Life Science Compliance Update

December 02, 2014

A Tough Road: Cost To Develop One New Drug Is $2.6 Billion; Approval Rate for Drugs Entering Clinical Development is Less Than 12%

High cost

Developing a new prescription medicine that gains marketing approval is estimated to cost drugmakers $2.6 billion according to a recent study by Tufts Center for the Study of Drug Development. This is up from $802 million in 2003—equal to approximately $1 billion in 2013 dollars, and thus a 145 percent increase in the ten year study gap. Furthermore, while the average time it takes to bring a drug through clinical trials has decreased, the rate of success has gone down by almost half, to just 12 percent.

Tufts breaks down its $2.558 billion figure per approved compound to include approximate average out-of-pocket cost 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 research and development 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 safety and long-term side effects in patients” as required by the FDA as a condition of approval.

Tuft’s analysis was developed from information provided by 10 pharmaceutical companies on 106 randomly selected drugs that were first tested in human subjects anywhere in the world from 1995 to 2007.

“Drug development remains a costly undertaking despite ongoing efforts across the full spectrum of pharmaceutical and biotech companies to rein in growing R&D costs,” stated Joseph A. DiMasi, director of economic analysis at Tufts CSDD and principal investigator for the study. “Because the R&D process is marked by substantial technical risks, with expenditures incurred for many development projects that fail to result in a marketed product, our estimate links the costs of unsuccessful projects to those that are successful in obtaining marketing approval from regulatory authorities.”

According to DiMasi, rising drug development costs have been driven mainly by increases in out-of-pocket costs for individual drugs and higher failure rates for drugs tested in human subjects. This explanation stuck out to Don Seiffert, editor of BioFlash, who listened to DiMasi’s presentation last week:  “Based on an analysis of 1,442 experimental drugs that were in clinical tests in recent years through the end of 2013, DiMasi said the overall chance that a drug entering clinical development will be approved for marketing is just under 12 percent.”

"Approximately seven out of eight compounds that enter the clinical testing pipeline will fail in development," DiMasi said. "Put another way, you need to put an average of 8.5 compounds in clinical development to get one approval."

Seiffert notes that DiMasi arrived at the 12 percent figure using a "weighted average, since as of the study, just 7 percent of the 1,442 drugs had actually been approved. Fully 80 percent had been abandoned by the companies developing them, and the other 13 percent were still in active development. DiMasi said it's likely that many of the drugs in later development will eventually earn approval, hence the overall 12 percent rate."

The previous study set a success rate for drugs that enter human trials at 21.5 percent.

According to DiMasi, factors that likely have boosted out-of-pocket clinical costs include increased clinical trial complexity, larger clinical trial sizes, higher cost of inputs from the medical sector used for development, greater focus on targeting chronic and degenerative diseases, changes in protocol design to include efforts to gather health technology assessment information, and testing on comparator drugs to accommodate payer demands for comparative effectiveness data.

Consumer Advocate Groups Scrutinize Study

After the Tufts press release, a number of consumer advocates and academics took various shots at the data. James Love of Knowledge Ecology International believes the study is "long on propaganda, and short of details." Love urges readers to "put some pressure on Tufts to provide more details of what the data looks like." He references the most recent industry funded study on drug costs, from 2012, entitled "The R&D Cost Of A New Medicine," published in the Office of Health Economics (OHE). That study found R&D cost to be $1.506 billion. "[That] report was 98 pages," he states. "So far, we have a press release of 579 words" from Tufts.

Love questions a number of aspects of the study, including the fact that the study assumes that NIH provided no funding in the pre-clinical development of drugs. Furthermore, Love states that “we don’t know how many patients were in the trials (that were used to calculate the estimate) or how much money was claimed to have been spent per patient in the trials. Since the entire estimate was based upon the costs of the trials, we don’t have any idea of what the sample looked like.”

DiMasi responded to some of these critiques in the Wall Street Journal:

[T]he "OHE analysis was based on a small sample (with regard to clinical testing) of projects that were in some phase of clinical development from 1997 to 1999 and followed only to 2002.  The data for our study are effectively much more recent than the data used for the OHE report.

"What we are measuring is what private developers actually spent on development.  NIH research is complementary.  If the NIH does some basic research, or even clinical research, that has findings that developers find interesting and useful, then the cost of that NIH research is just part of the social cost of drug development.

"The social cost is the private cost PLUS what governments and non-profits spend that somehow contributes to the discovery and development of new drugs. If private developers spend less than they otherwise would because of the NIH research, then that is captured in our estimate because we are only measuring what private developers spent."

View the Tufts slide show here for DiMasi's methodology and calculations.

