Letter from the Secretary, HHS

Executive Summary

Background

Meeting the Legal Conditions for User Fees in FY 2001

User Fee Revenues

Obligation of User Fee Revenues

Carryover Balances

Total Costs of the Process for the Review of Human Drug Applications

Management Challenges for FY 2002

Appendices

Appendix A: Conditions for Assessment and Use of Fees

Appendix B: Exemptions and Waivers

Appendix C: Allowable and Excluded Costs for the Process for the Review of Human Drug Applications

Appendix D: Development of Costs for the Process for The Review of Human Drug Applications

The Honorable Richard Cheney
President of the Senate
Washington, D.C. 20510

Dear Mr. President:

Enclosed for your consideration is the annual financial report to the Congress required by the Prescription Drug User Fee Act of 1992 (PDUFA) as amended (section 104(b) of the Food and Drug Administration Modernization Act of 1997 (FDAMA)). This report covers fiscal year FY 2001, documenting how each of the conditions specified in PDUFA for continued collection of prescription drug user fees was met.

The report also presents the user fee revenues and related expenses for FY 2001, comparative data for earlier periods, and details the amounts carried over at the end of each year that remain available. In FY 2001, FDA collected $132 million in user fees, and spent $161 million, including balances collected in earlier periods that remained available. About 67 percent of the fees were spent for salaries and benefits. This infusion of human resources is the single most critical factor enabling FDA to meet the performance goals associated with PDUFA-goals that become increasingly more stringent each year.

In FY 2001 FDA experienced a sharp and unanticipated shortfall in revenues, due to an abrupt drop in the number of fee-paying applications submitted, even though industry submissions that do not pay fees and other aspects of FDA's review workload are steadily increasing. That requires FDA to also reduce fee revenue forecasts for FY 2002. The result is that the drug review program will have to use all of its reserve funds to meet operating costs in FY 2002. Reserves will be depleted when FY 2003 begins.

Challenges facing FDA in FY 2002 include carefully monitoring fee receipts and, if necessary, curtailing operations to manage within available resources-even if that means some goals may not be met. And because PDUFA expires at the end of FY 2002, and there will be no carryover balances, it is also imperative that PDUFA be reauthorized well in advance of September 30, 2002, to prevent serious disruption of FDA's drug review program.

Sincerely,

/s/

Tommy G. Thompson

Enclosure

The law requires the Food and Drug Administration (FDA) to report annually on the financial aspects of its implementation of the Prescription Drug User Fee Act of 1992 (PDUFA), as reauthorized by the Food and Drug Administration Modernization Act of 1997 (FDAMA). This report covers fiscal year (FY) 2001.

The PDUFA, as amended, specifies that the following three conditions must be satisfied each year in order for FDA to collect and spend PDUFA fees:

1. FDA's overall salaries and expenses appropriation, excluding fees, must exceed FDA's overall FY 1997 salaries and expenses appropriation (excluding fees and adjusted for inflation).
2. Fee revenues collected must be specified in Appropriation Acts.
3. FDA must spend at least as much from appropriated funds for the review of human drug applications as it spent in FY 1997, adjusted for inflation.

This report describes how those specific statutory conditions or "triggers" were met in FY 2001. The statements and tables included in this report also provide information on the user fee revenues and expenditures in FY 2001, and on the carryover balance. Comparative data for earlier periods are also provided.

For FY 2001, FDA collected $132.2 million in fees and, at the end of the year, FDA also had receivables of $6.2 million.

In FY 2001, FDA spent $160.7 million from PDUFA revenues-$28.5 million more than its net collections. This resulted from two events. The first was planned spending of carryover balances in order to fund adequate staffing levels to permit FDA to meet increasingly challenging PDUFA goals that involve a wide range of industry activities, not just review of the types of applications upon which the fees are based. The second was an unexpected and sharp drop in the number of applications in FY 2001 that paid fees, decreasing revenues by about $17 million. This caused FDA's carryover balances to drop to $35 million by the end of the fiscal year-the lowest level since the end of FY 1993.

