PhRMA Chart Pack: Biopharmaceuticals in Perspective (Spring 2013)

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Information about PhRMA Chart Pack: Biopharmaceuticals in Perspective (Spring 2013)
Health & Medicine

Published on April 15, 2013

Author: PhRMA

Source: slideshare.net

Description

Our Chart Pack, “Biopharmaceuticals in Perspective,” contains useful facts and figures about prescription medicines and their role in the health care system, as well as in America's overall economy. Bookmark it today.

TABLE OF CONTENTSIntroduction . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 1Chapter 1 Advances in Treatment . . . . . . . . . . . . . . . . . . 3Chapter 2 Research and Development . . . . . . . . . . . . . 13Chapter 3 Spending and Costs. . . . . . . . . . . . . . . . . . . . 32Chapter 4 Outcomes and Savings . . . . . . . . . . . . . . . . . .47Chapter 5 Marketing and Promotion. . . . . . . . . . . . . . . 62Chapter 6 Economic Impact . . . . . . . . . . . . . . . . . . . . . . 73

INTRODUCTIONThis chart pack provides facts and figures about prescriptionmedicines and their role in the health care system. Topicsinclude medicines’ impact on health and quality of life, thedrug discovery and development process, biopharmaceuticalspending and costs, the challenge of treatment gaps andimproving use of prescribed therapies, the marketing andpromotion of medicines, and the role of the biopharmaceuticalsector in the U.S. economy.Data and information found in this publication were drawnfrom a wide range of sources, including government agencyreports, peer-reviewed journals, and the PharmaceuticalResearch and Manufacturers of America’s (PhRMA’s) ownresearch and analysis. PhRMA hopes this publication providesuseful context for discussions about the role of medicines inthe U.S. health care system. 1

DR TORSTEN WITTMANN/SCIENCE PHOTO LIBRARY

1 ADVANCES IN TREATMENT Medicines’ Impact on Health and Quality of Life Prescription medicines play a large role in saving and improving lives. Over the last 25 years, prescription medicines have significantly reduced deaths from major diseases such as heart disease, several cancers, and HIV/AIDS. They have also improved the quality of life for people suffering from conditions such as arthritis and Alzheimer’s disease. Recent advances have included, for example, entirely new classes of treatments for diabetes, hypertension, and HIV/AIDS; a new generation of personalized medicines; and the very first treatments for a number of rare diseases, such as Pompe disease and Hunter syndrome. As our population ages and faces increased rates of disease, medical advances will be key to alleviating suffering.1 • Advances in Treatment 3

U.S. Life Expectancy 1950–2011*“While nutrition, sanitation, other public health measures, and expanded access to care have been major sourcesof increasing human health, innovative medicines have also played a profound role in this progress.” — The President’s Committee of Advisors on Science and Technology1 85 81.1 78.8 79.3 80 77.4 76.3 At Birth (in Years) 74.7 74.1 75 73.1 71.8 71.1 70 70 66.6 67.1 65.6 65 Women Men 60 1950 1960 1970 1980 1990 2000 2011 *Life expectancies prior to 1997 were calculated using a slightly different methodology than for those post-1997. Source: U.S. Centers for Disease Control and Prevention (CDC)21 • Advances in Treatment 4

Cardiovascular Disease:Declining Rates of Death and Heart Failure“Factors contributing to the decline in heart disease and stroke mortality include better control of risk factors,improved access to early detection, and better treatment and care, including new drugs and expanded uses forexisting drugs.” — U.S. Centers for Disease Control and Prevention3 U.S. Death Rates Due to Diseases of the Heart* 450 401.6 397.0 388.9 375.0 Age-adjusted Death Rates per 100,000 400 355.9 332.0 350 313.8 309.9 296.3 300 280.4 266.5 247.8 232.3 250 211.1 190.9 180.1 200 173.7 150 100 50 0 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 *Age-adjusted death rates based on Year 2000 U.S. Standard Population. 1980–1998 causes of death are classified by the Ninth Revision International Classification of Diseases (ICD-9). Beginning in 1999, causes of death are classified by the Tenth Revision International Classification of Diseases (ICD-10). Source: CDC41 • Advances in Treatment 5

