A NEW Study on Ballooning Pharma R&D Cost: Exploring a Sustainable Model for Greater Patients’ Access

The high-decibel debate on increasing prices for patented drugs affecting patients’ access to innovative medicines gets a new fuel. A brand new study dated December 2012 carried out by the Office of Health Economics (OHE), UK, which was partly supported by a grant from AstraZeneca, estimated that the cost of developing new medicine has risen by ten times from US$100 million in the 1970s to as high as US$ 1.9 billion in 2011.

The study identifies the following key reasons for a galloping increase in the cost of research and development:

  • Inflation-adjusted investments
  • Sharp increase in the rate of failure
  • Stringent regulatory demands together with scientific complexity
  • Longer time for clinical development
  • Significant increase in the cost of capital

 Another recent study goes even beyond:

Many experts have gone even further on this subject, arguing that pharmaceutical R&D expenses are over stated and the real cost is much less.

An article titled “Demythologizing the high costs of pharmaceutical research”, published by the London School of Economics and Political Science in 2011 indicates that the total cost from the discovery and development stages of a new drug to its market launch was around US$ 802 million in the year 2000. This was worked out in 2003 by the ‘Tuft Center for the Study of Drug Development’ in Boston, USA.

However, in 2006 the same figure increased by 64 per cent to US$ 1.32 billion, as reported by a pharmaceutical industry association. Maintaining similar trend, if one assumes that the R&D cost will increase by another 64 per cent by 2012, the cost to bring a new drug to the market through its discovery and development stages will be around US $2.16 billion. This will mean a 2.7 times increase from its year 2000 estimate, the article articulates.

The important caveat:

The authors also mentioned that the following factors were not considered while working out the 2006 figure of US$ 1.32 billion:

  •  The tax exemptions that the companies avail for investing in R&D.
  • Tax write-offs amount to taxpayers’ contributing almost 40% of the R&D cost.
  • The cost of basic research (should not have been included), as these are mostly done in public funded universities or laboratories.

The article commented that ‘half the R&D costs are inflated estimates of profits that companies could have made if they had invested in the stock market instead of R&D and include exaggerated expenses on clinical trials’.

The authors alleged that “Pharmaceutical companies have a strong vested interest in maximizing figures for R&D as high research and development costs have been the industry’s excuse for charging high prices. It has also helped generating political capital worth billions in tax concessions and price protection in the form of increasing patent terms and extending data exclusivity.”

The study concludes by highlighting that “the real R&D cost for a drug borne by a pharmaceutical company is probably about US$ 60 million.”

 A positive side of the story:

The book  titled “Pharmaceutical R&D: Costs, Risks, and Rewards”, published by the government of USA states that the three most important components of R&D investment are:

  • Money
  • Time
  • Risk

Money is just one component of investment, along with a long duration of time, to reap benefits of success intertwined with a very high risk of failure. The investors in the pharmaceutical R&D projects not only take into account how much investment is required for the project against expected financial returns, but also the timing of inflow and outflow of fund with associated risks.  It is thus quite understandable that longer is the wait for the investors to get their return, greater will be their expectations for the same.

This publication also highlights that the cost of bringing a new drug from ‘mind to market’ depends on quality and sophistication of science and technology involved in a particular R&D process together with associated investment requirements for the same. In addition, regulatory demand to get marketing approval of a complex molecule for various serious disease types are also getting more and more stringent, significantly increasing their cost of clinical development simultaneously. All these factors when taken together make the cost of R&D not only very high, but unpredictable too.

Thus to summarize from the above study, high pharmaceutical R&D costs involve:

  •  Sophisticated science and technology dependent high up-front financial investments
  • A long and indefinite period of negative cash flow
  • High tangible and intangible costs for acquiring technology with rapid trend of obsolescence
  • High risk of failure at any stage of product development

 The ground reality: R&D productivity is going south

 That pharmaceutical R&D productivity is fast declining has been vindicated by ‘2011 Pharmaceutical R&D Factbook’ complied by Thomson Reuters, the key highlights of which are as follows:

  •  21 new molecular entities (NMEs) were launched in the global market in 2010, which is a decrease from 26 NMEs of the previous year.
  • 2010 saw the lowest number of NMEs launched by major Pharma players in the last 10 years
  • The number of drugs entering Phase I and Phase II clinical trials fell 47% and 53% respectively during the year.

