We identified the clinical trials performed for Pediatric Exclusivity though the “Written Request”. Although Pediatric Exclusivity was initiated in 1997, we evaluated studies for which the data were submitted from 2002–2004 (inclusive) because these data were available and presented to FDA uniformly under the electronic submission process, summaries from these studies are publicly available,9
economic data are current, and the decisions regarding the granting of exclusivity were complete. During this period, data from 59 products were submitted to FDA. We selected the products to study using the following algorithm. We subdivided the program into the following areas: allergy/immunology (6 products), cancer (n=9), central nervous system (n=8), cardiovascular (n=9), psychiatry (n=5), endocrine (n=6), gastro-intestinal (n=4), infectious disease (n=10), and other (n=2). We selected one product from each area, using the most recent application for which data were most complete in the ‘electronic document room’ of FDA. The electronic document room is a repository in which all components of submissions have been stored since 2002.
For each product, we estimated the net economic return to industry from participation in the Exclusivity program, and calculated the resulting net return to cost ratio. We use the following definitions: net economic return is the difference between after-tax cash inflows and outflows associated with the additional period of patent exclusivity; cash inflows represent estimates of product sales (net of production, marketing, and distribution costs) during the period of extended patent exclusivity; and cash outflows are estimates of the costs of performing pediatric studies. Cash inflows and outflows for each product were adjusted to 2005 after-tax values and adjusted to their present values as of June 30, 2005 using a discount factor comparable to the pharmaceutical industry’s expected return from investment.
To estimate cash outflows, we used the final study report to estimate the cost of the trials, including investigative site costs, contract research organization costs, pharmaceutical company costs, and core laboratory costs. We partnered with two organizations to assist us in our estimates, Fast Track Systems, Inc. (Conshohocken, PA) and Covance Central Laboratory Services (Indianapolis, IN).
Fast Track Systems provided access to three separate global cost and procedure benchmarking databases drawn from over 240,000 negotiated investigator agreements, 25,000 finalized protocols in 800 indications and 3,000 contract research organizations10
. Investigative site, coordinating center, and internal pharmaceutical costs were estimated based on input of trial parameters including: trial phase, indication, trial locations, number of sites, screen failure percentage, number of enrolled patients, study procedures, overhead costs, document preparation, pre-study preparation and recruitment, investigator meetings, site initiation visits, site monitoring, site close-out, site management, project management and administration, data entry, data clean-up, database programming and transfers, generation and review of tables, statistical plan and analysis, integrated clinical/statistical report, regulatory audits, and drug distribution.
When clinical trials required the use of a central core laboratory, we obtained an estimate from Covance Central Laboratory Services11
internal pricing tool, which provides costs in an 8 service template including: database construction services, investigator training, collection services, transportation services, laboratory services, data services, clinical trials management, and specimen management. Drug shipment costs were included in the price of the trials, but costs for drug manufacturing and drug packaging were not.
Trial costs were estimated in 2005 dollars and did not require price adjustment. To adjust these cash outflows to after-tax values, we assumed that cash outflows (study costs) would be allowable expenses in income tax computation and that they would be taxed at the industry’s average rate (30%) 12
, which was varied between 25% and 35% in sensitivity analyses. Yearly sales data for each drug product was obtained from IMS Health, Inc (Fairfield, CT)13
from pharmaceutical sales data audits. 14
Data were obtained from either 2002–2004, or the last three years before patient exclusivity expired.
We used contribution margin 15
(sales revenue less variable costs) which represents funds available to support fixed costs and profit to estimate the incremental after-tax cash inflows accruing from investments in pediatric clinical trials. (e.g. a 45% contribution margin means that to sell an additional dollar worth of product, it costs the company an additional 55 cents in variable costs) To estimate net cash inflows from average annual IMS sales, we assumed a 10% sales discount rate, a 50% contribution margin, and a 30% tax rate. IMS reports gross sales and does not include discounts to managed care, we therefore adjusted the IMS data to reflect a 10% discount from gross sales (90% net sales). The contribution margin averages 45% in the pharmaceutical industry12
. However, the products in this study were nearing the end of their patent lifecycles and would be expected to have lower marketing and administrative costs. Thus, we assumed a 50% contribution margin (varied between 40% and 60% in sensitivity analyses). We assumed that cash inflows would be taxed at the industry average rate (30%, 25%–35% in sensitivity analyses).12
To avoid bias, we adjusted cash inflow and outflow estimates to account for differences in the timing of events. We used 2005 as our reference year and assumed that FDA final submissions for all products would occur on June 30th
, 2005. Cash outflows were adjusted for the time interval between the midpoint of each study’s duration and the reference date; and cash inflows were adjusted for the time interval between the reference date and the end of patent exclusivity. We selected a discount rate of 8% (0%–20% in sensitivity analyses) that is reflective of return on investment expectations in the pharmaceutical industry. A lower cost of capital of 8 % is used for the 2002–04 period because of lower interest rates on debt capital and lower returns on equity capital than was prevalent in the 1990s.12
As cash outflows occurred before the reference date, their values were inflated to account for the company’s lost opportunity costs. Conversely, because cash inflows occurred after the reference date, their values were deflated. We calculated the net economic return per Written Request by subtracting the discounted after-tax cash outflows from the discounted after-tax cash inflows associated with an additional 6 months of exclusivity. The net return to cost ratio was obtained by dividing the net economic return by the discounted after-tax cash outflow. Estimates were also calculated for 3 months of exclusivity.
We contacted companies to confirm estimates of costs and received validation on the condition that their product and the company were not identified. We did not include the cost of regulatory filing of the drug with the FDA, the costs of any pre-clinical work including juvenile animal toxicology studies, or the costs of developing a liquid formulation for pediatric use.