Topics Congressional Budget Office Report "Research and Development in the Pharmaceutical Industry

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Akira Nakao, Senior Researcher, Pharmaceutical and Industrial Policy Research Institute

1. Introduction

In April 2021, the Congressional Budget Office (CBO) released a report titled "Research and Development in the Pharmaceutical Industry. Research and Development in the Pharmaceutical ^Industry1). 1) This report was compiled at the request of the Chairman of the Senate Finance Committee and provides an objective and impartial analysis. As the title suggests, the report provides a very clear summary of R&D trends in the U.S. pharmaceutical industry and the factors influencing its costs, and includes details of federal funding to support the development and production of the new coronavirus vaccine. The report is therefore of interest to a wide range of readers, from those who are not familiar with the pharmaceutical industry to those who are familiar with the U.S. pharmaceutical industry. Therefore, we have decided to provide a comprehensive and concise introduction to the contents of this report.

2. Summary of the Report

The U.S. pharmaceutical industry develops and launches a variety of new drugs every year, many of which are expensive and contribute to rising healthcare costs. As a result, policymakers have considered policies that would lower drug prices and reduce federal drug spending, but CBO predicts that such policies would likely reduce industry incentives to develop new drugs.

The report is divided into two main topics: first, "Trends in R&D Expenditures and New Drug Development," and second, "Factors Affecting R&D Expenditures," which analyzes trends in R&D expenditures and new drug creation over the past 20 years; and second, "Factors Affecting R&D Expenditures," which examines the impact of three factors that influence R&D expenditures. The second section explains how these three factors affect a company's R&D expenditures. The three factors are as follows

Trends in R&D Expenditures and New Drug Development

3.1. trends in R&D expenditures

R&D investment by member companies of the Pharmaceutical Research and Manufacturers of America (PhRMA) ranged from about $5 billion in 1980 and $38 billion in 2000 to $83 billion in real terms in 2019. While this total spending does not include many small and medium-sized pharmaceutical companies that are not PhRMA members, a survey by the National Science Foundation (NSF) of R&D spending by all U.S. pharmaceutical companies (including small and medium-sized companies) found a similar trend: NSF estimates of R&D spending since 2008 show that PhRMA member companies' worldwide R&D R&D expenditures accounted for approximately 75% to 85% of the total pharmaceutical industry.

While industry-wide R&D spending is on the rise, the focus of R&D differs between smaller and larger companies: smaller companies that are not members of PhRMA spend most of their R&D on R&D and testing of new drugs, while larger companies, such as PhRMA members, focus on clinical trials, development of incremental improvements (dosage modifications, DDS studies, combination therapies, etc.), and safety. and combination therapies), safety monitoring, and differentiation studies.

In recent years, pharmaceutical R&D spending as a percentage of net sales (sales minus expenses and rebates) has increased: in the early 2000s, R&D intensity (R&D spending as a percentage of net sales) in the pharmaceutical industry averaged about 13%; in the decade from 2005 to 2014, it averaged 18% to 20% annually. The ratio has been on an upward trend since 2012. This ratio has been on an upward trend since 2012 and exceeded 25% in 2018 and 2019. By comparison, the average R&D intensity for all industries was between 2% and 3%. The R&D intensity of the software and semiconductor industries remained below 18%, although their reliance on R&D was generally comparable to the pharmaceutical industry (Figure 1).

CBO offers the following four possible examples of reasons for the increase in R&D intensity in the pharmaceutical industry over the past eight years

3.2. development of new drugs

Over the past decade, the pharmaceutical industry has increased the number of new drug introductions each year: an average of 38 new drugs were approved each year from 2010 to 2019, an increase of about 60% over the previous decade. The number of new drugs approved reached a new peak in 2018, surpassing the record number approved in the late 1990s (Figure 2).

Approval of new drugs

Over the past five years, both R&D spending and the number of drug approvals have increased significantly. Because it takes more than a decade of R&D expenditures to develop a new drug and successfully conduct clinical trials, drug approvals are typically delayed behind underlying R&D expenditures. This time lag makes it difficult to interpret the relationship between R&D expenditures and new drug approvals. For example, in the first decade of the 2000s, the number of new drug approvals declined despite a steady increase in R&D expenditures. At that time, there were concerns about a decline in R&D productivity in the pharmaceutical industry, but this was temporary and the number of drug approvals began to increase around 2012, even though R&D expenditures remained flat from 2008 to 2014 (Figure 3).

