[Ip-health] Public Citizen Rebuttal to Tufts Center R&D study

[Frank Clemente]

Jamie, if you'd please post this to ip-health I'd appreciate it.=20
Thanks, Frank Clemente

Public Citizen released a premptive report last Wednesday, Nov. 28 =
critiquing the Tufts Center Drug Cost study (see news release below).   We =
also issued a rebuttal to the Ernst & Young critique of our July R&D study =
that critiqued the $500 million PhRMA figure, which was based on DiMasi.=20=

Sory this did not get out to you sooner.

For Immediate Release:		Contact: Bob Young 202-454-5139
Nov. 28, 2001						          =20

New Study Expected to Significantly Overstate Drug Industry R&D Costs

True Figure Is Likely at Least 75% Lower

WASHINGTON, D.C. - A new study, which is expected to claim the average =
cost of developing each new prescription drug far exceeds $500 million, =
once again significantly overstates real R&D costs, according to the =
national consumer group Public Citizen.  The study was prepared by the =
Tufts Center for the Study of Drug Development and is scheduled for =
release in Philadelphia on Friday, Nov. 30.

	In its last study on the cost of developing a new drug, completed =
in 1991, the Tufts Center pegged the figure at $231 million.  That figure =
then became the basis of claims by the drug industry's trade association, =
the Pharmaceutical Research and Manufacturers of America (PhRMA), that the =
cost of developing a new medicine, including successes and failures, was =
$500 million.  The updated Tufts study, prepared by Joseph A. DiMasi, is =
expected to use the same methodology as the original study.

	In July 2001, Public Citizen published a detailed critique of the =
original DiMasi study. It demonstrated that the actual after-tax cash =
outlay for developing a new drug, including failures, was $110 million - =
about 75 percent less than PhRMA's estimate using the DiMasi study.  =
Public Citizen's analysis was based on a major study analyzing the DiMasi =
report prepared by the congressional Office of Technology Assessment =
(OTA).  OTA found that DiMasi's original study included significant =
expenses that are tax deductible and was inflated with theoretical costs =
that drug companies don't actually incur. Public Citizen's study, Rx R&D =
Myths, is available on the web at http://www/citizen.org/publications/relea=
se.cfm?ID=3D7065.

	PhRMA commissioned the accounting firm of Ernst & Young to respond =
to the Public Citizen report.  Public Citizen's rebuttal to the Ernst & =
Young critique is available on the web at http://www.citizen.org/congress/r=
eform/drug_industry/articles.cfm?ID=3D6514

	 But Ernst & Young failed to rebut the Public Citizen's separate =
findings that were based on PhRMA data, which showed R&D costs for all new =
drugs brought to market (including failures) to range between $71 million =
and $150 million.  This analysis (contained in Section II of Rx R&D Myths) =
was not based on the DiMasi methodology but on PhRMA's own claims about =
how much the industry spends on R&D compared with the number of new drugs =
approved by the Food and Drug Administration.  Below is a more detailed =
critique of the DiMasi report.

Detailed Critique of the DiMasi Methodology Used in Original Study and=20
Other Key Prescription Drug R&D Issues

=A7 DiMasi's original $231 million figure does not represent what =
companies actually spend to discover and develop new molecular entities. =
It includes the expense of using money for drug research rather than other =
investments. It also does not account for huge tax deductions that =
companies get for R&D. Therefore, it substantially overestimates net =
expenditures on R&D.

=A7 According to the OTA's 354-page report on pharmaceutical R&D: "The net =
cost of every dollar spent on R&D must be reduced by the amount of tax =
avoided by that expenditure." Therefore, the OTA revised DiMasi's =
calculation, subtracting expenses that are tax deductible and the =
opportunity cost of capital.=20

=A7 The tax deduction reduces the cost of R&D by the amount of the =
corporate marginal tax rate (currently 34 percent). This means, in effect, =
that every dollar spent on R&D costs $0.66.   The OTA concluded that =
DiMasi's original $231 million figure (in 1987 dollars) was $171 million =
(in 1990 dollars) after accounting for the R&D tax deduction.=20