The drop in fee-paying applications in FY 2001 has serious implications for operations in FY 2002. It causes the level of application fees projected for FY 2002 to drop, and that will also cause the level of both establishment and product fee revenues to drop-by about $22 million in aggregate. This will mean that virtually all of the $35 million in carryover balances will be consumed to support FY 2002 operations. There will be no carryover balances going into FY 2003. This drop in revenue is not an indication that overall FDA review workload has declined-only that a large and increasing number of FDA submissions do not pay fees. FDA overall review workload continues to increase. This drop in revenue is not an indication that overall FDA review workload has declined-only that a large and increasing number of industry submissions are in categories for which fees are not paid.

Challenges facing FDA in FY 2002 include carefully monitoring fee receipts and, if necessary, adjusting operations to manage within available resources. Since PDUFA expires at the end of FY 2002, and FDA does not anticipate having any carryover balances in FY 2003, it is important that PDUFA be reauthorized in advance of September 30, 2002, to prevent disruption of FDA's drug review program. Reauthorization is supported in the President's FY 2003 budget, and FDA will have a draft bill in the spring.

PDUFA authorizes FDA to collect fees from the pharmaceutical industry to augment appropriations spent on drug review. These additional resources are to be used to hire and support additional staff for the review of human drug applications so that effective drug products could reach the American public more quickly. PDUFA has been very successful and, with support from the pharmaceutical industry and the Administration, Congress amended and extended it through FY 2002.

Under PDUFA, as amended, an application fee must be submitted when certain new drug applications or biologic license applications are submitted. The application fee amount is set in statute, but is adjusted each year for cumulative inflation since FY 1997. In addition, FDA collects annual establishment and product fees. The law authorizes FDA to set those fees each fiscal year so that the total revenue FDA receives from each category equals the amount FDA expects to collect from application fees. Thus, a third of the fee revenue each year comes from application fees, a third from establishment fees, and a third from product fees.

PDUFA, as amended, also requires FDA to submit two reports to Congress each fiscal year. A performance report is to be sent within 60 days of the end of the fiscal year, and a financial report is to be sent within 120 days. The FY 2001 PDUFA Performance Report, which discusses FDA's progress in meeting the goals referred to in FDAMA, is being separately transmitted to Congress. This is FDA's FY 2001 PDUFA Financial Report, covering the period October 1, 2000 through September 30, 2001.

As required by statute, this report presents the legal conditions or "triggers" that must be satisfied before FDA can collect and spend the fees, and FDA's calculations showing how those conditions were met for FY 2001. This report also presents FY 2001 revenues and obligations from user fees and a summary statement of user fees by source (application, establishment, or product fees). The total costs applicable to the process for the review of human drug applications, as defined in FDAMA, are also presented, with the amounts paid from fee revenues and from appropriations.

In keeping with the requirements of the Chief Financial Officers Act of 1990, the Office of the Inspector General (OIG), Department of Health and Human Services, audits FDA's annual financial statements. The audit covers FDA's financial systems and funds, including PDUFA revenues and expenses. The OIG rendered unqualified audit opinions on FDA's financial statements for fiscal years 1998, 1999, and 2000. This is the most favorable category of auditor opinion. The OIG audit report on FDA's FY 2001 financial statement is expected to be available in February of 2002.

PDUFA, as amended, contains three legal conditions or "triggers" that must be satisfied each year before FDA can collect and spend user fees. FDA's calculations showing how those conditions were met for FY 2001 are summarized below and presented in more detail in Appendix A.

The first condition is that FDA's Salaries and Expenses Appropriation (excluding user fees) must meet or exceed FDA's FY 1997 Salaries and Expenses Appropriation (excluding user fees and adjusted for inflation). In FY 2001, FDA's Salaries and Expenses Appropriation (excluding user fees and excluding rent to GSA, which was also not included in the FY 1997 Appropriation amount) totaled $978,897,000. FDA's FY 1997 total Salaries and Expenses appropriation, excluding user fees, and adjusted as required by the statute, was $876,273,628. Therefore, since the FY 2001 amount is greater, the first condition was met.

The second condition is that the amount of user fees collected each year must be specifically included in Appropriation Acts. For FY 2001, FDA's Appropriation Act specified that $149,273,000 would come from PDUFA fees, in addition to sums provided in regular appropriations. The Appropriation Act specified that the fees collected could remain available until expended. Thus, the second condition was met.