The CBO notes that while the number of new drug approvals is an easily accessible indicator of the output from the pharmaceutical industry's R&D expenditures, they do not necessarily reflect the degree of usefulness or the number of patients, and the recent rapid increase in R&D expenditures does not necessarily mean that the high level of new drug introductions will continue The report also states that the recent rapid increase in R&D expenditures does not necessarily mean that the introduction of new drugs at a high level will continue. He further states that the increase in R&D spending in the pharmaceutical industry does not provide information about the types of drugs that will be launched in the future, and that the uncertainties in drug development mean that it is impossible to know exactly what drugs will eventually make it to the market.

Recent trends in drug costs by disease area

New and improved specialty drugs for diabetes, various cancers, autoimmune diseases such as rheumatoid arthritis and multiple sclerosis, and HIV have led to significant increases in retail sales in these disease areas (Figure 4). Many of the new specialty drugs are biologics. New antiretroviral therapies for HIV, on the other hand, are fixed-dose combinations of specialty drugs that simplify treatment.

Disease areas that saw significant increases in sales included diabetes, which has a large patient population; chronic diseases such as autoimmune diseases, which require continuous treatment; and cancer, which has a relatively small number of potential patients but a high price per unit of treatment. However, the increase in retail sales seen in this figure may overestimate the increase in net revenue for manufacturers because it does not take into account rebates paid by manufacturers to insurance companies. Rebates on diabetes drugs tend to be a much higher percentage of the retail price than on cancer drugs, which are not highly substitutable.

In the psychiatric, hypertension, and gastrointestinal areas, including top-selling drugs developed in the 1990s (atypical antipsychotics, ACE inhibitors, and PPI inhibitors), retail sales declined from 2009 to 2019 due to generic entry. Lipid regulators, including statins, also lost their place in the top 20 retail value rankings due to the penetration of those generic versions.

Another area where retail sales declined for different reasons was in the area of viral hepatitis, where the introduction of more effective and more affordable HCV drugs in 2014 brought viral hepatitis drugs into the top 20, but retail sales declined for a combination of reasons. First, new lower-priced drugs entered the market and gained market share, resulting in lower average prices. Second, the very high therapeutic efficacy of the drugs reduced the number of potential patients as the drugs were administered, resulting in lower retail sales.

Disease areas for new drugs in development

Information from recent clinical trials suggests that pharmaceutical companies are focusing on treatments for cancer and neurological diseases such as Alzheimer's and Parkinson's. Of the human clinical trials underway as of 2018, drugs in these two therapeutic classes account for vaccines, pain treatments including arthritis, and dermatology together account for more than twice the number of trials in these two therapeutic classes. In addition, the 2020-2021 novel coronavirus pandemic has spurred the development of vaccines to halt the spread of COVID-19 infections. In addition to research and development funding by the private sector, the federal government is assisting the private sector in developing a vaccine to respond to the pandemic.

Large and small pharmaceutical companies and the "do it yourself or buy it" decision

Small pharmaceutical companies (with annual sales of less than $500 million) currently account for more than 70% of the approximately 3,000 drugs in Phase 3 trials, and they are expanding their share of existing drugs as well. Since 2009, about one-third of all new drugs approved by the FDA have been developed by pharmaceutical companies with annual sales of less than $100 million. Large pharmaceutical companies (with annual sales of $1 billion or more) account for more than half of all new drugs approved since 2009 and an even larger share of sales, but have initiated only about 20% of the products currently in Phase 3 trials.

One option for large pharmaceutical companies to increase the number of new drugs in their pipelines is to acquire smaller companies developing new drugs. Over the past 30 years, about one-fifth of all drugs in development or companies developing them have been acquired by other pharmaceutical companies. At the same time, the purpose of acquisitions by large pharmaceutical companies has sometimes been to limit competition from competing products. For example, it has been reported that when a drug in the acquired company's pipeline competed with an existing drug in the acquiring company's pipeline, the likelihood of success for that development was about 5% to 7% lower than when it did not. Government Accountability Office) reported that merger deals in the pharmaceutical industry reduce R&D spending and patenting for several years, while companies' R&D spending increases as competition in the pharmaceutical industry increases.

