Business of
Drug Discovery
      David Ridley
      January 2009

            Health Sector Management
David Ridley

   Assistant Professor at Duke
   Teaching: health economics
    for MBA students
   Research: co-author of
    priority review voucher

Bill Gates described priority review
voucher at Davos last year

                   “But some of the highest-leverage
                   work that government can do is to
                   set policy and disburse funds in ways
                   that create market incentives for
                   business activity that improves the
                   lives of the poor. Under a law signed
                   by President Bush last year, any drug
                   company that develops a new
                   treatment for a neglected disease
                   like malaria or TB can get priority
                   review from the Food and Drug
                   Administration for another product
                   they've made. If you develop a new
                   drug for malaria, your profitable
                   cholesterol-lowering drug could go
                   on the market a year earlier. This
                   priority review could be worth
                   hundreds of millions of dollars.”
Drug Discovery:
Who, What, When, Where, How

 When? Drug development timeline
 How much money?
 By whom? License in R. Contract out D
 Where? Clinical trial location
 What? Orphan and neglected diseases

  R&D Is Risky & CostlyCompound Success
                                                       Rates by Stage
             Discovery:        0

            (2-10 years)             Preclinical:
                                     laboratory &        5,000–10,000
                               4     animal tests
   Phase I: 20-80 healthy      6
                                     Phase II: 100-           250
  volunteers to determine            300 volunteers     Enter Preclinical
         safety & dosage                                    Testing
                                     to look for
     Phase III: 1000-5000     10     efficacy & side
     volunteers to monitor           effects                   5
      adverse reactions to                                   Enter
            long-term use     14     FDA Review             Testing
            Additional               Approval
           post-market                                        1
                testing                                  Approved by
                                                           the FDA
                                                    Net Cost: $802 million
Source: DiMasi et al. 2003, Tufts                   invested over 15 years   5

  Vary by disorder

Source: Chris Adams & Van Brantner (FTC), Health Affairs, 2006
Probabilities and duration estimated using PharmaProjects data
Did not observe actual costs

Probability of anti-TB by 2010 < 5%
Source: Glickman et al., Science, 2006

But anti-infectives already used now in
phase III so might be higher

                                 Preclinical Phase I Phase II Phase III

  Expected duration (years)          1.6      1.8      2.5       5.5

           Patients                   -       104      264      1000

   USA expected cost ($m)            5.1      0.7      3.4      26.6

 Uganda expected cost ($m)           5.1      0.2      1.6       8.2
Patent = 20 years
Effective patent < 20 years

   Patent life is 20 years
   Effective patent life is considerably shorter
    –   Clinical trials
    –   FDA time
   Patent restoration:
    –   1/2 R&D and all FDA time
    –   <=5 years extra
    –   <= 14 years total
   But time value of $ so 1 year delay for blockbuster
    costs $300 million (Ridley et al. 2006)
Drug Discovery:
Who, What, When, Where, How

 When? Drug development timeline
 How much money?
 By whom? License in R. Contract out D
 Where? Clinical trial location
 What? Orphan and neglected diseases

$802 million

   Cost per new drug averages $802 million
    (year 2000 dollars) (Source: DiMasi, Hansen,
    Grabowski, 2003)
   The estimate has been criticized, even used
    as the title for a critical book
   Is it really “just” $200 million?
    –   Cut in ½ for opportunity cost of capital
    –   Cut in ½ again for share of dry wells
Cost of R&D

 $200m Clinical $130m+Pre-clinical $70m

 $400m Dry wells

 $800m Cost of capital

 $900m Phase 4

$1300m Inflation

•We often hear $800 million but with post-approval costs it’s $900
million and with inflation adjustments it’s > $1300 million
•Accountants might say, however, $200 million (+ inflation)
Sarafem different?

   How costly are line extensions?
   Manufacturer sought a line extension for Prozac
   Branded Sarafem as treatment for premenstrual
    dysphoric disorder (PMDD)
   Quick search of clinical studies. Appears that 3
    clinical trials testing effectiveness of Sarafem for
    PMDD. Trials had 260, 42, and 19 patients. At
    $10,000 per patient cost is $3.2 million
   Caveat: haven‟t seen records, this is just back of

Torcetrapib different?