HIV/AIDS: Decline in Death RatesThe number of U.S. AIDS deaths decreased dramatically following the introduction of highly active antiretroviraltreatment (HAART) and has continued to decline. Annual Number of AIDS Deaths in the United States 18 16 16.2Deaths Per 100,000 Population 14 12 1996: HAART becomes widely available 10 8 6 6.0 5.3 5.0 4 4.7 4.2 3.7 2 3.1 2.5 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: CDC51 • Advances in Treatment 6

Cancers: Decline in Death RatesAccording to the American Cancer Society, improvements in treatment contributed to the increase in cancersurvival.6 Percent Change by Decade in U.S. Death Rates from Cancer 4% 4.7% 3.9% -1% -6% -7.6% -11% -15.5% -16% 1970–1980 1980–1990 1990–2000 2000–2011 Source: CDC71 • Advances in Treatment 7

Rare Diseases: Drug Approvals for Rare DiseasesHave IncreasedRare diseases are those that affect 200,000 or fewer people in the United States. There are between 6,000 and7,000 rare diseases affecting 25 million Americans. Number of Drug Approvals for Rare Diseases* 450 400 350 300 250 200 1983: Orphan Drug Act passed 150 100 50 0 Cumulative Prior Orphan Drug Approvals New Orphan Drug Approvals *Approvals for rare diseases include initial approvals of new medicines and subsequent approvals of existing medicines for rare disease areas. Source: U.S. Food and Drug Administration (FDA)81 • Advances in Treatment 8

Future Impact: Need for New Treatmentsfor Alzheimer’s DiseaseThe development of a new treatment that delays the onset of Alzheimer’s could reduce Medicare and Medicaidspending on patients with Alzheimer’s by more than $100 billion annually by 2030.* Projected Annual Medicare & Medicaid Spending, With and Without New Treatment Advances (Billions)** $1,000 Projected Medicare and Medicaid Spending $900 Current Trajectory Projection with Delayed Onset Treatment Advance $800 $805 $700 $600 (in Billions) $500 $529 $400 $443 $300 $297 $276 $200 $174 $157 $100 $140 $122 $122 $0 2010 2020 2030 2040 2050*Assumes research breakthroughs that delay the average age of onset of Alzheimer’s disease by five years beginning in 2010.**Projected savings to Medicare and Medicaid assume research breakthroughs that slow the progression of Alzheimer’s disease.This would dramatically reduce spending for co-morbid conditions and expensive nursing home care. Source: Alzheimer’s Association91 • Advances in Treatment 9

Notes and Sources1. Executive Office of the President (EOP), Presidents Committee of Advisors on Science and Technology. “Report to the President on Propelling Innovation in Drug Discovery, Development, and Evaluation.” Washington, DC: EOP, September 2012.2. U.S. Department of Health and Human Services (HHS), CDC, National Center for Health Statistics (NCHS). “Health, United States, 2008 With Chartbook.” Hyattsville, MD: HHS, 2009; 1950–2006 data from M. Heron, et al. “Deaths: Final Data for 2006.” National Vital Statistics Reports 2009; 57(14): 5. Hyattsville, MD: NCHS. www.cdc.gov/nchs/data/nvsr/nvsr57/nvsr57_14.pdf (accessed June 2010); 2007 data from J. Xu, et al. “Deaths: Final Data for 2007.” National Vital Statistics Reports 2010; 58(19): 13. Hyattsville, MD: NCHS. www.cdc.gov/nchs/data/nvsr/nvsr58/nvsr58_19.pdf (accessed June 2010); 2008–2009 data from K. Kochanek, et al. “Deaths: Preliminary Data for 2009.” National Vital Statistics Reports 2011; 59(4): 28. Hyattsville, MD: NCHS. www.cdc.gov/nchs/data/nvsr/nvsr59/nvsr59_04.pdf (accessed August 2011); 2010–2011 data from D.L. Hoyert and J. Xu. “Deaths: Preliminary Data for 2011.” National Vital Statistics Reports 2012; 61(6): 5. Hyattsville, MD: NCHS. www.cdc.gov/nchs/data/nvsr/nvsr61/nvsr61_06.pdf (accessed December 2012).3. HHS, CDC, NCHS. “Health, United States, 2006 With Chartbook on Trends in the Health of Americans.” Hyattsville, MD: HHS, 2006. www.cdc.gov/nchs/data/hus/hus06.pdf (accessed December 2012).4. CDC, NCHS, National Vital Statistics System. "Unpublished table NEWSTAN 79–98S created on 00/03/02: Age-Adjusted Death Rates for 72 Selected Causes by Race and Sex Using Year 2000 Standard Population: United States, 1979–98." Mortality. Atlanta, GA: CDC, 2002. www.cdc.gov/nchs/data/mortab/aadr7998s.pdf (accessed February 2013); D.L. Hoyert, et al. “Deaths: Final Data for 1999.” National Vital Statistics Reports 2001; 49(8): 1–3. Hyattsville, MD: NCHS. www.cdc.gov/nchs/data/nvsr/nvsr49/nvsr49_08.pdf (accessed February 2013); K.D. Kochanek, et al. “Deaths: Final Data for 2009.” National Vital Statistics Reports 2011; 60(3): 32. Hyattsville, MD: NCHS. www.cdc.gov/nchs/data/nvsr/nvsr60/nvsr60_03.pdf (accessed December 2012); D.L. Hoyert and J. Xu. “Deaths: Preliminary Data for 2011.” National Vital Statistics Reports 2012; 61(6): 28. Hyattsville, MD: NCHS. www.cdc.gov/nchs/data/nvsr/nvsr61/nvsr61_06.pdf (accessed December 2012).1 • Advances in Treatment 10