Factors Affecting R&D Expenditures

The benefits a pharmaceutical company would derive from each drug it is considering for research and development depend on three main factors

CBO estimates that companies will invest more in R&D and produce more new drugs if their expectations for future profits are higher. Similarly, if price and profit expectations are low, companies will invest less in R&D and produce fewer drugs. As a specific example, they cite H.R. 3 (the drug price suppression bill) ²⁾ in the 116th Congress, which did not become law, and estimate that if pharmaceutical companies' expectations for future revenues decline under this bill, about 8 fewer new drugs will be introduced into the US market between 2020 and 2029, and about 30 fewer drugs in the following 10 years. The report estimates that

4.1. projected revenues from new drugs

Pharmaceutical companies base their revenue projections from a given drug on the price and sales volume of "existing" drugs. Existing prices indicate the willingness of consumers and insurers to pay for the drug's treatment, and existing prescription volumes provide an estimate of the number of potential patients, their propensity to use the drug at that price, and the impact of competing drugs. Sales information on other unrelated existing drugs is also useful in that it provides information on the magnitude of drug costs currently allowed by the market for conditions that have more or less in common with the condition being treated by the new drug (duration, severity, quality of life, life expectancy, etc.). Once a new drug is approved, the CBO expects that its developer, i.e., the pharmaceutical company, will set the price to maximize the net revenue derived from the drug, regardless of the costs incurred in developing the drug.

（Real (inflation-adjusted) drug revenues will increase rapidly from the mid-1990s until the mid-2000s, when many blockbuster drugs lose their patents and generics are introduced, and then from the mid-2000s to the mid-2010s, when these patents expire and the 2007-2009 recession takes its toll. From the mid-2000s to the mid-2010s, revenues declined slightly due to the expiration of these patents and the economic recession of 2007-2009. However, revenue growth subsequently recovered due to expensive new drugs (Figure 5).

Revenue to fund R&D

For existing pharmaceutical companies, revenues from existing products are an important source of funding for future R&D projects. On the other hand, in recent years, research-based pharmaceutical companies, which have few products on the market, have been conducting more and more R&D projects, most of which must seek outside funding, such as venture capital, or joint agreements with large pharmaceutical companies, thus reducing the proportion of R&D expenditures that are funded directly from sales The number of pharmaceutical companies that are not directly funded by sales has been decreasing. Drug development also takes place in university laboratories, where funding comes primarily from revenues, as many universities work with private pharmaceutical companies to conduct R&D in addition to grants from the National Institutes of Health (NIH).

4.2. expected costs of new drug R&D

Pharmaceutical R&D is inherently risky, and abortions and failures are a regular part of drug development programs. Companies initiate projects knowing that most projects will not produce a marketable drug. According to one study, the average preclinical phase takes about 31 months and the average clinical trial takes about 95 months, or about 10.5 years from start to finish. Some drugs developed in the preclinical phase do not enter clinical trials, and only about 12% of those that enter clinical trials make it to market (recent estimates range from 10% to 14%). According to one estimate using data provided by a large pharmaceutical company, preclinical development accounted for an average of 31% of a company's total drug R&D expenditures, or $474 million per approved new drug, with an average of about $1.065 billion spent on clinical trials. An average of $28 million was spent on Phase I, $65 million on Phase II, and $282 million on Phase III, with the remaining $690 million reflecting contemporaneous company spending on drugs that failed in clinical trials or were withheld for other reasons.

In addition to out-of-pocket expenses for preclinical research and clinical trials, research and development expenses include the capital costs (i.e., the benefits that would have been obtained had the funds been invested in other ways) incurred by tying up funds in the drug development process for several years between the investment and the return on the investment. As indicated earlier, these capital costs are significant because pharmaceutical companies' drug R&D expenditures are spread over many years, and estimates from the earlier studies suggest that, when capital costs are added, preclinical research costs of approximately $900 million and clinical trial costs of $1.4 billion, for a total estimated value of $2.3 billion.