September 24, 2014

False Claims Act: Device Maker Settles For $8 Million For Allegedly Selling Products Manufactured in Malaysia

Virginia rotunda

An interesting False Claims Act issue cropped up in a recent $8 million settlement involving U.K.-based medical device manufacturer Smith & Nephew. The company allegedly violated the U.S. Federal Trade Agreement Act by selling orthopedic devices to the Department of Veteran’s Affairs that were manufactured in Malaysia, a country that has not executed a trade agreement with the U.S. This implicated the False Claims Act because Smith & Nephew allegedly certified that they were compliant with the Trade Agreement Act. The settlement is reportedly the first medical device “country of origin” case.

Trade Agreement Act and the False Claims Act

The U.S. Federal Trade Agreement Act (TAA) generally requires the United States to purchase only “U.S.-made or designated country end products.” The Act requires contractors to certify that each end product meets the applicable requirements. “End products” are defined as “those articles, materials and supplies to be acquired for public use.”

Several countries that are major suppliers of goods or services to the U.S. market, such as China, India, Malaysia, Thailand, and Taiwan, are not “designated countries” within the definition of the TAA. Therefore, items that are considered end products of those countries are not eligible for being placed on GSA schedules unless no U.S.-made or designated country end products are available.  

Qui tam whistleblowers and the United States have brought many successful False Claims Act lawsuits against federal contractors arising from violations the Trade Agreements Act. The FCA was enacted to provide the government with restitution for losses sustained as a result of fraud. It also authorizes whistleblowers (often former or sometimes current employees) to bring an action on behalf of the United States and share in the recovery.

Government contract competitors or former employees have brought qui tam actions alleging that the manufacturer knew or acted with reckless disregard that they were selling the government products that violated the TAA.

Smith & Nephew Case

In case at hand, the U.S. government declined to intervene in the case, which is a recurring trend we are noticing.  The whistleblower, Sam Cox, opted to litigate the case without the assistance of the government.

Cox was a former information technology manager of S&N who claimed that his former employer violated the TAA by selling the Department of Veterans Affairs orthopedic devices made in Malaysia. The TAA restricts sales to federal agencies to products only made in the U.S., or in countries which have standing trade agreements with the U.S., which Malaysia does not have.

“Today's settlement sends a clear message to those medical device companies that routinely violate the Trade Agreements Act by misrepresenting the ‘country of origin’ of goods sold under contract to U.S. Government agencies,” stated H. Vincent McKnight, Jr., Co-Chair of Sanford Heisler's whistleblower practice, which represented Cox. 

Other Developments under the Trade Agreements Act

On August 29, 2014, the U.S. Court of Appeals for the D.C. Circuit upheld the dismissal of a qui tam suit under the False Claims Act in United States ex rel. Folliard v. Government Acquisitions, Inc. The Circuit held that a contractor did not “knowingly” make a false claim regarding the country of origin of certain products when it reasonably relied upon the country of origin certifications provided by its distributor.

The whistleblower in this case alleged that government contractor, Govplace, violated the TAA by selling computer and IT products to the government that did not originate in the US or designated countries. These sales could be considered “false claims.”

Govplace acquires many of the products listed in its schedule contract from a distributor, Ingram Micro, which expressly certified that its products are TAA compliant. The relator in this case alleged that certain products acquired from Ingram Micro were actually manufactured in China, a non-designated country. The relator alleged that Govplace acted with reckless disregard in relying on Ingram Micro’s certifications.

The district court, equating reckless disregard to “an extreme version of ordinary negligence,” found that Govplace’s reliance on certifications from its distributors did not qualify, absent a showing that Govplace had reason to question those certifications. The National Law Review notes that the Circuit rejected two main pieces of evidence offered to demonstrate Govplace’s reliance was unreasonable: (1) an email from a manufacturer to Govplace concerning the possible foreign origin of a product, which was received only after the sale to the Government; and (2) a price list from an Ingram Micro competitor, allegedly demonstrating inconsistencies in the origin of the products at issue. The relator was unable to demonstrate Govplace had ever read this price list. 

“A contractor like Govplace is ordinarily entitled to rely on a supplier’s certification that the product meets TAA requirements,” the Court noted. Govplace participated in Ingram Micro’s “Pass Through Program,” through which Ingram Micro expressly certified compliance with the country of origin laws. Furthermore, the court found that the GSA “implicitly approved” of Govplace’s reliance on the Program’s certifications during Contractor Administrative Visits.

Arnold and Porter provided thoughtful commentary on the implications of this case as well:

“The D.C. Circuit's decision represents an important step in limiting the sweeping approach that the government and relators often take to the concept of ‘reckless disregard.’ Nonetheless, reasonable reliance remains a fact-specific inquiry and contractors should apply appropriate diligence when vetting any supplier. As set forth in more detail in the underlying District Court decision, Govplace’s contract compliance team undertook significant due diligence regarding Ingram Micro’s methodology for assuring TAA compliance. Contractors who intend to rely on supplier certifications would be prudent to undertake similar diligence and to document the steps they have taken.”


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