Notes and Sources5. HHS, CDC, NCHS. “Health, United States, 2003 With Chartbook on Trends in the Health of Americans.” Hyattsville, MD: HHS, 2003; HHS, CDC, NCHS. “Health, United States, 2009 With Chartbook on Medical Technology.” Hyattsville, MD: HHS, 2010; 2007 data from J. Xu, K.D. Kochanek, and B. Tejada-Vera. “Deaths: Preliminary Data for 2007.” National Vital Statistics Reports 2009; 58(1): 5. Hyattsville, MD: NCHS. www.cdc.gov/nchs/data/nvsr/nvsr58/nvsr58_01.pdf (accessed December 2009); 2009 data from K.D. Kochanek, et al. “Deaths: Final Data for 2009.” National Vital Statistics Reports 2011; 60(3): 41. Hyattsville, MD: NCHS. www.cdc.gov/nchs/data/nvsr/nvsr60/nvsr60_03.pdf (accessed December 2012); 2011 data from D.L. Hoyert and J. Xu. “Deaths: Preliminary Data for 2011.” National Vital Statistics Reports 2012; 61(6): 38. Hyattsville, MD: NCHS. www.cdc.gov/nchs/data/nvsr/nvsr61/nvsr61_06.pdf (accessed December 2012).6. American Cancer Society. “Cancer Facts & Figures, 2011.” Atlanta, GA: American Cancer Society, 2011. www.cancer.org/acs/groups/content/@epidemiologysurveilance/documents/document/acspc-029771.pdf (accessed December 2012).7. HHS, CDC, NCHS. “Health, United States, 2011 With Special Features on Socioeconomic Status and Health.” Hyattsville, MD: HHS, 2012; K.D. Kochanek, et al. “Deaths: Final Data for 2009.” National Vital Statistics Reports 2011; 60(3): 32. Hyattsville, MD: NCHS. www.cdc.gov/nchs/data/nvsr/nvsr60/nvsr60_03.pdf (accessed December 2012); D.L. Hoyert and J. Xu. “Deaths: Preliminary Data for 2011.” National Vital Statistics Reports 2012; 61(6): 28. Hyattsville, MD: NCHS. www.cdc.gov/nchs/data/nvsr/nvsr61/nvsr61_06.pdf (accessed December 2012).8. U.S. Food and Drug Administration (FDA), Office of Orphan Product Development. “Orphan Drug Designations and Approvals Database.” Available at www.accessdata.fda.gov/scripts/opdlisting/oopd/index.cfm (accessed December 2012).9. Alzheimers Association. “Changing the Trajectory of Alzheimers Disease: A National Imperative.” Washington, DC: Alzheimers Association, May 2010.1 • Advances in Treatment 11

