are
Increasingly Licensing-in New Drugs
100
80
77.8
70.3 71.8
60
40
14.8
23.6 25.0
20
0
Self-originated Licensed-in
7.4
6.2
3.2
Licensed-out
1993-97 1998-02 2003-05
* Ten largest pharmaceutical firms
Source: Tufts CSDD Impact Report, 8(3): May/June 2006

Conclusions
 Drug development has been and still is costly, risky, and lengthy
 Periods of market exclusivity have shrunk for first-in-class drugs
 The potential payoffs for improvements in the development process are substantial
 After a period of decline, more new drugs are now entering clinical testing pipelines