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The odds of an experimental drug making it from the discovery stage to the pharmacy shelf is probably a lot smaller than you realize.

According to a report published in online journal Medscape in 2001, just one out of every 5,000 to 10,000 experimental compounds that enters preclinical trials will be approved by the Food and Drug Administration. If a drug is lucky enough to make it into clinical trials (i.e., testing in humans), nearly 90% will wind up failing.

Mind you, these failures can come after years of extensive research and testing -- they don't always happen early in the development process. Based on a 2014 report from the Tufts Center for the Study of Drug Development, it costs $2.6 billion to develop a drug from the discovery stage to approval (nearly half of which is estimated to be intangible time costs). Of course, we should keep in mind that the Tufts Center is primarily funded by the pharmaceutical industry, so its estimates may not be without some inherent bias. Nonetheless, these are eye-popping statistics all the way around.

Clinical trial success rates rise for the first time in more than a decade

Now here's the great news: For the first time in more than a decade, the clinical trial success rate is improving, according to a new three-author analysis that was published in Nature earlier this year.

Authors Katarzyna Smietana, Marcin Siatkowski, and Martin Møller used Informa's Pharmaprojects database to track the clinical and regulatory phase progression of more than 9,200 compounds between 1996 and 2014, ultimately finding that nearly 90% of clinical trials end in failure. More importantly, though, the success rate of clinical trials rose between 2012-2014 to 11.6% from an all-time measured low of just 7.5% between 2008 and 2011. The most recent data is only a two-year average, whereas the previous data points have been three-year averages, as you can see below.

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Data source: "Trends in Clinical Success" via Nature. Chart by author. 

As we would expect, clinical success from phase 1 to launch grew for both phase 2 and phase 3 trials over the previous period. Success in phase 3 trials in 2012-2014 improved to 64% from 60% between 2008 and 2011, while phase 2 success has risen nearly 10% from the trough of the previous period to approximately 40%.

We still have a long way to go to get back to the high clinical approval success rate experienced between 1996 and 1999, but this is a clear step in the right direction in terms of improving patient quality of life and bringing innovative new treatment options to market.

Why clinical trial success rates have made an about-face

You might be wondering what the driving force is behind improved clinical success rates. I'd opine that it's a confluence of factors.

To begin with, the sizable bounce in clinical success rates from 7.5% in the 2008-2011 period to 11.6% in the 2012-2014 period could partly be explained by economic conditions during the two periods. The Great Recession, which was the worst recession the U.S. had witnessed in nearly 70 years, wreaked havoc on pretty much every facet of business. Pharmaceutical and biotech companies pared back their research and development spending during the recession, which could have led to more strategic budgeting that paid off years down the road. With drug developers pruning their pipelines and angling their investment dollars at only the most promising projects from 2008-2011, the report notes that clinical trial success rates have subsequently moved higher as these trials reach completion in later years. 

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Second, we've witnessed considerable growth in M&A in the drug space. In 2015, there was a total of 166 mergers and acquisitions, which is a record for the biotech and pharmaceutical industries. Mergers can help combine complementary products and pipelines and further facilitate research, boosting clinical success rates.

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Collaborations in the drug space have also arguably increased. We only need to look at a biotech giant like Celgene for evidence. Celgene has more than 30 ongoing collaborations across oncology, inflammation, and immunology. Though it's dangled some very large milestone carrots (sometimes in the billions of dollars), it could be well worth it for Celgene if a partner's first-in-class drug and Celgene's marketing prowess can come together. According to the report, about a fifth of all in-licensed drugs in phase 1 trials successfully made it to market in 2014, whereas non-licensed experimental drugs had a success rate that was approximately 8 percentage points lower.

Finally, we can also give credence to the inherent pricing power of drug companies in the U.S. for possibly driving innovation and approvals. The U.S. has 10 factors that are conducive to high drug prices. In recent years, specialty drug prices (e.g., cancer and diabetes drugs) have been soaring at well above the medical inflation rate, which has encouraged drug developers to invest in previously stagnant therapeutic indications such as cardiovascular disease.

For instance, Amgen (NASDAQ:AMGN) recently brought Repatha, an injectable PCSK-9 inhibitor, to market. Amgen's injectable drug provided LDL-cholesterol clearance (the bad kind) of around 60% in clinical trials, and it has an opportunity to become an LDL-C-lowering staple in the years to come if its long-term cardiovascular study pans out as superior to the current standard of care.

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The burning question

The big question is whether the clinical success rate can continue to grow in subsequent rolling three-year periods. While this is nothing more than a wild guess at this point, I'd say modest clinical success rate growth is possible, but it'll require two key factors to be successful.

To begin with, we'll need to see a continued upward tick in collaborative activity in the drug development space. The good news is that we're seeing a number of new drugs hitting pipelines or pharmacy shelves in the oncology space that are conducive to combination studies. This is especially true of cancer immunotherapies, which are designed to remove the immunosuppressant quality of cancer cells and expose them to the full brunt of a patient's immune system. We're also seeing encouraging collaborative activity from Big Pharma, which has arguably been searching for new avenues to growth following the patent cliff.

The other factor that will be critical is whether prescription drug reform measures are passed in Congress. President-elect Donald Trump recently expressed displeasure with the state of drug pricing in the U.S. and vowed during an interview with Time to "bring down drug prices." Unfortunately, there's a push-pull to drug pricing in America. Pushing down on prices could discourage R&D, which is bad for investors and especially bad for patients. Allowing drug developers to keep their pricing power weighs on insurers and the consumer, but it also encourages heavy reinvestment. If drugmakers' pricing power is mostly left unchanged, I'd expect R&D investment to drive innovation and clinical success.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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