2 RESEARCH AND DEVELOPMENT The Process of Drug Discovery and Development More than 5,000 medicines are in development globally. PhRMA member companies invested $48.5 billion in biopharmaceutical research and development (R&D) in 2012, accounting for the majority of private biopharmaceutical R&D spending. Development of new medicines is a long and high-risk process, and it has become more costly and complex over the last decade. Even among the new drug candidates reaching Phase III trials, about one-third fail. Companies “race” to bring the first medicine in a class to market, and just two in ten approved drugs are ultimately commercial successes. Recent biopharmaceutical advances — driven by scientific research and creative genius — would have been impossible without a system of laws that provide the structure, stability, and opportunity for the needed investment.2 • Research and Development 13

Medicines in Development by Regulatory Phase GloballyIn 2011, 5,408 medicines* were in clinical development worldwide. Phase I Phase II 2,164 2,329 Phase III Regulatory 833 Review in the United States, 82 *Defined as single products which are counted exactly once regardless of the number of indications pursued. Source: Analysis Group12 • Research and Development 14

More than 900 Biologic Medicines in Development in 2013 Biologic medicines — large, complex molecules derived from living cells — frequently represent novel strategies that have the potential to transform the clinical treatment of disease. Number of Medicines in Development in 2013, by Therapeutic Category* Autoimmune Disorders 71 Blood Disorders 43 A vast array of biologic Cancers/Related Conditions 338 medicines are in development, for Cardiovascular Disease 58 example: Diabetes/Related Conditions 28 • A monoclonal Digestive Disorders 26 antibody to treat juvenile rheumatoid Eye Conditions 25 arthritis Genetic Disorders 30 • Several cancer vaccines for Infectious Diseases 176 malignant Musculoskeletal Disorders 34 melanoma Neurologic Disorders 39 • A gene therapy to treat bladder cancer Respiratory Disorders 38 Skin Diseases 30 Transplantation 13 Other 58 0 50 100 150 200 250 300 350 400 *Some medicines are being explored in more than one therapeutic category. Source: PhRMA2Source: Biotechnology Research Continues to Bolster Arsenal Against Disease with 633 Medicines in Development. PhRMA, 2008. 2 • Research and Development 15

Potential First-in-Class Medicines in the Pipeline70% of drugs across the pipeline are potential first-in-class medicines. Percentage of Projects in Development that are Potentially First-in-Class Medicines in Selected Therapeutic Areas, 2011 Neurology 84% Cardiovascular 81% Cancer 80% Psychiatry 79% Immunology 72% Diabetes 71% HIV/AIDS 69% Infections 57% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Analysis Group32 • Research and Development 16

The Research and Development ProcessDeveloping a new medicine takes an average of 10–15 years. Source: PhRMA42 • Research and Development 17

Government and Industry Roles in Research & DevelopmentGovernment and biopharmaceutical industry research complement one another. PhRMA Member Companies: $48.5 Billion Clinical Research Clinical Research Translational Research Translational Research Basic Basic Research Research National Institutes of Health: $30.9 Billion* *NIH spending is for FY 2012. PhRMA member companies’ spending is estimated for CY 2012. PhRMA member companies account for the majority of private biopharmaceutical R&D spending. Non-member company data are not included. Sources: PhRMA5; NIH Office of Budget6; adapted from E. Zerhouni72 • Research and Development 18

PhRMA Member Company R&D Spending“The pharmaceutical industry is one of the most research-intensive industries in the United States.Pharmaceutical firms invest as much as five times more in research and development, relative to their sales,than the average U.S. manufacturing firm.” — Congressional Budget Office (CBO)8 PhRMA Member Company R&D Expenditures: 1995–2012 $60 $50.7 $47.9 $47.4 $48.6 $48.5* $50 $46.4 $43.4 Expenditures (Billions of Dollars) $39.9 $40 $37.0 $34.5 $29.8 $31.0 $30 $26.0 $22.7 $21.0 $19.0 $20 $16.9 $15.2 $10 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 *Estimated for CY 2012. Source: PhRMA92 • Research and Development 19

Drug Development Costs Have IncreasedAccording to a 2007 study, it costs an average of $1.2 billion to develop one new drug.10 More recent studiesestimate the costs to be even higher.11 The Average Cost to Develop One New Approved Drug — Including the Cost of Failures $1.4 $1.2 $1.2B Billions (Constant Dollars, Year 2000) $1.0 $0.8 $800M $0.6 $0.4 $320M $0.2 $140M $0.0 mid-1970s mid-1980s late-1990s early-2000s Sources: J.A. DiMasi and H.G. Grabowski10; J. Mestre-Ferrandiz, et al. and S.M. Paul, et al.11; J.A. DiMasi, et al.122 • Research and Development 20

