In Pursuit of High Performance: Understanding Pharmaceutical Research and Development Cost Drivers

While the pharmaceutical and biotechnology industry continues to revolutionize how diseases are studied, treated, cured and prevented, the cost to develop the world's therapies continues to rise. Various experts have reported different estimates on the exact cost, but there seems to be consensus that the increase of these costs has been significant over the past five years. Further, there is overall agreement and evidence to support the fact that these increases will continue.

Pharmaceutical companies, as well as the general population, need a firm understanding of not only why the costs of research and development (R&D) are complex and increasing but also what the industry is doing currently to manage R&D spending. In this report, Accenture highlights a number of cost drivers impacting three key areas of R&D.

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To understand what drivers are responsible for such a high investment in R&D, it is important to first understand R&D spend across the industry and per drug, and next how pharmaceutical output has changed over the years.

Industry spending on R&D
There does not seem to be disagreement that the pharmaceutical and biotechnology industries invest heavily in R&D, but experts report various cost estimates. According to an analysis performed by EvaluatePharma® that included 250 global pharmaceutical companies, the global pharmaceutical and biotechnology industry spent nearly $90 billion on pharmaceutical-related research and development in 2005, up roughly 56 percent from 2001. Goldman Sachs estimates predict that R&D spending amongst the big pharmaceutical companies will increase 7 percent per year over 2004 to 2009.

Cost of a new drug
Experts also report slightly different estimates on the cost to develop a new drug. These different estimates are not surprising given the complexity of the variables required to arrive at such cost estimates: therapeutic area variable costs, costs per patient per trial by therapeutic area, success rates per phase by indication (that is, disease state) and phase, the inclusion or exclusion of post-approval commitments, novel therapies vs. follow-on, etc. All of these estimates take into account cost incurred before earning any returns.

It should be noted that some nonclinical activities take place throughout the drug development process and, therefore, the associated costs are incurred and reflected in the appropriate stages. It is also noteworthy that 36 percent of the R&D budget is going toward late stage development, mostly due to the rather expensive Phase II and Phase III clinical trial process.

R&D output
From 2000 to 2004, there was a 32 percent increase in the number of Investigational New Drugs (INDs) submitted for drugs (excluding therapeutic biological INDs) to the Center for Drug Evaluation and Research. However, the future trend remains unclear as data from 2004 to 2005 suggests. Discovery research challenges such as more complex targets, disease areas and new exploratory technologies may be root causes for this potential innovation crossroad as well as the industry's challenging pursuit of drug differentiation and proof of value.

Accenture identifies three areas as contributors to the increased R&D costs and, therefore, to increased spending: longer R&D timelines, an increase in attrition and increased key R&D component costs.

Longer R&D timelines
Most experts would agree that the time it takes to move a drug candidate through discovery and development is currently 10 to 15 years. CMR estimated an increase of nearly 8 to 10 percent from 2000 to 2003. This longer development timeline is caused by a number of factors, including:

• A shift in the Phase II design strategy: This new strategy requires that each program design includes more studies, running sequentially, with fewer clinical questions per study. Development teams are able to make program decisions based on more conclusive analyses of the data in real time. This approach allows pharmaceutical companies to move forward slowly, cautiously and with more information, which, in turn, allows them to mitigate risk across the portfolio.
  
  
• Cost implications for study design decisions: The operational feasibility of a trial is considered during program planning along with scientific and regulatory design requirements. When these requirements and operational implications are out of balance, development teams run the risk of greater timeline delays and, subsequently, spending increases.
  
  
• Increased competition for patients: The more an investigator, site or region is tapped for clinical trial participation, the more difficult enrollment becomes according to protocol timelines. This more difficult and, therefore, longer enrollment period occurs not only because there may be a limited number of patients in a given area, but also because there may be competition for patients by a number of companies working in the same indication.
  
  
• Movement through internal stage gates: It is difficult to move through internal stage gates quickly regardless of the internal process. Many challenges exist for drug development teams to overcome or work through, such as:
  
  • Real-time data analysis on drug candidates is rarely conclusive.
  • New research/findings are surfacing on an ongoing basis, whether on the specific drug candidate, competitor drug information or interactions with concomitant medicines.
  • Many variables must be considered at each decision-making stage gate.

An increase in attrition
While Phase II success rates have fallen from 40 percent to 25 percent over the past five years, Phase III success rates have started to level off. There are a number of drivers behind this decrease in Phase II success rates or increased attrition, including:

• Improved program design to reach the right "go/no-go" decision prior to Phase III: Improved program designs are allowing development teams to make earlier and more informed go/no-go decisions in Phase II, but it can be an expensive trip to make it even that far.
  