The third condition is that user fees may be collected and used only in years when FDA also uses a specified minimum amount of appropriated funds for the review of human drug applications. The specified minimum is the amount FDA spent on the review of human drug applications from appropriations (exclusive of user fees) in FY 1997, adjusted for inflation. That amount, adjusted for inflation, is $158,211,813. As this report shows, in FY 2001 FDA obligated $162,691,657 from appropriated funds for the review of human drug applications, which exceeds the specified minimum amount. Thus, the third condition has been met.

Appendix A provides more detail on the calculations that show that these three statutory conditions were met.

The PDUFA specifies that fee revenues are to be collected from establishment, product, and application fees. The statute specifies annual application fee amounts and how they are adjusted each year for inflation. Fees for establishments and products are set each year so that the total amount of revenue collected from each category (establishment fees and product fees) equals the revenue FDA expects to collect from application fees that year.

Under PDUFA, any fees collected and appropriated but not spent by the end of a fiscal year continue to remain available to FDA to spend in future fiscal years. The balances carried over from year to year are covered in the section on carryover balances beginning on page 6. The following table provides a breakout of user fees by fee source during the past two fiscal years, and also reflects estimates of receivables.

Note that user fee revenues are reported in the year the fee was originally due-referred to as cohort years. For example, a fee due in FY 2000, even if it is received in FY 2001, is attributed to FY 2000 revenues. Totals reported for each year are net of any refunds for that year. Application fees collected for FY 2001 may include a few fees for applications that will not be filed until FY 2002

The Fees Receivable for FY 2000 of $210,699 includes deferred collections of $110,904, pending final resolution of waiver requests. Most of the FY 2001 accounts receivable are product and establishment fees billed near the end of the fiscal year. Fees receivable for FY 2001 also include deferred collections of $333,699 pending final resolution of waiver requests. A summary of exemption and waiver actions is included in Appendix B.

User fee revenues are expended only for costs necessary to support the process for the review of human drug applications, as defined in FDAMA. Allowable and excludable costs for the process for the review of human drug applications are defined in Appendix C. In FY 2001, FDA continued to improve and expedite the activities involved with the process for review of human drug applications, obligating $160,713,000 from user fees.

FDA dedicated 1,277 FTE's (Full Time Equivalents or staff-years) to the review of human drug applications in FY 1992, before PDUFA was enacted. A time reporting study was undertaken in 1993 to determine the percentage of time each division devotes to user fee related activities. This allowed calculation of FTE related costs. The percentages are updated regularly through additional time surveys, which parallel the method used by independent consultants in FY 1993. The development of these user fee related costs associated with the review of human drug applications is described in more detail Appendix D.

In FY 2001, PDUFA fees and appropriations paid for 1063 more FTE's than were used in 1992 for the process for the review of human drug applications, and 54 more FTE's than were funded in the preceding year. FDA's payroll costs paid from user fee funds in FY 2001 totaled $107,331,472-representing almost 67% of the funds expended. This includes all pay and benefits for the additional FTE's and costs of the FY 2001 payroll increases for the baseline FTE's.

A substantial amount of the remaining funds were spent on information technology (IT). FDA is engaged in an Agency-wide IT program to support the transition from a largely paper-based regulatory submission and review environment to an electronic environment. This effort is called the Electronic Regulatory Submission and Review (ERSR) program. ERSR is comprised of a variety of projects, each of which is designed to satisfy a different part of the overall PDUFA IT goal that:

the agency shall develop and update its information management infrastructure to allow, by FY 2002, the paperless receipt and processing of exemptions for investigational new drugs (IND's) and human drug applications….

The major ERSR project areas are described below.

• Standards and Guidance. These projects promote consistent exchange of electronic information between the FDA and external constituents. At the completion of FY 2000, several technical standards had been established and supporting guidance documents were provided to external constituents.
• Capability to Receive Electronic Submissions. These projects implement procedures and technology to support electronic submissions in lieu of paper. Progress in this area includes the establishment of Electronic Document Rooms that permit the receipt of electronic submissions in physical media format (e.g., CD-ROM, magnetic tape) from industry.
• Electronic Review. These projects enable FDA reviewers and field inspectors to conduct review activities in an electronic environment. Progress in this area includes the implementation of electronic document management systems that facilitate electronic collaboration between review staff and the expansion of existing management information systems that track the status of each review.
• Updated Infrastructure - These projects include the implementation of underlying technologies required to support the transition to a paperless review environment. Progress in this area included installing new computer hardware and software, increasing network capacity, updating the skills of technical support staff, and training for reviewers.