 According to findings of the latest review of ‘Pharmaceutical R&D returns performance’ by Deloitte and Thomson Reuters of December 2012, the R&D Internal Rate of Return (IRR) of leading pharmaceutical companies has fallen for a second successive year to 7.2 percent in 2012 from 7.7 percent in 2011.

High cost of failure:

By challenging the status quo, Andrew Witty, the global CEO of GlaxoSmithKline (GSK) in his speech  in Mumbai on September 27, 2011 to the members of the Indian pharmaceutical industry commented that the cost of over a billion dollar to bring a new molecule to the market through its discovery and development stages is “unacceptable.” He attributed such high R&D expenses to the ‘cost of failure’ by the industry.

Witty said, “High in-house failure rates are slowing progress on pricing affordability… We need to fail less and deliver more”.

He commented during his deliberation that success in reducing the R&D cost to make innovative drugs more affordable to the patients of all income levels, across the globe, will be the way forward in the years ahead.

 Conventional thinking and an unsustainable model:

Research scientists have already articulated that sharp focus in the following areas may help containing the R&D expenditure to a great extent and the savings thus made, in turn, can fund a larger number of R&D projects:

  •  Early stage identification of unviable new molecules and jettisoning them quickly
  • Newer cost efficient R&D models, like one implemented by GSK
  • Significant reduction in drug development time. 

Unfortunately, sustainability of the above model still remains a wishful thinking and a question mark to many for various other reasons.

 Exploring a seemingly ‘Sustainable Model’:

Should Pharmaceutical R&D move from the traditional models to a much less charted frontier?

Perhaps towards this direction, in November, 2010 a report of Frost & Sullivan titled, “Open Source Innovation Increasingly Being Used to Promote Innovation in the Drug Discovery Process and Boost Bottom-line”, underscored the urgent need of the global pharmaceutical companies to respond to the challenges of high cost and low productivity in their respective Research and Development initiatives, in general.

‘Open Innovation’ model, they proposed, will be most appropriate in the current scenario to improve not only profit, but also to promote more innovative approaches in the drug discovery process.  Currently, on an average it takes about 8 to 10 years to bring an NCE/NME to market with a cost of around U.S$ 1.9 billion.

The concept of ‘Open Innovation’ is being quite successfully used by the Information Technology (IT) industry since nearly three decades all over the world, including India.  Web Technology, the Linux Operating System (OS) and even the modern day ‘Android’ – the open source mobile OS, are excellent examples of commercially successful ‘Open innovation’ in IT.

In the sphere of Biotechnology Human Genome Sequencing is another remarkable outcome of such type of R&D model.

On May 12, 2011, in an International Seminar held in New Delhi, the former President of India Dr. A.P.J. Abdul Kalam commented, “Open Source Drug Discovery (OSDD) explores new models of drug discovery”. He highlighted the need for the scientists, researchers and academics to get effectively engaged in ‘open source philosophy’ by pooling talent, patents, knowledge and resources for specific R&D initiatives from across the world. In today’s world ‘Open Innovation’ in the pharmaceutical R&D has a global relevance, especially, for the developing world of many ‘have-nots’.

 ‘Open Innovation’:

As the name suggest, ‘Open Innovation’ or the ‘Open Source Drug Discovery (OSDD)’ is an open source code model of discovering a New Chemical Entity (NCE) or a New Molecular Entity (NME). In this model all data generated related to the discovery research will be available in the open for collaborative inputs. The licensing arrangement of OSDD where both invention and copyrights will be involved, will be quite different from any ‘Open Source’ license for a software development.

In ‘Open Innovation’, the key component is the supportive pathway of its information network, which is driven by three key parameters of:

  •  Open development
  • Open access
  • Open source

As stated earlier, ‘Open Innovation’ concept was successfully used in the ‘Human Genome Project’ where a large number of scientists, and microbiologists participated from across the world to sequence and understand the human genes. However, this innovation process was first used to understand the mechanics of proteins by the experts of the biotech and pharmaceutical industries.

Making innovative drugs affordable through ‘Open Innovation’:

The key objective of ‘Open Innovation’ in pharmaceuticals is to encourage drug discovery initiatives at a reasonably cheaper price, especially for Non-infectious Chronic Diseases (NCD) or the dreaded ailments like Cancer, Parkinson’s, Alzheimer, Multiple Sclerosis etc. and also many neglected diseases of the developing countries, to make innovative drugs affordable even to the marginalized people of the world.  