   Average: $130 million (in 2000 dollars)
     –   DiMasi et al. (2003)
     –   + other costs + cost of capital + dry wells = $800m
   Torcetrapib: $800 million (?!)
     –   “Pfizer announced that it had pulled the plug on the medicine entirely,
         turning the company‟s nearly $1 billion investment in it into a total loss.” –
         NYT 2006
     –   “Pfizer had spent close to US$1 billion in the development of Torcetrapib
         which included US$ 800 million in the clinical trials itself” - case
     –   About $90 million for plant in Ireland
     –   “The numbers are correct. They are based on a simple sum of outlays
         related to Torcetrapib R&D over the years. They do not include cost-of-
         capital or NPV.” – Pfizer friend
   Why Torcetrapib more costly?
     –   More people: 7500 in treatment, 7500 in control in Illuminate; 10,000

Devices & diagnostics different?

   Clinical trials often aren‟t required for approval
    –   For devices, 510(k) submissions demonstrate
        substantial equivalence to approved
   But
    –   For more innovative, clinical trials necessary for
        Premarket Approval (PMA)
    –   For convincing providers and payers
    –   For the future. Critical GAO report encouraged FDA
        to subject devices to more rigorous review

Biotech different?

   Faster
    –   More nimble and creative (different corporate culture)
    –   Fewer safety issues (more relevant to early biotech era
   Slower
    –   Less experience in clinical development and interacting with
    –   More costly manufacturing process R&D and production of
        clinical supplies

                   Source: DiMasi and Grabowski 2007              16
Pre-Approval Capitalized Cost per
Approved New Molecule

     ** Based on a 5-year shift and prior growth rates for the preclinical and clinical periods
                  New pharmaceutical R&D # is not $802 or $899 but $1318                         17
                   Source: DiMasi and Grabowski 2007
Pre-Approval Cash Outlays per
Approved New Molecule

 * 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              18
                                 Source: DiMasi and Grabowski 2007
Clinical Trial Size Increases

   Smaller treatment difference
    relative to “noise” (variation)
   Want smaller false positive
    rate (α)
   Want higher power (1- )

   Intervention group size:

Pivotal Trials

   Often 2 pivotal trials, but 1 for orphan
   “The Food, Drug and Cosmetic Act… calls for „adequate and well-
    controlled clinical trials‟ to support approval of a product for a specific
    indication. In traditional drug development terms, this language
    translates into at least two „pivotal‟ trials to support registration. The
    purpose of these two clinical trials is to have one trial confirm the
    results of the other, thereby reducing the probability of outcomes
    associated with false positives” (Brenner & Ellis-Grosse 2006).
   For example, all 4 of the following groups
    1.   Duke: treatment & control (placebo)
    2.   Quintiles (CRO): treatment & control (placebo)
   But orphan drugs are often approved based on one pivotal Phase III
    clinical trial (or a combined Phase II/III trial).

R&D by function, PhRMA, 2006

Prehuman/Preclinical   $12 b   27%    Does not account for
                                        time value of $.
      Phase I          $3 b    7%       Source: PhRMA
                                      Industry Profile 2008
     Phase II          $6 b    13%

     Phase III         $12 b   28%

     Approval          $3 b    6%

     Phase IV          $6 b    13%

   Uncategorized       $3 b    6%

     Total R&D         $43 b   100%                 21
Postapproval Drug Safety
                Ridley, Kramer, Tilson, Grabowski, &
                 Schulman (2006)
                11 companies participated
                  –   Accounting for 71% of 2003 sales by
                      top 20
                For 2003:
                  –   Mean pharma sales: $17 billion
                  –   Mean safety spend per company:
                      $56 million (0.3% of sales)
                  –   Estimated spending by top 20 drug
                      manufacturers: $800 million
                Context
                  –   Total budget for FDA‟s Office of Drug
                      Safety in 2003: $ 22.1 million
                  –   Industry spend on R&D 2003: 15.6%
                      of sales

Drug Discovery:
Who, What, When, Where, How

 When? Drug development timeline
 How much money?
 By whom? License in R. Contract out D
 Where? Clinical trial location
 What? Orphan and neglected diseases

Who innovates? Big pharma or others?
2006 Domestic R&D by PhRMA Members

    Licensed-in                         $6 b              17%

   Self-Originated                     $24 b              70%

   Uncategorized                        $4 b              13%

     Total R&D                         $34 b              100%
         17% of dollars, but probably > 17% of products
             Source: PhRMA Industry Profile 2008            25
Who conducts trials?
Contract research is an option

   For contract research, how does the price for government and
    foundations compare to the industry price?
   “we provide the US government and Bill and Melinda Gates grantees
    (and other non for profit entities working in the neglected diseases
    space) with preferential terms of business.
   One way is rather simple - discounted rates off our fees/hourly rates.
    US discount and non-US discounts are different, with the more
    aggressive reduction being provided for services in non US-locations.
   Another way is to provide rebates at the end of a calendar year based
    on revenues (tranche system). I would love to chat further if you are
    interested. .”
   - Vaila Clements, VP Public Health and Government Services,
    Quintiles Transnational, January 2009

