High Cost of R&D Innovation in Healthcare

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We are in a new era of healthcare where breakthrough science and personalized therapies and technologies are transforming the way clinicians treat patients. New treatments yield important progress against some of the most challenging diseases of our time. Targeting the underlying causes of disease using breakthrough treatments like immunotherapy has already transformed deadly diseases such as certain types of cancer into manageable and even curable ones. Significant investments over the past 10 years are beginning to pay off, especially as it relates to the treatment of untreatable disorders and chronic diseases, one of the biggest cost drivers in healthcare today. The cost of treating patients with chronic conditions accounts for 90 percent of the nearly $3 trillion spent on healthcare in the United States each year.

Investments in healthcare innovation are driving contributions to the American economy and solidifying the nation’s role as a leader in medical innovation. According to the recently released IQVIA report, investment in future medical innovations continued to grow in 2018 reflecting confidence in scientific innovation to tackle unmet health needs. Venture capital firms invested over $23 billion in 2018, and the 15 largest pharmaceutical companies recorded more than $100 billion in R&D expenditure for the first time, up 32% over the past five years.  Furthermore, the number of molecules in late-stage development totaled 2,891 in 2018, growing 39% over the past five years with oncology medicines increasing by 63% and Next-Generation Biotherapeutics (NGB) including cell, gene and nucleotide therapies more than doubling over the past three years.

California’s life sciences sector is leading the way in helping to solve many of the long-standing and emerging health problems. According to the 2019 California Life Sciences Industry Report by the California Life Sciences Association (CLSA), the Golden State is home to more than 3,400 life sciences companies. Many of these companies are developing new therapies and technologies, while others are conducting preclinical testing or operating clinical trials to discover the treatments of tomorrow. All are working to create and deliver innovative products that will improve the lives of patients and their families. This ecosystem has been incredibly productive. In 2018, California companies started clinical trials for more than 1,300 therapies. Of those, over half are intended to treat cancer, central nervous system conditions, and infectious diseases – all serious conditions where patients still have major unmet medical needs.

High Cost of Development

In order to encourage continued innovation, it is important to understand the significant challenges and costs associated with the development of pioneering therapies and technologies. This issue is critically important given that policymakers in Sacramento and Washington, D.C. are working to address unaffordable healthcare costs for patients and exploring a wide range of policy solutions which could affect our sector’s ability to accelerate the introduction of new treatments for patients in the future.

The development of a ground-breaking, patented medicines or technology is a lengthy, complex, and costly process, entrenched with a high degree of uncertainty that a new drug, device, or biologic therapy will actually be approved by federal regulators and succeed in the marketplace. According to the Tufts Center for Drug Development (TCDD), the research and development (R&D) process cost estimate is roughly $2.6 billion according to studiespublished in the Journal of Health Economics. The estimated costs include the expenses of unsuccessful projects, as well as those that are successful in obtaining marketing approval from regulatory authorities. The fact is that life sciences companies spend significant investment dollars (multi-million to billions) on developing technologies and biopharmaceutical compounds for every product that reaches the market.

The reality is that the cost of innovation is rising with the level of investment up from $802 million in 2003—equal to approximately $1 billion in 2013 dollars.

TCDD breaks down its $2.6 billion figure per approved compound to include the technical risks of drug development at the start of the discovery process (10-12%) and approximates the average out-of-pocket outlay of $1.4 billion and time costs (the expected returns that investors forego while a drug is in development) of $1.2 billion. Furthermore, the estimated cost of post-approval R&D of $312 million boosts the full product lifecycle cost per approved drug to close to $3 billion. R&D costs include studies to test new indications, new formulations, new dosage strength and regimens, and to monitor the safety and long-term side effects in patients as required by regulatory authorities such as the U.S. Food and Drug Administration (FDA) as a condition of approval.

Additionally, according to TCDD, factors that likely have boosted the rising R&D and clinical costs include increased clinical trial complexities, larger and more diverse clinical trial sizes, higher cost of inputs from the medical sector used for development, greater focus on targeting chronic and degenerative diseases, cell and gene therapies, and testing on comparator drugs to accommodate payer demands for comparative effectiveness data and risk-benefit ratios.

Science and regulations today are more complex and associated failure risks are compounded, but patients are also better served by the development of precision medicine.

The Economic Reality of Development and Associated Costs

Policymakers in Sacramento and Washington, D.C. must engage in the difficult conversations about the important issues related to controlling the rising costs of healthcare and sustaining investment in R&D to develop new therapies and technologies. We must ultimately tackle the fundamental question of how much innovation for which we are willing to pay. This conversation must be informed by the economic realities underpinning the business model of how new drugs and devices are developed. We must also weigh the costs of policies that could either hinder or hurt the development of new therapies and technologies for patients suffering from conditions without any existing treatments. This is where the ability to continue to innovate is critical to driving scientific advancement for patient benefit.

Final Thoughts

America’s healthcare and life sciences sectors are committed to working with policymakers and stakeholders to advance solutions aimed toward driving value in our healthcare system, supporting innovation, combating threats to public health, and ensuring patient access to treatments without unaffordable out-of-pocket costs. The tremendous promise that is evident in today’s development pipeline represents a new frontier of research with the potential to transform the lives of patients. In this new era of medicine, science that was once considered unimaginable is now on the verge of producing a paradigm shift in the treatment of the most complex and challenging diseases of our time. It is critical that policymakers in Sacramento and Washington, D.C. are not deceived by proposals that could short-circuit the next generation of treatments and cures. We must recognize and be mindful of the enormously high cost it takes to develop these innovative therapies that improve patient lives and treat disorders that otherwise may never be treated.

Disclosure

David H. Crean, Ph.D., is a Managing Director for Objective Capital Partners, a leading investment banking advisory firm whose Principals have collectively engaged in more than 500 successful transactions serving the transaction needs of growth stage and mid-size companies. Services include M&A sale transactions, partnering/ licensing, equity and debt capital raises, valuation and comprehensive advisory services. Additional information on Objective Capital Partners is available at www.objectiveibv.com.

This article is provided for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. David H. Crean is a Registered Representative for BA Securities. Objective Capital Partners and BA Securities are separate and unaffiliated entities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC makes no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.

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