 Multiple benefits:

According to the above report of Frost & Sullivan on the subject, the key benefits of ‘Open Innovation’ in pharmaceuticals will include:

  •  Bringing together the best available minds to tackle “extremely challenging” diseases
  • Speed of innovation
  • Risk-sharing
  • Affordability

 The key barrier: Shared IPR

Industry observers feel that the key barrier to ‘Open Innovation’ is that IPR needs to be shared. Hence, large innovator companies, by and large, have not evinced much commercial interest in this initiative as yet. Other issues for ‘Open Innovation’ model are:

  •  Who will fund the project and how much?
  • Who will lead the project?
  • Who will coordinate the project and find talents?
  • Who will take it through clinical development and regulatory approval process?

However, the experts feel that all these do not seem to be an insurmountable problem at all, as the saying goes, ‘where there is a will, there is a way’.

 The Global initiatives on ‘Open Innovation’:

  •  In June 2008, GlaxoSmithKline announced that it was donating an important slice of its research on cancer cells to the cancer research community to boost the collaborative battle against this disease. With this announcement, genomic profiling data for over 300 sets of cancer cell lines was released by GSK to the National Cancer Institute’s bioinformatics grid. It has been reported that over 900 researchers actively contribute to this grid from across the industry, research institutes, academia and NGOs. Many believe that this initiative will further gain momentum to encourage many more academic institutions, researchers and even smaller companies to add speed to the drug discovery pathways and at the same time make the NCE/NME coming through such process much less expensive and affordable to a large section of the society, across the globe.
  •  The Alzheimer Disease Neuroimaging Initiative (ADNI) is another example of a Private Public Partnership (PPP) project with an objective to define the rate of progress of mild cognitive impairment and Alzheimer’s disease, develop improved methods for clinical trials in this area and provide a large database which will improve design of treatment trials’.   
  •  Recently announced ‘Open invitation’ strategy of GlaxoSmithKline (GSK) to discover innovative drugs for malaria is yet another example where GSK has collaborated with European Bioinformatics Institute and U.S. National Library of Medicine to make the details of the molecule available to the researchers free of cost with an initial investment of US$ 8 million to set up the research facility in Spain involving around 60 scientists from across the world to work in this facility. 

 Indian initiative:

In India, Dr. Samir Brahmachari, the Director General of the Council of Scientific and Industrial Research (CSIR) is the champion of the OSDD movement. CSIR believes that for a developing country like India OSDD will help the common people to meet their unmet medical needs in the areas of neglected tropical diseases.

‘Open Innovation’ project of CSIR is a now a global platform to address the neglected tropical diseases like, tuberculosis, malaria, leishmaniasis by the best research brains of the world working together for a common cause.

To fund this initiative of the CSIR the Government of India has allocated around U.S$ 40 million and an equivalent amount of funding would be raised from international agencies and philanthropists.

 Conclusion:

Currently pharmaceutical R&D is an in-house initiative of innovator global companies. Mainly for commercial security reasons, only limited number of scientists working for the respective innovator companies will have access to the projects.

‘Open Innovation’ on the other hand, is believed to have the potential to create a win-win situation, bringing in substantial benefits to both the pharmaceutical innovators and the patients.

According to available reports, the key advantage of the ‘Open Innovation’ model will be substantial reduction in the costs and time of R&D projects, which could be achieved through voluntary participation of a large number of Researchers/Scientists/Institutions in key R&D initiatives. This in turn will significantly reduce ‘mind-to-market’ time of more affordable New Chemical/Molecular Entities in various disease areas making innovative medicines affordable to all.

Thus, many experts argue, high prices of new patented drugs, giving rise to low access to majority of patients, at least, in the developing world, should by and large be attributed to high R&D cost. They feel, such ballooning increase in research and development expenditures is commercially unsustainable even in the medium term.

Many thought leaders now believe, despite hard commercial consideration related to IPR, which perhaps has to be amicably sorted out willy-nilly in the long run, ‘Open Innovation’ concept could well be an important commercial model for tomorrow’s global R&D initiatives. This sustainable model would possibly address the issue of improving access to innovative affordable Medicines to a larger number of patients of the world, meeting their unmet medical needs, more effectively and with greater care.

By: Tapan J Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion and also do not contribute to any other blog or website with the same article that I post in this website. Any such act of reproducing my articles, which I write in my personal capacity, in other blogs or websites by anyone is unauthorized and prohibited.

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