Complexity of Clinical Trials Has IncreasedDuring the last decade, clinical trial designs and procedures have become much more complex, demanding morestaff time and effort, and discouraging patient enrollment and retention. Trends in Clinical Trial Protocol Complexity Percentage 2000–2003 2008–2011 Change Total Procedures per Trial Protocol (median) 105.9 166.6 57% (e.g., bloodwork, routine exams, x-rays, etc.) Total Investigative Site Work Burden 28.9 47.5 64% (median units) Total Eligibility Criteria 31 46 58% Clinical Trial Treatment Period 140 175 25% (median days)* Number of Case Report Form Pages per 55 171 227% Protocol (median) *These numbers reflect only the “treatment duration” of the protocol. Source: K.A. Getz, et al. and Tufts Center for the Study of Drug Development132 • Research and Development 21

Illustrative Pharmaceutical LifecycleNew pharmaceutical medicines face competition after a relatively short period on the market. FDA Generics Approval Enter Market Most brand drugs face competition from other brands Drug Development Brand Drug Lifespan Generics Average time to develop a Average time on market new medicine before generic entry = 10–15 yrs = 11.8* yrs*Refers to new drugs (i.e., excludes new forms of administration) with annual sales in 2008 of more than $100 million,which accounted for 95% of the sales of new medicines exposed to generic competition. Sources: PhRMA14; H.G. Grabowski, et al.152 • Research and Development 22

Earlier and More Frequent Patent Challengesby Generic CompaniesOn average, new brand drugs face generic competition after 11.8* years, but generic companies canchallenge patents as soon as 4 years after a brand enters the market. Share of Brand Products that Ever Experienced a “Paragraph IV” Patent Challenge** from a Generic Manufacturer, Among Those Facing Generic Entry in Year Listed 100% Hundreds 80% 75% 60% 40% 20% 17% 0% 1995 2008 Year of First Generic Entry*Refers to new drugs (i.e., excludes new forms of administration) with annual sales in 2008 of more than$100 million, which accounted for 95% of the sales of new medicines exposed to generic competition.**A generic company may file with FDA a Paragraph IV certification to “challenge” patents associated withbrand-name medicines, potentially allowing generic market entry before the patent expiration date. Source: H.G. Grabowski, et al.162 • Research and Development 23

Competing Medicines Race for ApprovalBy 1995, nearly all first-in-class medicines being approved already had potential competitors inPhase II clinical testing. Percentage of First-in-Class Medicines with a Competitor Already in Phase II Clinical Testing at Time of Approval 100% 90% 90% 80% 70% 77% 71% 60% 50% 50% 40% 30% 20% 23% 10% 0% 1970s 1980–1984 1985–1989 1990–1994 1995–1999 Source: J.A. DiMasi and L.B. Faden172 • Research and Development 24

Increasing Competition Within Therapeutic CategoriesThe time a medicine is the only drug available in its therapeutic class has declined dramatically — from a medianof more than 10 years in the 1970s to less than two years by 1998. Time Between Approval of First and Second Drugs in a Therapeutic Class 12 10 10.2 Median Number of Years 8 6 4 4.1 2 1.2 0 1970s 1980s 1990–2003 Year of Approval of First-in-Class Medicine Source: Tufts Center for the Study of Drug Development182 • Research and Development 25

Few Approved Medicines are Commercially Successful Ongoing investment in R&D depends on the commercial success of a few products that must make up for all the rest, including those that never reach the market. Just 2 in 10 Approved Medicines Produce Revenues that Exceed Average R&D Costs $2,000 $1,880After-Tax Present Value of Sales $1,500 (Millions of 2000 Dollars) $1,000 After-Tax Average R&D $701 $500 $434 $299 $87 $162 $39 $21 $6 -$1 $0 1 2 3 4 5 6 7 8 9 10 New Medicine Introduced Between 1990 and 1994, grouped by Tenths, by Lifetime Sales Source: J.A. Vernon, et al.19 2 • Research and Development 26