Drug Discovery:
Who, What, When, Where, How

 When? Drug development timeline
 How much money?
 By whom? License in R. Contract out D
 Where? Clinical trial location
 What? Orphan and neglected diseases


     or false: clinical trials are
 True
 moving to India and China

      Regional Distribution of
Biopharmaceutical Clinical Trial Sites

                                                   •Emerging (green)
                                                   grew from 8% in 2002
                                                   to 20% in 2006
                                                   •Largest losses in
                                                   Western Europe
  Western Europe and North                         between 2002 and
  America declining but large                      2004, while decline in
                                                   North America
                                                   between 2004 and
                                                   • Growth is 5-10% so
                                                   not necessarily
                                                   leaving, just not
                                                   growing as fast

         Source: Berndt, Cockburn, & Thiers 2008
Shares of Biopharmaceutical
     Clinical Trial Sites

                                              •Top 5 (US,
                                              France, Canada,
                                              and Spain) host
                                              • Emerging now
                                              host 17% of sites

    Source: Berndt, Cockburn, & Thiers 2008
Average Relative Annual Growth Rates in

                                                   shares in North
                                                   shares in China
                                                   and other

         Source: Berndt, Cockburn, & Thiers 2008
Drug Discovery:
Who, What, When, Where, How

 When? Drug development timeline
 How much money?
 By whom? License in R. Contract out D
 Where? Clinical trial location
 What? Orphan and neglected diseases

Problem: Little private financial
incentive to develop treatments for

 Orphan           Neglected          Bioterrorist
 diseases          diseases            attacks

                                   Unlikely to need and if
Have $, but few   Many, but poor    need then give away
How can we induce companies to
   develop treatments for orphan
 diseases, neglected diseases, and
        bioterrorist attacks?

    Solution: Push & Pull Mechanisms

    Pull Mechanisms fund outputs
    (drugs, vaccines)                           Push Mechanisms fund inputs
                                                (pay R&D costs)
   Advance Markets
    –   Guaranteed price creating $3
        billion market
    –   Malaria, TB, HIV
   Transferable voucher for
    extended patent life                    Push + Pull
    –   Prize for treatment for              Orphan Drug Act
        neglected diseases or                   –   Tax credits & grants (push)
        bioterrorism                            –   Marketing exclusivity (pull)
    –   Extra patent life for a different      Priority Review Voucher
        drug                                    –   Priority review for other drug
                                                –   Dengue, Chagas, …

1983 U.S. Orphan Drug Act

   Eligibility
     –   Disease affects few people in U.S. (<200,000)
     –   Or no reasonable expectation that profitable
        Low expected returns sufficient not necessary
   Push
     –   R&D tax credits: ½ clinical, even if not approved
     –   Clinical research grant programs
   Pull
     –   FDA counseling and priority review
     –   Guaranteed market exclusivity of 7 years

U.S. Definition of Disease Prevalence

   From www.fda.gov/orphan/
   (i) The disease or condition for which
    the drug is intended affects fewer than
    200,000 people in the United States
    or, if the drug is a vaccine, diagnostic
    drug, or preventive drug, the persons
    to whom the drug will be administered
    in the United States are fewer than
    200,000 per year as specified in Sec.
    316.21(b), or
   (ii) For a drug intended for diseases or
    conditions affecting 200,000 or more
    people, or for a vaccine, diagnostic
    drug, or preventive drug to be
    administered to 200,000 or more
    persons per year in the United States,
    there is no reasonable expectation that
    costs of research and development of
    the drug for the indication can be
    recovered by sales of the drug in the
    United States as specified in Sec.         37
Orphan Drug Laws

                      Disease                     Pull: years
 Country   Passed                  Push: grants
                     prevalence                   exclusivity

  U.S.     1983     0.07% (200K)    ½ clinical        7

                       0.04%         Average
 Japan     1993                                       10
                     (4 in 10K)       $100K

                       0.05%        Apply for
  E.U.     1998                                       10
                     (5 in 10K)      grants
Orphan Drugs Laws:
More Details on US & EU

                    US                                            EU
                                                  Access to centralized procedure for
 Tax credits for costs of clinical research
                                                          marketing authorization

 Annual grant funding to defray costs of      EU-funded research grants from Community
     qualified clinical testing expenses                   and member states

