Page 5
Output of Innovative New Drugs
Continued growth in R&D spending has appeared to have little effect on the pace at which new drugs are developed. Annual approvals of innovative new drugs— so-called new molecular entities—by the Food and Drug Administration (FDA) increased over the 1980s and peaked sharply in the mid-1990s but then experienced a pronounced six-year decline.14 In that decline, the total number of NMEs approved each year fell from a high of 53 in 1996 to 17 in 2002 . Annual approvals rebounded to 36 by 2004 but fell again in 2005, to 20.15 (The number of applications for approval of new molecular entities has exhibited a similar pattern. Applications rose sharply in 1995—the year before the peak in approvals—generally declined from 1998 to 2002, and rose again in 2003 and 2004.) The drop in approvals since 1996 could simply mark a return to their long-term average, but even so, the pace of new-drug approvals has not matched the rise in real R&D spending. As a result, the average R&D cost per new drug has grown significantly. The FDA defines an NME as “a medication containing an active substance that has never before been approved for marketing in any form in the United States”; see Food and Drug Administration, Center for Drug Evaluation and Research, “FDA’s Drug Review and Approval Times” Most of the upsurge in NME approvals that occurred in the mid-1990s resulted not from “priority” NMEs— those judged by the FDA to provide “a significant therapeutic or public health advance” over existing drugs—but from an increase in approvals of “standard” NMEs. Approvals of priority NMEs have shown no sustained increases or decreases over the past 20 years. Some analysts have concluded that the spike in total NME approvals may have been partly caused by a federal law designed to hasten the review process, the Prescription Drug User Fee Act of 19 The law imposed a large increase in the filing fee for new-drug applications submitted for FDA approval; that increase funded additional FDA staff to review applications. As a result, the median FDA review time fell by nearly one-half, from 22 months in 1992 to 12 months in 1999.19 That change suggests that if a backlog of applications existed when the law was enacted, faster processing could have contributed to the record number of NME approvals in 1996. A backlog may have accumulated in the early 1990s, because the annual number of applications was rising at that time, while FDA approvals were falling. The decline in NME approvals in the late 1990s would be consistent with a decrease in the backlog, although NME applications were also in decline at that time. It is not clear why the number of applications rose and then fell, but that pattern could indicate that the prospect of faster (and thus less costly) reviews induced firms to complete, and to prepare approval applications for, their late-stage development projects more quickly. The number of NME approvals has varied more widely over the past 10 years than it did before—meaning that the number of drugs under patent, and thus firms’ revenue streams, have become more variable. Most manufacturers of brand-name drugs earn the majority of their revenue from drugs under patent. Wider fluctuations in revenue heighten companies’ uncertainty about their main source of R&D funding. If that variability persists, firms may have to rely to a greater extent on external, more costly forms of financing. Such a change could make firms less likely to invest in drug projects with smaller, more uncertain, or more distant payoffs.
Leading Therapeutic Classes
Brand-name drug products span a wide array of therapeutic classes (groups of drugs that are similar in their chemical structure, pharmacological effect, or clinical use). In 2003, 17 therapeutic classes included at least three brand-name drugs that ranked in the top 200 for prescriptions dispensed among all brand-name drugs. Those products are mostly newer drugs, since sales of brand-name drugs typically drop sharply once generic versions become available. As such, the 17 therapeutic classes indicate where the industry’s recent R&D spending has been directed. In several classes—such as antihypertensives, antibiotics, and antidepressants—a striking number of brand-name drugs are available. That is particularly true of therapeutic classes with higher sales. In addition to the first (or pioneer) compound, some leading classes have as many as five to 10 subsequent brand-name drugs (known colloquially as me-too drugs). Those other drugs are not necessarily imitative: often, advances in basic science can spark multiple competitive innovations, with total R&D costs that may be as high as or even higher than the costs of developing the pioneer compound. In fact, most of the me-too drugs developed in recent years were in clinical trials before the respective pioneering drugs received approval from the FDA. In cases where actual imitation occurs, it can still create consumer benefits (as it does in the markets for cars, colas, computers, or any other product). Me-too drugs benefit consumers by competing with incumbent products and providing alternatives for people who do not respond equally well to all drugs. Some of those benefits come at the expense of producers of pioneering drugs, who see their monopoly profits eroded by competition. But total benefits to society increase when consumers have more choices. The availability of so many brand-name drugs in popular therapeutic classes may result partly from the willingness of insurers and patients to sometimes pay high prices for drugs that are only slightly better than less expensive competitors.