Feed the Beast: Renewing the Prescription Drug User Fee Act

The entire biopharmaceutical industry is suffering a crisis of poor productivity in research and development, some of which is due to overregulation. It’s not suprising that an increasing number of observers conclude that the Food and Drug Administration is broken and needs radical redesign.

The pages of august publications such as the Wall Street Journal are peppered with op-eds condemning the FDA’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’ freedom 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 in Europe or other developed jurisdictions, if the FDA is too slow.

These are all great ideas, but they are not ready for primetime in 2012. Indeed, over emphasizing them now 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. This would result in the fifth version of PDUFA, which was first passed in 1992.

These renewals have generally granted more money and power to the FDA, in exchange for promises of faster approval of new medicines – 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 biopharmaceutical enterprise.

Amongst the largest research-based pharmaceutical companies, investors seem to punish those that invest in R&D. Who can blame them? Deloitte recently published an analysis of returns to R&D for the twelve largest pharma firms. Deloitte concluded that ten of them suffered a decrease of internal rate of return (IRR) on their R&D to 11.8 percent in 2011 from 8.4 percent in 2010. Although not harping on the role of the FDA, it is clear from the analysis that pretty much the entire collapse was due to delayed product approval.

Previously, Bain & Co. concluded that productivity of pharma R&D (measured in dollars per New Medical Entity) shrunk by 20 percent from 2001 through 2007. And the cost of R&D is staggering. Deloitte estimates that the average cost of bringing a product to market from discovery to late stage jumped from $830 million in the ten years to 2010. 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 higher if we include both of these periods, which is what Matthew Herper of Forbes.com and Bernard Munos appear to have done in their staggering estimate of a range of between $3 billion to almost $12 billion spent on R&D for every drug approved.

In the mid-market, BDO examined R&D spending by biotech companies reporting less than $300 million in revenue that are included in the NASDAQ Biotechnology Index (NBI). BDO concluded that R&D spending dropped seven percent in 2010, continuing a trend that started in 2008. BDO holds the FDA largely responsible for this decline.

As for new ventures, a 2011 survey by the National Venture Capital Association (NVCA) reported that the FDA’s ineffectivenes was causing U.S. venture capitalists to reduce their investments in domestic biotech in favor of Europe and Asia, as well as shifting investment to non-FDA regulated investments. These respondents accounted for 93 percent of the NVCA members’ invested capital, and had invested $10 billion in health deals over the past three years.

39 percent of the respondents had decreased investments in health ventures, versus only 17 pecent that had increased their commitments. The forecast for the next three years was virtually the same. Furthermore, investments dropped most in biopharma and medical devices – where FDA regulation is onerous – but increased in sectors where the FDA’s obstacles are low – such as consumer health and health IT. 61 percent of respondents reported that the regulatory challenges of the FDA were the greatest challenge to investment.

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. However, this is a climb up from a very steep fall. 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. 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 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 littel effect. Failure to renew the FDA’s funding will not reduce its power. On the contrary, patients will suffer, because the FDA will punish patients if Congress fails to feed the beast.

John R. Graham is Director of Health Care Studies at the Pacific Research Institute, & Senior Fellow at the National Center for Policy Analysis. This post first appeared at The Apothecary.

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