Drug Development: The Short Story
9. Return on Investments
The source of protection for a company which brings a new chemical entity to market as a drug is patent life. The total patent life is currently set to be 17 years from the date that a patent was approved. During the 1980's this law was amended to credit patent life with the amount of time that a company's NDA submission was under review by the FDA. Over the past thirty years, the average effective time which remained on a patent after the NDA approval date has been reported to be:
| Year | Effective Patent Life (Years) | |
|---|---|---|
| 1966 | 13.6 | |
| 1979 | 9.5 | |
| 1984 | 7.0 | |
| 1987 | ~7.0 | |
| 1996 | ?? |
Given the cost of development, the average new drug approved during 1994 would be required to generate $3.7 billion in sales ($530 million/year) over its market life in order to pay back development costs and on-going sales costs. According to published figures, less than two dozen drugs have reached this level of sales.
Selected Industry Facts
In 2000, sales for the top 11 companies reporting earnings to the Securities and Exchange Commission were $226,369,800,000. Research and Development expenses published for this group were $27,680,000,000. (12.2%).
Sales for the top 6 U.S. biotechnology companies (Amgen, Biogen, Chiron, Genentech, Genzyme, Immunex) in 2000 totaled $8,878,700,000. R & D expenses for this group were reported to be $2,216,000,000 (25%).
The table below shows the number of New Chemical Entities introduced world-wide as therapeutic agents as well as a breakdown in countries of discovery for the United States, the United Kingdom, Germany and Japan from 1990 through 2000.
| Year | World-Wide NCE Introductions | US | UK | Germany | Japan |
|---|---|---|---|---|---|
| 1990 | 37 | 7 | 4 | 4 | 9 |
| 1991 | 36 | 14 | 4 | 8 | |
| 1992 | 36 | 8 | 5 | 3 | 13 |
| 1993 | 43 | 10 | 3 | 15 | |
| 1994 | 44 | 11 | 2 | 3 | 21 |
| 1995 | 35 | 8 | 5 | 10 | |
| 1996 | 38 | 10 | 8 | 5 | 5 |
| 1997 | 39 | 10 | 6 | 4 | 7 |
| 1998 | 27 | 13 | 1 | 5 | 3 |
| 1999 | 35 | 15 | 12 | 12 | 12 |
| 2000 | 35 | 11 | 14*** | 6 |
***: Introductions of New Molecular Entities reported for Europe rather than individual countries.
Given the cost of drug development and the time required to complete the process, what type of return can be expected for this investment? What are the estimated on-going expenses? The Wall Street Journal reported an analysis of expenses for Genzyme's Ceredase which is used to treat Gaucher's disease.
"In 1882, a French physician named Philippe Charles Ernest Gaucher (pronounced: go-SHAY) first described a clinical syndrome in a 32-year-old woman whose liver and spleen were enlarged. The most common symptoms of Gaucher Disease are enlargement of the liver and spleen, anemia, reduced platelets (resulting in easy bruising and long clotting times), bone pain ("bone crises"), bone infarctions often leading to damage to the shoulder or hip joints, and a generalized demineralization of the bones (osteoporosis). The weakening of the bones can then lead to spontaneous fractures. The course of the disease is quite variable, ranging from no overt symptoms to skeletal problems, liver or spleen damage, bleeding, or other problems. There are indications that persons with Gaucher Disease have an increased cancer risk. The characteristics just listed refer primarily to the Type 1 form of the disease. This is often called the adult form, although the cause is present from the time of conception. Type 1 Gaucher Disease occurs worldwide in all populations, but is most prevalent in the Ashkenazi Jewish population (the Jews of Eastern European ancestry). Within this population, Type 1 Gaucher Disease occurs at a rate of 1 in 450 live births, and is the most common genetically-based disease affecting Jewish people." (From Wayne Rosenfield's Gaucher's page with permission.)
The average cost for Ceredase for each patient is approximately $150,000 per year. The breakdown of costs for Ceredase on a per patient basis is shown below.
| Item | Amount | Percentage |
|---|---|---|
| Material | $47,900 | 32 |
| State & Fed. Taxes | $14,600 | 10 |
| Corporate Overhead | $12,600 | 8 |
| Selling Reimbursement | $12,200 | 8 |
| Distribution | $10,500 | 7 |
| Mfg. Labor & Material | $5,300 | 4 |
| Bad Debt | $4,900 | 3 |
| Amortization on R&D | $4,500 | 3 |
| Medicaid Rebate | $2,800 | 2 |
| R&D for Mfg. Operations | $2,000 | 1 |
| Free Goods | $1,500 | 1 |
| TOTAL | $118,800 | 79 |
Given these figures, the after tax profit for Ceredase can be calculated to be 21%, or an average $45,000 per patient per year. During 1995 (the drug was approved for sale in May, 1994), sales for Ceredase were approximately $215 million. The impact of this drug on Genzyme's sales and net income is shown in the table below.
| 1991 | 1992 | 1993 | 1994 | 1995 | |
|---|---|---|---|---|---|
| Sales ($millions) | $121.9 | $219.1 | $270.4 | $311.1 | $383.8 |
| Net Income ($millions) | $20.8 | ($30.3) | ($6.1) | $16.6 | $21.7 |
While Genzyme generated and increase of $215 million in sales for Ceredase during 1995, their net income rose only by $5.1 million. This differential is an indication of the cost of supporting the research and development cycle which brings new products to market. Given that only ten in ten thousand new chemical entities make the transition from research to clinical development and that one drug out of this group will come to market, each company must have at least 10 compounds in active development to fund on-going operations and to expand their facilities. The sales of new products provide the funds to accomplish these objectives. Larger pharmaceutical companies also use these profits to pay shareholder dividends.
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