Accounting Treatment of R&DOverstates Biopharmaceutical Profits“Correctly accounting for R&D as a long-lived investment tends to reduce substantially, if not to eliminatealtogether, the inference that pharmaceutical companies are on average achieving supranormal profit returns.”20 — F.M. Scherer, AEI-Brookings Joint Center for Regulatory Studies“...the standard accounting measure of profits overstates true returns to R&D-intensive industries, such aspharmaceuticals, and makes it difficult to meaningfully compare profit levels among industries. Accountingmeasures treat most R&D spending (except for capital equipment) as a deductible business expense rather thanas a capitalized investment. But the intangible assets that research and development generate — such asaccumulated knowledge, new research capabilities, and patents — increase the value of a company’s asset base.Not accounting for that value overstates a firm’s true return on its assets.”21 — Congressional Budget Office“Usual profit figures greatly overstate the industry’s economic profit rate.”22 — J.P. Newhouse, Harvard University Sources: F.M. Scherer20; CBO21; J.P. Newhouse222 • Research and Development 27

Notes and Sources1. Analysis Group. "Innovation in the Biopharmaceutical Pipeline: A Multidimensional View." Boston, MA: Analysis Group, January 2013. www.analysisgroup.com/uploadedFiles/Publishing/Articles/2012_Innovation_in_the_Biopharmaceutical_Pipeline.pdf (accessed January 2013).2. Pharmaceutical Research and Manufacturers of America. "Medicines in Development: Biologic Medicines." Washington, DC: PhRMA, 2013.3. Analysis Group, Op. cit.4. Pharmaceutical Research and Manufacturers of America. "Drug Discovery and Development: Understanding the R&D Process." Washington, DC: PhRMA, 2007. www.innovation.org/drug_discovery/objects/pdf/RD_Brochure.pdf (accessed February 2013).5. Pharmaceutical Research and Manufacturers of America. “PhRMA Annual Membership Survey.” 2013.6. National Institutes of Health (NIH), Office of Budget. “History of Congressional Appropriations, Fiscal Years 2000–2012.” Bethesda, MD: NIH, 2012. http://officeofbudget.od.nih.gov/pdfs/FY12/Approp.%20History%20by%20IC)2012.pdf (accessed February 2013).7. Adapted from E. Zerhouni. “Transforming Health: NIH and the Promise of Research.” Transforming Health: Fulfilling the Promise of Research. Washington, DC. November 2007. Keynote address. www.researchamerica.org/transforming_health_transcript (accessed January 2013).8. CBO. “Research and Development in the Pharmaceutical Industry.” Washington, DC: CBO, October 2006.9. Pharmaceutical Research and Manufacturers of America. "PhRMA Annual Membership Survey." 1996–2012.10. J.A. DiMasi and H.G. Grabowski. "The Cost of Biopharmaceutical R&D: Is Biotech Different?" Managerial and Decision Economics 2007; 28: 469–479.11. More recent estimates range from $1.5 billion to more than $1.8 billion. See e.g. J. Mestre-Ferrandiz, J. Sussex, and A. Towse. “The R&D Cost of a New Medicine.” London, UK: Office of Health Economics, 2012; S.M. Paul, et al. “How to Improve R&D Productivity: The Pharmaceutical Industry’s Grand Challenge.” Nature Reviews Drug Discovery 2010; 9: 203–214.2 • Research and Development 28