CBO bases its estimates of drug R&D spending on the results of three studies, which vary in sample selection and data source, with the largest estimate above averaging $2.3 billion, the next highest averaging $1.2 billion (median $900 million), and the lowest averaging $1.2 billion for new anti-cancer drugs from companies with no previously approved products The smallest estimate was limited to new cancer drugs from companies with no previously approved products, with an average of $900 million (median $800 million) (all estimates shown converted to 2019 dollars) (Table 1).

Trends in R&D Expenditures

R&D expenditures have increased at an annual rate of approximately 8.5% over the past decade. Possible reasons for this include a decline in the average success rate of drug development, the type of drug being developed (biologic or conventional small molecule drug), differences in its success rate, and increased clinical trial costs due to difficulties in patient recruitment.

4.3. government policies affecting both demand and supply of drugs

Federal policies affect the magnitude and direction of R&D spending by pharmaceutical companies. Among these, those that most directly affect the demand for new drugs are federal policies on health care programs and subsidies. On the other hand, those that affect the supply of new drugs include federal support for basic research, tax treatment of R&D expenditures, and policies affecting market exclusivity. Those that affect both supply and demand include vaccine and regulatory policies. Policy changes that increase the demand for or promote the supply of pharmaceuticals tend to make R&D activities more attractive investments. Policy changes in the opposite direction may make it a less attractive investment.

Federal Health Care Programs and Grants

Federal health care programs and subsidies that affect the demand for new drugs are Medicare, Medicaid, TRICARE, the Veterans Health Administration, the Children's Health Insurance Program, and the health insurance market established by the Affordable Care Act (commonly known as Obamacare). and the federal government purchases or subsidizes prescription drugs on behalf of retirees, veterans, the disabled, and low-income families. The federal government also subsidizes employer-provided health insurance. More generous health insurance coverage results in more people having access to health care, including prescription drugs, which increases demand and indirectly stimulates research and development by pharmaceutical companies. Federal and state government spending on such prescription drugs accounted for about 40% of total retail sales of U.S. prescription drugs in 2019.

Support for Basic Research

One federal policy that will affect the supply of new drugs is support for basic research in biomedicine. While basic research provides insight into the development of new drugs, such as the identification of disease targets, private companies are reluctant to conduct basic research because of its lack of exclusivity. Government support for such basic research allows private companies to use the knowledge gained to stimulate research and development, ultimately increasing the supply of new drugs. Over the past two decades, federal funding for the NIH has totaled more than $700 billion, with much of that funding supporting basic research to identify new disease mechanisms; between 1995 and 2003, federal support for the NIH doubled from $18 billion to about $37 billion. It then declined annually (in inflation-adjusted dollars) until 2015, but has increased in real terms each year for the last five years, reaching $41 billion in funding for the NIH in 2020.

Between 2010 and 2016, every drug approved by the FDA was based on some form of NIH-funded biomedical research. In addition, most of the new drugs created by the pharmaceutical industry over the past 60 years have been developed with the help of research conducted by the public sector. Public sector research has been found to tend to increase private sector R&D, but this is because NIH funding focuses on basic research that leads to the discovery of new drugs, while private R&D funding focuses on the application of such research, which is complementary to each other.

Tax Treatment of R&D Expenditures

The second federal policy that affects the supply of new drugs is the tax system. This can be done in two ways: first, through tax credits for certain R&D, and second, through deductions for non-R&D business expenses. The cost savings to these companies will promote R&D expenditures.

Policies Affecting Market Exclusivity

The third federal policy affecting the supply of new drugs is the policy affecting market exclusivity. The primary way in which the government grants temporary market exclusivity to inventors is through the U.S. patent system. Although most patents expire 20 years after the filing date, the Hatch-Waxman Act allows pharmaceutical companies to seek up to five years of additional patent protection because drugs may spend several years during the market exclusivity period in clinical trials and fail to generate revenue. For drugs for relatively rare diseases, the Orphan Drug Act, enacted in 1983, grants seven years of market exclusivity to drugs for the treatment of diseases affecting fewer than 200,000 patients in the U.S. or drugs that, in the judgment of the FDA, face market conditions that prevent innovative companies from recovering their R&D costs, as The Orphan Drug Act provides for seven years of market exclusivity for drugs for the treatment of rare diseases. The Orphan Drug Act is believed to have increased the number of new drugs for rare diseases.

