By Mark D. Uehling
January 12, 2004 | What do a) GM’s 2002 earnings, b) the gross domestic product of Guyana, and c) the cost to develop a new drug have in common? Each is $1.7 billion.
The new stomach-turning statistic for drug development, released last month by the consulting firm Bain & Co., is roughly double the quasi-liturgical estimate of $897 million from the Tufts Center for the Study of Drug Development.
The Tufts number rests on data from 68 projects supplied by 10 major companies during the 1990s. “Our cost analyses are principally based on the collection of actual (not projected) historical costs for randomly selected drug projects,” says Joseph DiMasi, director of economic analysis at Tufts. But given scandals at Enron and WorldCom, it’s unclear whether any unaudited numbers are believable, especially since the industry cites the Tufts data to justify its pricing.
Bain, for its part, won’t quantify how many projects were used in its model. But it starts with audited R&D-related statistics in the top 15 drug companies’ filings to the U.S. Securities & Exchange Commission, and mixes in its own consulting experience. Bain includes the real-world costs of marketing drugs after FDA approval, which add $250 million per compound. (Tufts omits launch costs.)
Bain’s analysts considered a more recent time period, 2000 to 2002, and came up with sharply lower productivity in every phase of drug development. According to Bain, just one compound now reaches the market for every 13 discovered and put in preclinical trials, versus one in eight from 1995 to 2000. “The success rates are much lower than the success rates that Tufts uses,” says Preston Henske, a vice president at Bain and one of the authors of the new Bain report, “Rebuilding Big Pharma’s Business Model.”
Bain estimates that the price of drug development has risen 55 percent since the 1995-2000 period, particularly in the area of clinical costs. “Declining productivity has been particularly severe in Phase III development,” Bain writes of late-stage studies. “Average development costs per compound have increased from $131 million to $200 million, while the chance of each compound receiving approval has fallen from 73 percent to 59 percent.”
Low productivity has forced pharma’s decision makers to adjust their strategy. As Henske explains: “Before, they may have gone for one major indication. They’re now going after multiple indications simultaneously.”
At first, the Bain analysis paints a seemingly damning portrait of the industry’s investment in technology, whether genomics, proteomics, or high-throughput screening. But Henske says those bets may yet pay off. “The big companies have made the technology investment for very good reasons, and with very good rationale,” he says.
More heretical is the notion that blockbusters are bad. The allure of megadrugs has fogged the mind of the industry, Bain says, robbing it of a clear-eyed appreciation of a research process that poses ruinous financial risks – and seldom generates blockbusters. The solution: more partnering, as is common in the oil industry and Hollywood. “If you look at Paramount Pictures, they partner everything that they do,” Henske says.
Recent trims to research budgets, Bain says, show the blockbuster era is about to end. “Given the current economics of drug development, Big Pharma would need to invest twice as much as it does today to sustain double-digit growth,” the report states. “Many companies are living on borrowed time until their blockbuster patents run out.”
One risk-reduction strategy, Henske says, is out-licensing. He’s not using that term in the way that cash-starved biotechs employ it – to save themselves – but in a routine, strategic manner, at the end of a promising Phase II trial. Henske explains: “Start out-licensing earlier in the process in the areas that are not your area of focus.”
But all is not lost. “There isn’t a crisis right now,” Henske says. “You’ve got the time to think about different approaches. You need to use the time extremely wisely and try some different approaches from the traditional blockbuster model.”