Notes and Sources12. J.A. DiMasi, et al. “The Price of Innovation: New Estimates of Drug Development Costs.” Journal of Health Economics 2003; 22: 151–185. Study findings originally reported in 2005 dollars. Based on correspondence with the study author, these figures were adjusted to 2000 dollars.13. K.A. Getz, R.A. Campo, and K.I. Kaitin. “Variability in Protocol Design Complexity by Phase and Therapeutic Area.” Drug Information Journal 2011; 45(4): 413–420; updated data provided through correspondence with Tufts Center for the Study of Drug Development.14. Pharmaceutical Research and Manufacturers of America. "Drug Discovery and Development: Understanding the R&D Process." Washington, DC: PhRMA, 2007. www.innovation.org/drug_discovery/objects/pdf/RD_Brochure.pdf (accessed February 2013).15. H.G. Grabowski, et al. “Evolving Brand-name and Generic Drug Competition may Warrant a Revision of the Hatch-Waxman Act.” Health Affairs 2011; 30(11): 2157–2166.16. Estimate is based on sample of 200 New Molecular Entities (NMEs) experiencing first generic entry between 1995 and 2008. The 11.8 refers to the market exclusivity period, which is defined as the time between launch of the brand-name version of the drug and its first generic competitor. See H.G. Grabowski, et al. "Evolving Brand-name and Generic Drug Competition may Warrant a Revision of the Hatch-Waxman Act." Health Affairs 2011; 30(11): 2157–2166.17. J.A. DiMasi and L.B. Faden. "Follow-On Drug R&D: New Data on Trends in Entry Rates and the Timing of Development." Tufts Center for the Study of Drug Development Working Paper. Boston, MA: Tufts Center for the Study of Drug Development, September 2009.18. Tufts Center for the Study of Drug Development. Unpublished data. March 2010. Median data for shorter time periods published in: Tufts Center for the Study of Drug Development. “Marketing Exclusivity for First-in-Class Drugs Has Shortened to 2.5 Years.” Impact Report 2009; 11(5).2 • Research and Development 29

Notes and Sources19. J.A. Vernon, et al. “Drug Development Costs When Financial Risk Is Measured Using the Fama-French Three-Factor Model.” Health Economics 2009; 19(8): 1002–1005; Drug development costs represent after-tax out-of-pocket costs in 2000 dollars for drugs introduced from 1990–1994. The same analysis found that the total cost of developing a new drug was $1.3 billion in 2006. Average R&D costs include the cost of the approved medicines as well as those that fail to reach approval.20. F.M. Scherer. “Pharmaceutical Innovation.” AEI-Brookings Joint Center for Regulatory Studies Working Paper 07–13. July 2007.21. CBO. “Research and Development in the Pharmaceutical Industry.” Washington, DC: CBO, October 2006.22. J.P. Newhouse. “How Much Should Medicare Pay for Drugs?” Health Affairs 2004; 23(1): 89–102.2 • Research and Development 30

3 SPENDING AND COSTS Biopharmaceutical Spending and Health Care Costs Prescription medicines represent a small share of national health spending. Since 2000, growth in prescription drug spending has slowed markedly, while prices for prescription medicines have risen in line with overall medical inflation. Innovator pharmaceutical companies produce medical advances through pioneering scientific work and large-scale investments. The innovators’ work and investment lead both to new medicines and, over time, to generic copies that consumers use at low cost for many years. Health plans use many tools — such as tiered formularies and cost sharing — to steer use toward generics and lower- cost medicines. Payers also typically require patients to pay a higher share of the costs of medicines out-of-pocket compared with other health services.3 • Spending and Costs 32

Sharply Declining Prescription Medicine SpendingGrowth: 1999–2011*Spending growth for prescription medicines has slowed dramatically over the past decade, with historically lowrates of growth observed in recent years. 20% 18% 18.4% 16% 15.4% 14% 14.7% 14.0% 12% 10% 11.3% 9.2% 9.5% 8% 6% 6.5% 4% 5.2% 5.0% 2% 2.8% 2.9% 0.4% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *Total retail sales including brand medicines and generics. Source: Centers for Medicare & Medicaid Services (CMS)13 • Spending and Costs 33

Medicines Account for a Small and Declining Share ofHealth Spending Growth Growth in Health Care Expenditures Attributable to Prescription Drugs, 1997–2011 100% 7% 17% 13% 90% 80% 70% 60% 50% 93% 83% 87% 40% 30% Prescription Drugs 20% All Other Health Care 10% 0% 1997–2001 2002–2006 2007–2011 Source: CMS23 • Spending and Costs 34

Retail Spending on Prescription Medicines is a Small Shareof Total U.S. Health Care Spending Health Care Dollar, 2011 Prescription Drugs $0.10 Other* $0.25 Government Hospital Care Admin. & Net Cost $0.34 of Private Health Insurance $0.06 Physician and Home Health and Clinical Services Nursing Home Care $0.22 $0.03*Other includes dental, home health, and other professional services as well as durable medical equipment costs. Source: PhRMA analysis based on CMS33 • Spending and Costs 35

