Welcome to the New Era of FDA Regulation

In recent days, I've investigated whether the FDA is approving as many new drugs as in previous years and whether the Vioxx saga has had any outwardly visible effects on the FDA. 

Today, we'll look at FDA drug approvals through the prism of drugmaker productivity. Specifically, we'll examine whether the pace of new drug approvals is being slowed by reduced pharmaceutical research and development, or whether it's a stricter FDA causing the lower number of approvals in recent years.

Drugmaker productivity up; new drug approvals down
The simplest way to measure this would be to match up the number of New Drug Applications that the agency reviews in any given year with the number of drug approvals in that year.

Unfortunately, the FDA has not released such data. The agency does release data on the number of new drug applications it receives in a calendar year and data on drug approvals, but because of the six- or 10-month lag between application filing date and FDA decision date, there's no way to get a precise figure for the number of new compounds that get reviewed each year.

Without this vital information, we're left to find another variable for drugmaker productivity. Fortunately, the FDA gives data on the number of clinical trials under way in the U.S. every year. That figure should be a relatively good proxy for drugmaker productivity and also a leading variable of New Drug Applications in later years.

Comparing the number of clinical trials under way to the number of new drugs approved may help us figure out if it's the FDA or drug developers that are responsible for the lower number of new drugs getting the OK to go to market.

Up until Merck's (NYSE:MRK) Vioxx was pulled from the market in late 2004, there was a relatively stable correlation (except in 2002) between the number of clinical trials and the number of approvals: It held steady in the range of eight drugs per 1,000 trials for most of these years.

Following the pulling of Vioxx, which would have had only a moderate impact on the 2004 approval ratio since it occurred in late September of that year, the number of clinical trials continued to soar (up nearly 50% from 2000 to 2006). This shows that drugmakers haven't reduced their research endeavors following the Vioxx safety issues.

In the two full years following the pulling of Vioxx, the ratio of FDA approvals to clinical trials dipped to the range of five approvals per 1,000 trials, whereas only once in the five years previous was the ratio in that range.

The fact that drugmaker productivity has gone up dramatically in recent years (as measured by the number of clinical trials under way) but drug approvals have been flat shows pretty well that it's the FDA and not drugmakers responsible for the lower amount of new drug approvals.

Combine this with the fact that drugmaker R&D spending has grown from less than $30 billion in 2001 to more than $43 billion in 2006, according to the PhRMA lobbying group, and it's clear that drugmakers are not letting up on the gas pedal in terms of their R&D activities.

One more important thing to consider is that the above numbers probably make the approvals-to-productivity ratio look prettier than it really is, since, in recent years, more and more drugmakers -- including Rule Breakers pick InterMune (NASDAQ:ITMN) -- have started doing at least some of their early-stage clinical trials outside the United States. These studies don't get counted in the FDA figures.

Forecasting the 2007 numbers
Assume the number of clinical trials under way in 2007 continues on the nearly 7% average growth rate that has occurred in the past six years. Then consider that even if the FDA approves BioMarin's (NASDAQ:BMRN) Kuvan and Neurocrine Biosciences' (NASDAQ:NBIX) indiplon compounds in December -- which would bring the total number of new drugs approved in 2007 to 25 -- the ratio of approvals to clinical trials would fall to 4.3 for the year.

To put the lower FDA approval rate in perspective: If the pharmaceutical and biotech industries were dealing with the pre-Vioxx FDA today, then based on a rate of eight approvals for each 1,000 clinical trials, and the aforementioned forecast of nearly 7% growth in clinical trials for 2007, there would be 47 new drugs approved in 2007, rather than the 25 or fewer we're likely see this year.

A more stringent FDA going forward
No definitive conclusions can be drawn from the data shown here, but the weight of the evidence is heavy. It definitely corroborates what many investors and drugmakers would describe as a new era of stricter FDA supervision.

Gone are the days when the FDA was willing to take a risk with an oncology compound such as AstraZeneca's Iressa after the company produced data from only a small phase 2 study. Indeed, the sagas of Dendreon (NASDAQ:DNDN) and GPC Biotech earlier in the year with their oncology compounds bears witness.  

Drugs that had no problem getting past European regulators, such as Novartis' (NYSE:NVS) diabetes treatment Galvus or Sanofi-Aventis' (NYSE:SNY) weight loss drug Zimulti, have been denied marketing approval by the FDA in recent months.

With the increased scrutiny on drug safety that Congress mandated earlier in the year with the new PDUFA regulations, the future is not going to be any easier for drugmakers trying to get their compounds past the FDA. 

Invest accordingly.

For another Foolish look at the data see Drugmakers Spinning Their Wheels.