The total expenditure of $160,713,000 in FY 2001 is an increase of about 9% over FY 2000 amounts spent from fee revenue. This spending amount is consistent with the latest PDUFA II Five-Year Plan Update, and is in excess of the revenues FDA collected in FY 2001. Spending at this level was possible because FDA spent less than it collected in several earlier years, and the amounts carried over are available to FDA for spending on the drug review process in subsequent years, as explained in the next section of this report.

Under PDUFA and FDAMA, any fees collected and appropriated but not obligated by the end of a fiscal year continue to remain available to FDA in future fiscal years. These revenues are referred to as carryover balances. The net result of operations in FY 2001 decreased the carryover balances by $21,951,706.

The table below captures the changes in carryover balances over the course of PDUFA.

The balances above reflect cumulative cash at the beginning/end of each fiscal year, and net cash collected during each fiscal year for all cohort years. The figures do not include accounts receivable. The collections balance shown above for FY 2001 of $138,761,294 is substantially more than the FY 2001 collections balance on page 3 of $133,238,324. Most of this difference is the result of FY 2001 collections of amounts applicable to earlier cohort years.

There are also a number of claims on these carryover funds. Those claims (refunds and 2002 operating needs) are explained below. As a result of these claims, the carryover balances are expected to be virtually depleted at the end of FY 2002.

PDUFA prohibited FDA from keeping fees in excess of the amount specified in appropriations (collection ceiling) each fiscal year through FY 1997. Amounts collected that exceed collection ceilings through FY 1997 will be refunded. Under FDAMA, balances collected in excess of amounts specified in appropriations after FY 1997 may be kept, and used to reduce fee charges that would otherwise be made in a later fiscal year. The following table depicts net collections since FY 1993, collection ceilings specified in appropriations, and amounts to be either refunded or used to offset future collections.

As of September 30, 2001, collections have exceeded appropriations in FY's 1994 ($277), 1996 ($3,488) and 1997 ($126,312). A total of $1,656,596 of pre-1998 surplus collections was refunded in FY 2001, substantially decreasing the carryover balance from last year. Further refunds of remaining pre-1998 balances will not be made until all pending appeals from this period are resolved.

FDA's FY 1998 collections currently exceed the appropriations limit by $615,470. Some FY 1998 requests for refunds or waivers are still pending, however. If the net collections still exceed the appropriation limit after these waiver requests are settled, then FDA will set fees at a lower level in the future to offset these surplus collections.

In the past, FDA has kept some funds set aside as a reserve for future operations and for refunds for pending and future waiver requests. Due to both a revenue decrease in FY 2001 (application fees were about $17 million below forecasts) and the fact that fee-setting mechanisms in PDUFA will cause revenues in FY 2002 to fall by about $22 million below earlier forecasts, there will be virtually no reserves left at the end of FY 2002.

Virtually all of the $35 million from carryover balances will be allocated to FDA components in FY 2002, in order for FDA to be able to sustain its current level of operations and meet the PDUFA II goals, several of which are increasingly challenging in the final year. Goals with higher standards for FDA in 2002 include review times for all standard original submissions, review times for manufacturing supplements requiring prior approval, review times for resubmitted applications.

The chart above summarizes all the claims on the carryover balance.

At the end of FY 2001, in addition to the cash collected, FDA had receivables totaling $6,871,950. An allowance for loss on accounts receivable has been recorded at $1,086,402, which consists of $120,500 of accounts receivable greater than one year in arrears, and $965,902 that is deferred and will not be payable until a final decision is made on pending waiver requests.

Waivers or exemptions that will be granted will have to be met from cash realized as accounts receivable materialize. Given past experience, amounts received from accounts receivable balances should adequately cover the cost of such waivers and exemptions.