In addition to extending market exclusivity for brand-name drugs, the Hatch-Waxman Act of 1984 supports the development of generic drugs. This law extends a drug's patent for up to five years while encouraging generic competition after the patent expires. The law allows the FDA to approve most generic drugs based solely on bioequivalence studies, without the need for clinical trials. The bill also allows for a three-year extension of market exclusivity for brand-name drugs for new uses. By extending a drug's patent, the law strengthens incentives for new drug development and facilitates the introduction of lower-priced generics after the patent expires.

Congress has sought to encourage the development of biosimilar drugs, and Obamacare establishes a simplified pathway for FDA approval of biosimilar drugs, which must demonstrate a "high degree of similarity and no clinically meaningful differences" to the prior biological product, but does not require that the prior It is not necessary to conduct as many clinical trials as were conducted for prior biologics.

Vaccine Policy

One impact on both the demand for and supply of new drugs is vaccine policy. Federal subsidies, such as the federal government's free Vaccines for Children program and the Centers for Disease Control and Prevention's (CDC) release of recommended childhood and adult immunization schedules, have resulted in reduced costs for consumers and increased demand for immunizations. There is also the federal Vaccine Injury Compensation Fund, established in 1986 to indemnify manufacturers against lawsuits resulting from adverse reactions to pediatric vaccines, thereby encouraging manufacturers to develop and supply new vaccines.

Federal funding to support development of COVID-19 vaccine

In May 2020, the U.S. Department of Health and Human Services (HHS) launched Operation Warp Speed, a collaborative effort with the CDC, FDA, NIH, and Department of Defense, to provide funding totaling more than $19 billion to seven private companies for the development and production of vaccines through the Biomedical Advanced Research and Development Administration (BARDA) As of March 2, 2021, five of these seven companies had received up-front funding for research and clinical trials; six of the seven companies had received up-front funding aimed at increasing their manufacturers' manufacturing capacity; and six of the seven companies had received up-front funding aimed at increasing their manufacturers' manufacturing capacity. In addition, six of the seven companies entered into advance purchase agreements, and two of the companies with vaccines licensed for emergency use received additional funding by selling more than the quantities guaranteed in their advance purchase agreements.

One year after the first case of COVID-19 was diagnosed in the U.S., three of the BARDA-funded vaccines had received emergency use clearance from the FDA, and two others were in Phase III clinical trials (Table 2) According to WHO, by February 2021 more than 200 COVID-19 vaccine candidates had been developed.

Regulatory Policies

Federal regulatory policies that affect the supply and demand for pharmaceuticals can affect the return on R&D spending by pharmaceutical companies and, consequently, the amount of money they can spend on R&D. Proposed price controls on drugs would affect the volume of existing drug sales, which in turn would affect the expected return on R&D for future drugs. Changes in regulations governing clinical trials would also affect the supply of new drugs, as they are so large that they can account for more than half of R&D expenditures (excluding capital costs).

Conclusion

This is a summary of the Congressional Budget Office (CBO) report, Research and Development in the PharmaceuticalIndustry. This report, prepared at the request of the Chairman of the Committee on Finance of the U.S. Senate, provides an objective and neutral analysis of the current state of R&D investment and the factors influencing that investment, from both an industry and policy perspective. Not all of the information contained in this report is applicable to the Japanese pharmaceutical industry, as laws, regulations, and systems related to pharmaceuticals differ from country to country. However, there is no doubt that the three factors identified as influencing drug research and development are universal: "expected revenues from new drugs," "expected costs of new drug development," and "government policies affecting the supply and demand of drugs. This report is useful in understanding the background to the repeated comments by US and European pharmaceutical industry groups regarding the importance of "predictability" in Japan's drug pricing system. The report is useful in understanding why Western pharmaceutical industry groups have repeatedly commented on the importance of "predictability" in Japan's domestic drug pricing system. In addition to viewing Japan's pharmaceutical industry as one of the nation's most important lifeblood industries, it will be important for the industry to be viewed as an attractive investment destination by pharmaceutical companies both domestically and globally in order to make it an internationally competitive growth industry.

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