Growth in Prescription Medicine Prices Has Been in Linewith Other Health Care Prices Consumer Price Index (Dec 1999 = 100)235 Hospital & Related Services215195175 All Medical Costs155 Prescription Medicines135 Consumer Price Index115 95 Source: PhRMA analysis based on Bureau of Labor Statistics43 • Spending and Costs 36

More Than Four Out of Five U.S. PrescriptionsAre Filled with Generics Generic Share* of Prescriptions Filled 1984–2012 90% 80% 84% 70% 71% 60% 50% 52% 40% 43% 30% 33% 20% 19% 10% 0% 1984 1990 1996 2002 2008 2012 *Generic share includes generics and branded generics. Sources: IMS5,6,7,8,93 • Spending and Costs 37

The U.S. Prescription Drug Lifecycle PromotesInnovation and AffordabilityInnovator pharmaceutical companies produce medical advances through pioneering scientific work and large-scale investments. The innovators’ work and investment lead both to new medicines and, over time, to genericcopies that consumers use at low cost for many years. Daily Cost of Top 10 Therapeutic Classes* Most Commonly Used by Medicare Part D Enrollees $1.50 $1.50 Actual Estimated $1.20 $1.00 Cost per Day ($) $0.90 $0.65 $0.60 $0.30 $0.00*Ten therapeutic classes most commonly used by Part D enrollees in 2006 were: lipid regulators, ACE inhibitors, calciumchannel blockers, beta blockers, proton pump inhibitors, thyroid hormone, angiotensin II, codeine and combination products, Source: M.L. Aitken and E.R. Berndt10antidepressants, and seizure disorder medications.3 • Spending and Costs 38

Insurance Covers a Lower Share of PrescriptionDrug Costs Than of Other Medical ServicesOn average, privately-insured consumers pay out-of-pocket more than 20% of their total prescription drugspending, compared with 4% of spending for inpatient hospital care and 7% on hospital outpatient care. Percentage of Spending for Each Type of Service Paid Out-of-Pocket: Privately-insured People Under Age 65 40% 30% 20% 22% 17% 10% 9% 7% 4% 0% Hospital Inpatient Hospital Outpatient Emergency Room Physicians Prescription Drugs* *Includes brand & generic Sources: P.J. Cunningham11; PhRMA analysis based on Medical Expenditure Panel Survey (MEPS)123 • Spending and Costs 39

Powerful Purchasers Negotiate on Behalf of PatientsA small number of large purchasers dominate the U.S. prescription drug market. Prescription Volume by Pharmacy Benefit Management (PBM) Companies, 2012 Company Number of Prescriptions Market Share (%)* 1. Express Scripts/Medco Health 1,411 million 29.5% Solutions** 2. CVS/Caremark 775 million 16.2% 3. Argus Health Systems 504 million 10.5% 4. OptumRx, Inc. 319 million 6.7% 5. ACS, Inc. 250 million 5.2% Top 5 PBMs Total 3,259 million 68.2% Top 10 PBMs Total 4,107 million 85.9% Top 15 PBMs Total 4,584 million 95.9% All PBMs in U.S. 4,780 million 100%*Figures may not sum to totals due to rounding.**Medco was acquired by Express Scripts in April 2012. Figure for Express Scripts/Medco is the sumof the individual script totals for each entity for the most recently reported 12 month period in 2012. Source: Atlantic Information Services, Inc.133 • Spending and Costs 40

In the U.S. System, Health Plans Have Powerful Tools toReduce Spending on Medicines Tiered Copays Formularies Prior Authorization Higher cost to patients for List of covered drugs Physicians required to justify brands than for generics and medicine’s use before it’s preferred brands covered Payers drive nearly all use of medicines to generics and “preferred” brands.Concentrated Purchasing Power Financial Incentives Individual Pharmacy Benefit Managers Payments to physicians and/or buy medicines for more people than Step Therapy pharmacies for generic prescribing or in entire European countries Patients must try and fail on switching patients to preferred drugs alternatives before certain medicines are covered Source: IMS Health, Inc.143 • Spending and Costs 41

Newly Introduced Generics are Adopted RapidlyWhen a generic version of a medicine becomes available for the first time, it can capture as much as 90% of themarket within 3 months. Generic Share of Filled Prescriptions Following the Launch of a New Generic Osteoporosis Treatment 100% Mail Retail 80% 60% Generic Use Rate 40% 20% 0% 0 7 14 30

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