Feed the Beast: Renewing the Prescription Drug User Fee Act (PDUFA)

Feed the Beast: Renewing the Prescription Drug User Fee Act (PDUFA)

Key Points:

  • There is a crisis in biopharmaceutical R&D in all segments of the industry – large, mid-market, and new ventures.
    Much of the responsibility for this can be laid at the door of the Food and Drug Administration (FDA), which is slow to approve new drugs.
  • The law that funds the Food and Drug Administration (FDA) must be renewed by September or new drug approvals will come to a stop.
  • Although PDUFA is far from ideal, there is no real opportunity to enact laws that significantly reduce the FDA’s power this year.
  • A “clean” re-authorization of PDUFA for the next five years is the best choice available to patients and biopharmaceutical investors in 2012.

The entire biopharmaceutical industry is suffering a crisis of poor productivity in research & development, some of which is due to overregulation by government. It’s not surprising that an increasing number of observers are concluding that the pharmaceutical regulatory environment is broken and needs to be radically redesigned.

The pages of august publications such as the Wall Street Journal are peppered with op-eds condemning the Food and Drug Administration’s sluggish proceedings and bloated bureaucracy. Proposed solutions include stripping the FDA’s power to judge the “efficacy” of new medicines, and limiting it to determining “safety”; increasing patients’ ability to use investigational new medicines before being finally approved by the FDA; and (my own long-standing recommendation) allowing American patients to use medicines approved for use in Europe or other developed jurisdictions, if the FDA is too slow.1

These are all great ideas: But they are not ready for primetime in 2012. Indeed, over emphasizing them runs the risk of making the situation significantly worse. This is because the federal law that largely determines the FDA’s funding, the Prescription Drug User Fee Act (PDUFA) must be reauthorized by this September. A reauthorization would be the fifth version of PDUFA, which has come up for renewal every five years since it was initially passed in 1992.

These renewals have generally granted more money and power to the FDA, in exchange for promises of faster approval of new drugs (and medical devices) – promises which were fulfilled initially but eventually slipped. The negative consequences of the FDA’s failure to meet its commitments have become very apparent in all segments of the biopharmaceutical enterprise.

Amongst the largest research-based pharmaceutical companies, investors seem to punish those that invest in R&D. Who can blame them? Deloitte, the international consultancy, recently published an analysis of returns to R&D for the twelve largest pharma firms. Apparently using material, non-public information gathered from its clients, Deloitte concluded that ten of the twelve had suffered a decrease in internal rate of return (IRR) on their R&D from 2010 to 2011. The IRR for the entire sample had dropped to 8.4 percent from 11.8 percent.2 Although not harping on the role of the FDA in bringing about this state of affairs, it is clear from the analysis that pretty much the entire collapse was due to delayed product approval.3

And this is not a new trend. Another international consultancy, Bain and Co. has concluded that pharmaceutical R&D productivity (measured in dollars per New Medical Entity) shrunk by 20 percent from 2001 through 2007.4

And the cost of R&D is staggering. Deloitte estimates the average R&D cost of bringing a product to market from discovery to late stage jumped from $830 million in the ten-year period finishing in 2010 to $1,048 million in the decade finishing in 2011.5 Let’s not forget that there’s also R&D investment pre-discovery and that many late-stage products fail to win FDA approval.

The cost estimate grows a lot if we include both of these periods. Matthew Herper of Forbes and Bernard Munos of the InnoThink Center for Research In Biomedical Innovation have estimated a range of over $3 billion dollars up to almost $12 billion spent on R&D for every drug approved.6 They calculated this by examining the R&D spending of twelve large pharmaceutical manufacturers (overlapping eleven with Deloitte’s, which includes Takeda instead of Abbott). Their estimate is “blunt” only because they do not have access to material non-public information (so they cannot ascribe a specific year’s spending to specific drugs) and do not account for the opportunity cost of capital. My analysis of their sample shows that the median R&D cost to develop a new drug was $5.2 billion, the weighted median was $5.8 billion, and unweighted median was $6.2 billion.7

The entire problem cannot be laid at the doors of the FDA. Companies have recognized the need to restructure their R&D functions as their blockbusters lose patent protection. Some, recognizing unproductive bureaucracy in-house, have outsourced R&D. For example, as Pfizer has cut its internal R&D budget, it has increased its investments in strategic partnerships with Contract Research Organizations (CROs).8 Furthermore, large research-based pharmaceutical companies have increased commitments to their own venture arms. These allocations have increased and now account for 20 percent of their investment, according to The Burrill Report.9

But overall R&D continues to fall. In the mid-market, the international consultancy BDO examined R&D spending by biotech companies reporting less than $300 million revenue that are included in the NASDAQ Biotechnology Index (NBI).10 Examining 2010 data, BDO concluded that R&D spending by these firms dropped 7 percent from the previous year, continuing a trend going back to 2008, and reports that this is in line with global cuts to pharmaceutical R&D reported by Thomson Reuters. BDO also concludes that this reduction in R&D spending is due to slow regulatory approval by the FDA.

The situation is also bleak for new ventures. A 2011 survey by the National Venture Capital Association (NVCA) reported that the FDA’s ineffectiveness was causing U.S. venture capitalists to reduce their investments in U.S. biotech in favor of Europe and Asia, as well as shifting capital towards non-FDA regulated investments. These respondents accounted for 92 percent of the NVCA members’ invested capital, and they had invested $10 billion in health deals over the previous three years.

Thirty-nine percent of the respondents had decreased investments in health ventures, versus only 17 percent that had increased their commitments. The forecast for the next three years was virtually the same (39 percent anticipated decreasing investments versus 21 percent increasing). Furthermore, investments dropped most in biopharma and medical devices – where FDA regulation is high – but increased in sectors where the FDA’s obstacles are low – such as consumer health and health IT. Sixty-one percent of respondents reported that the regulatory challenges of the FDA were the greatest obstacle to investment.11

We may get a breather now that the worst of the financial crisis has passed. PricewaterhouseCoopers (PwC) recently reported an uptick in venture funding of life sciences (which includes both biotech and medical devices), concluding that venture capitalists invested $7.5 billion in life-science deals in the last quarter of 2011. 12 Of the $7.5 billion, $4.7 went to biotech, an increase of 46 percent year on year, and ten percent on the previous quarter. Furthermore, PwC concludes that a good amount of this funding was in early-stage ventures ($797 million Q4). However, this is a climb back up from a very steep fall driven by the financial crisis. In the first quarter of 2009 alone, new investments dropped by over 40 percent.

Growth that results from beginning to shake off the consequences of the financial crisis is welcome, but hardly excuses the need to fix the FDA, which is another problem entirely. Reauthorizing PDUFA will not solve this problem – but at least it won’t make it worse. There is no chance that a coalition will form to successfully enact legislation by September that radically decreases government control over our access to new medicines.

Proposing to disrupt a “clean” renewal of PDUFA may satisfy a freedom fighter’s hunger to bring a government agency to heel. But we’ve had five years since the last PDUFA renewal to achieve this, and we’ve had little effect. Failure to renew the FDA’s funding will not reduce its power. On the contrary, patients will suffer, because the FDA will punish us if Congress fails to feed the beast.

John R. Graham
Director of Health Studies, Pacific Research Institute
San Francisco, CA
E-mail: jgraham@pacificresearch.org
Twitter: johnrgraham
Facebook: www.facebook.com/pages/JFreeAmericanHealthCare
Blog: http://free-american-healthcare.blogspot.com

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.