  
• Complex diseases and cutting-edge scientific and technological advances: Pharmaceutical companies continue to tackle chronic and complex diseases. With ambitious goals, the industry has invested more into these areas with the expectation of producing effective new treatments in the near future.
  
  
• Increasing market demand for pharmacoeconomic differentiation: With the rising costs of drug development and growing pricing pressures, pharmaceutical companies are making go/no-go decisions based not only on answers to clinical questions regarding safety and efficacy but also economics.

Increased key R&D component costs
There are a number of significant R&D costs, such as discovery costs, clinical trial costs and post-approval R&D costs, which have been on the rise over the past five years. It is interesting to understand how and why these have increased.

• Drug discovery costs: The identification and implementation of various discovery technology tools have dramatically affected the cost of drug discovery. While the benefits of these technological advances include improved identification, organization and optimization of targets and leads, these improvements have not yet been fully realized. Cost savings have also not yet been realized as non-technology costs have not yet been taken out of the system.
  
  
• Clinical study costs: Over the past few years, the number of clinical trials initiated has increased by roughly 52 percent for the 10 top selling US drug companies, according to Tufts CSDD. The implication on cost is great since more trials equates to more startup and closeout costs as well as site monitoring expenses. Also, with the increase in clinical trials, demand for sites has outweighed supply in some geographies and/or therapeutic areas, which means that pharmaceutical companies must increase recruitment budgets and, in some cases, offer supplemental training for new sites.
  
  
• Post-approval R&D costs: In 2005, 72 percent of the new molecular entities approved required post-marketing activities, ranging from a single human in vivo drug interaction study to a large randomized safety study to assess major clinical outcomes. In addition, pharmaceutical companies remain very focused on implementing more robust drug safety data management systems and processes. Companies also continue to assess proof of value by conducting post-marketing studies to better understand their drugs' differentiating factors from existing therapies.

New technology and innovative operating models provide promise of potential slowing of the growth of R&D costs. These changes offer hope that the current cost escalation trends will not continue.

In-licensing and partnerships
Pharmaceutical companies are beginning to construct new types of operating models. The traditional generalist company has focused on internal research and development equally. The new model is an internal/external hybrid that encourages the identification of innovation from all sources. The results for the industry are more healthy and viable pipelines where the ultimate beneficiaries are the patients.

Partnering is another approach to managing risk in the drug portfolio. Companies focus and utilize their stronger core competencies and partner with other companies with complementing strengths.

Validated surrogate endpoints/biomarkers
The identification and use of the appropriate surrogate endpoints for a given program allows the drug development team to predict therapeutic benefits earlier in the process. In addition, surrogate endpoints enable teams to understand whether the drug is achieving safety/efficacy goals in a wide range of in vivo and in vitro models. Furthermore, since many of these substitute endpoints can be visibly detected and/or easily measured, there seems to be a higher level of accuracy associated with them. The hope is that with more information in hand, the team is able to make go/no-go decisions earlier in the program, resulting in the attrition of ineffective treatments earlier in the process.

Focus on personalized medicine
There has been an increase in R&D spending on pharmacogenomics and the incidence of genetic testing during clinical trials over the past several years. Gaining more knowledge in the area of personalized medicine will allow researchers to design more definitive clinical trials and better predict which patients will benefit most from treatments. Less attrition, focused patient populations, more effective therapies—these things will ultimately reduce spending preapproval.

Adaptive trial design
Companies utilizing adaptive trial design are able to improve the statistical power of clinical trial results that are veering off target in nearly real time and throughout the duration of the trial. Based on interim analyses, ineffective treatment arms can be dropped that can reduce the number of patients enrolled overall. Unsuccessful trials are identified early on and stopped which, subsequently, reduces costs.

The world has great expectations for the future of health care. With such great expectations and significantly growing medical needs, investment in and by the pharmaceutical and biotechnology industry is expected to continue. The study of complicated diseases, undiscovered treatments, cures and preventions is a complicated and challenging undertaking.

As more new therapeutic and scientific areas are explored and the previously unimaginable becomes possible and attainable, it is critical for the pharmaceutical industry as well as policymakers to understand how R&D dollars are spent today to best plan for their future investment requirements. Understanding the drivers of R&D costs is only the beginning of the quest to harness R&D as a driver of high performance.

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