                                                    Protocol assistance to optimize
   Assistance in clinical-study designs
  7 years of exclusive marketing after           10 years of exclusive marketing after
                  approval                                       approval

                                              100% fee reduction for protocol assistance,
Waiver of Prescription Drug User Fee Act            50% fee reduction for marketing
                  filing fees                    authorization, 100% fee reduction for
                                                      pre-authorization inspections
Most Important Incentive:
Market Exclusivity

   Market exclusivity was most sought after
    incentive in Orphan Drug Act, said FDA
   Particularly important for
    –   biologicals that had uncertain patents
    –   older chemical entities with useful orphan drug

Orphan Drugs:
Lower Costs

   Orphan drugs have smaller and
    shorter clinical trials
   The 7 orphan drugs in 1999 were
    approved with an average of 588
   By contrast, non-orphan approvals
    in the late 1990s had over 5,000
    patients on average                 41
Orphan Drugs:
Lower Lifetime Sales Profile



           Source: Grabowski and Vernon 2003                 42
        1990-1994 Sales of New Drug Introductions
Orphan Drugs Can Be Lucrative

            Source: WSJ 2005
            Update: Cerezyme = $300K/yr, $1.1b in
            2007 (NYT March 2008)
Approvals of Drugs for Rare Diseases

                     1983 Orphan Drug Act
  Source: WSJ 2005
                             Source: FDA
Orphan Drug Act Conclusions

   Orphan Drug Act has been a success in
    encouraging many new drug approvals for
    rare diseases
   But few U.S. orphan drug approvals for
    neglected diseases. Malaria vaccine would
    qualify as orphan, but with so few high-
    paying customers, exclusivity does little good
   Need additional incentive mechanisms for
    neglected diseases

 Annual Global Burden (Millions of DALYs)

                                                  0                0.1%             1%               10%
                                                         Developed Countries’ Share of DALY Burden
                                             DALY=Disability-             Disparity                  Source: Ridley,
                                             adjusted life years                                     Grabowski, Moe
Priority Review Voucher

   Senator Brownback wrote
    “After reading their proposal
    in Health Affairs, I met with
    Ridley and colleagues to
    discuss the idea further, and
    I subsequently drafted an
    amendment…Indeed, their
    idea is the heart of my
    Elimination of Neglected
    Diseases (END) amendment.”
   Became law in 2007
  Priority Review Voucher


                        2. Voucher

  Developer of                           Manufacturer of
  treatment for             $              potential
neglected disease                         blockbuster
    Priority Review Voucher
    Creates Win-Win

   Benefits people suffering from neglected
   Benefits patients in the U.S. who receive earlier
    access to the priority drug
   U.S. patients also get earlier access to the
    generic because drugs with faster FDA review
    typically have earlier patent expirations
   Concept could also be applied to treatments for

Subchapter A of chapter V of the Federal Food, Drug, and Cosmetic Act
(21 U.S.C. 351 et seq.) is amended by adding at the end the following:
`(a) Definitions- In this section:
`(1) PRIORITY REVIEW- The term `priority review', with respect to a
human drug application as defined in section 735(1), means review and
action by the Secretary on such application not later than 6 months after
receipt by the Secretary of such application, as described in the Manual of
Policies and Procedures of the Food and Drug Administration and goals
identified in the letters described in section 101(c) of the Food and Drug
Administration Amendments Act of 2007.
`(2) PRIORITY REVIEW VOUCHER- The term `priority review voucher'
means a voucher issued by the Secretary to the sponsor of a tropical
disease product application that entitles the holder of such voucher to
priority review of a single human drug application submitted under section
505(b)(1) or section 351 of the Public Health Service Act after the date of
approval of the tropical disease product application.
`(3) TROPICAL DISEASE- The term `tropical disease' means any of the

On September 27, 2007, President Bush
signed H.R. 3580, "Food and Drug
Administration Amendments Act of 2007"
into Law

   When? Each of 3 phases of trials take couple of years
   How much? $800 million
    –   ½ is cost of capital, ½ is dry wells
    –   Update: $1300
    –   So if $325 million, you‟re average
   Big trials costly but need bigger if
    –   Smaller treatment difference, Higher “noise” (variation),
        Smaller false positive rate (alpha), Higher power (1-beta)
   By whom?
    –   License in: 17% of $ for in-license
    –   Contract out: Quintiles: lower rate for Gates
   Where?
    –   Emerging markets now host 17% of sites
   What?                                                            51
    –   Incentives for orphan, neglected, biodefense

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