=A7 The opportunity cost of capital accounts for slightly more than half =
(51 percent) of DiMasi's total figure. After subtracting tax deductions =
and the opportunity cost of capital, OTA found that DiMasi's after-tax R&D =
cash outlay for a new NME was $65.5 million (in 1990 dollars). That is the =
estimate of how much the drug companies in DiMasi's study actually spent =
on new chemical entities, including failures. Public Citizen inflated this =
figure to year 2000 dollars and found that actual after-tax cash outlay =
for NCEs (including failures) was $110 million - based on DiMasi's =
data.=20

=A7 It should be noted that five of the seven previous R&D cost studies =
that DiMasi references did not include opportunity cost of capital in =
their calculations. =20

=A7 It's important to stress that DiMasi's figure is the R&D cost for all =
new chemical entities (NCEs) - which are the most expensive class of new =
drugs. Not all new drugs brought to market are NCEs. The R&D costs for all =
new drugs is detailed in Section II of Public Citizen's July report. =
Public Citizen found that the R&D costs for all new drugs brought to =
market, based on PhRMA's data, ranged from $71 million to $118 million. =
The R&D costs for NCEs was $150 million, on average.

=A7 Evidence suggests that the time required to conduct clinical trials on =
new drugs is also decreasing. A January 2000 report by the Tufts Center =
for the Study of Drug Development stated that clinical testing time =
declined by 19 percent for drugs approved in 1996-1998 when compared with =
drugs approved in 1993-1995. =20

=A7 The advent of technologies such as genomics and combinatorial =
chemistry, has led, according to investment analysts at Lehman Brothers, =
"to a growing school of thought that the cost of discovering new biological=
 targets and the cost of creating drug leads is falling." =20
The Boston Consulting Group predicts that drug companies will increase the =
number of new drugs (NCEs) they produce annually by five-to-tenfold by the =
year 2003. =20

=A7 Industry R&D risks and costs are often significantly reduced by =
taxpayer-funded research, which has helped launch the most medically =
important drugs in recent years and many of the best-selling drugs, =
including all of the top five sellers in one recent year surveyed (1995). =
An internal National Institutes of Health (NIH) document, obtained by =
Public Citizen through the Freedom of Information Act, shows how crucial =
taxpayer-funded research is to top-selling drugs. According to the NIH, =
taxpayer-funded scientists conducted 55 percent of the research projects =
that led to the discovery and development of the top five selling drugs in =
1995. (See Section III of report) PhRMA has not challenged the NIH =
document.

=A7 Drug industry R&D does not appear to be as risky as companies claim. =
In every year since 1982, the drug industry has been the most profitable =
in the United States, according to Fortune magazine's rankings. During =
this time, the drug industry's returns on revenue (profit as a percent of =
sales) have averaged about three times the average for all other industries=
 represented in the Fortune 500. It defies logic that R&D investments are =
highly risky if the industry is consistently so profitable and returns on =
investments are so high. (See Section V)

=A7 Drug industry R&D is made less risky by the fact that only about 22 =
percent of the new drugs brought to market in the last two decades were =
innovative drugs that represented important therapeutic gains over =
existing drugs. Most were "me-too" drugs, which often replicate existing =
successful drugs. (See Section VI)

=A7 In addition to receiving research subsidies, the drug industry is =
lightly taxed, thanks to tax credits. The drug industry's effective tax =
rate is about 40 percent less than the average for all other industries, =
according to the Congressional Research Service. (See Section VII)

=A7 Drug companies also receive a huge financial incentive for testing the =
effects of drugs on children. This incentive called pediatric exclusivity, =
which Congress recently voted to reauthorize, amounts to $592 million in =
additional profits per year for the drug industry - and that's just to get =
companies to test the safety of several hundred drugs for children. It is =
estimated that the cost of such tests is less than $100 million a year. =
(See Section VIII)

=A7 The drug industry's top priority increasingly is advertising and =
marketing, more than R&D. Increases in drug industry advertising budgets =
have averaged almost 40 percent a year since the government relaxed rules =
on direct-to-consumer advertising in 1997. Moreover, the Fortune 500 drug =
companies dedicated 30 percent of their revenues to marketing and =
administration in the year 2000, and just 12 percent to R&D. (See Section =
X)



Frank Clemente
Director, Public Citizen's Congress Watch
215 Pennsylvania Avenue SE
Washington, DC  20003
202-546-4996
F 202-547-7392
Web site http://www.citizen.org