The following table presents the costs for the review of human drug applications for FY's 2000 and 2001 by organizational component. This presents the full cost of the process for the review of human drug applications, including costs paid both from appropriations and from user fee revenues. The amounts are based upon obligations recorded as of the end of each fiscal year. In the past, over 81 percent of amounts obligated are expended within one year, and 96 percent within two years. Thus, obligations represent an accurate measure of costs.

The costs for all components rose slightly in FY 2001. This increase primarily reflects mandatory increases in pay rates for federal employees.

The Agency General and Administrative Costs, though up slightly, have continued to decline as a percent to total spending on the drug review process. As reflected in Appendix D, the percent of process costs devoted to this area since 1998 has been reduced by 23%.

Since 1990 FDA has cut in half the time it takes to evaluate new drugs, while still maintaining its traditional rigorous standards for drug safety and effectiveness. This improvement, coupled with other attractive features of the US market, has led to an increase in the number of new drugs launched first in the US before they are available in other countries, making new therapies available first to Americans. This is a dramatic shift from the previous 20 years in which most new drugs were available in America years after they were available in other countries. Without the funds derived from PDUFA fees, the substantial progress FDA has achieved in improving and expediting the review of human drug applications would not have been possible.

Notwithstanding these successes, the agency is encountering challenges in trying to meet the PDUFA II goals.

The most significant tactical challenge facing FDA in FY 2002 is the shortfall in fee revenue available. In FY 2001 FDA collected $17 million less in application fees than projected in the Federal Register fee announcement in December 2000. Revenues fell due to both a drop in the number of applications received and an increase in the percent that were exempt from fees or received waivers. Total applications (measured in full application equivalents) fell about 15% from the previous year's level. That drop was exacerbated by the increase in the percent of applications that were exempt from fees or received fee waivers. This percent jumped to 35% in FY 2001, from 19% in FY 1999 and 22% in FY 2000.

The $17 million shortfall in FY 2001 is further exacerbated by the impact it has on fee revenue in FY 2002. The workload adjuster mechanism in PDUFA will cause fee revenue projected in FY 2002 to decline and thus lower the revenue targets for both establishment fees and product fees. Product and establishment fees are set each year so that fee revenues form each category equal the application fee revenue estimate. The result is that we now expect to collect about $22 million less in FY 2002 than projected in April of FY 2001. The shortfalls in FY 2001 and FY 2002 together total $39 million. At the end of FY 2002 FDA will have virtually no carry over balances available to fund any part of FY 2003 needs.

The combination of reduced income and the absence of carryover balances makes it important that PDUFA be reauthorized before the end of FY 2002, to prevent disruption of the drug review program. Without further legislative action PDUFA, and the revenues it provides, will expire at the end of FY 2002. Reauthorization is supported in the President's FY 2003 budget, and FDA will have a draft bill ready in the spring.

Another challenge FDA has faced in PDUFA II is that the agency underestimated the resources it would need to meet the demanding PDUFA II goals. The set of goals associated with meeting management have been much more resource intensive than FDA anticipated. The goals require scheduling meetings within two weeks of a request, holding the meeting within 30 to 75 days, depending on the type of meeting, and completing written minutes within 30 days. There have been more of these meeting requests than expected, they often involve a large number of FDA staff representing several professional specialties, and the meetings may result in significant commitments. Focus on these numerous short-term goals has been very time consuming, and their completion requires most of the same staff trying to meet application review goals. Also, reducing the review times at the margin has been much more costly than originally anticipated. The agency will require either substantial additional resources to meet these goals in the future, or the goals will have to be scaled back to levels sustainable within the available resource levels. Workload under PDUFA II continued to rise. Many of the activities covered by PDUFA II performance goals do not, themselves, generate fees, yet the workload in these areas has been substantial. For example, the numbers of commercial IND's and manufacturing supplements have increased, and the number of meetings, responses to clinical holds and special protocol assessments, all of which have specific PDUFA II performance goals, have been higher than anticipated. The new pediatric and fast track provisions of FDAMA, which were not supported by additional funding, have also contributed significantly to this increased workload. FDA does not foresee any performance gains in the absence of resources to meet the increased workload.

Workload under PDUFA II continued to rise. Many of the activities covered by PDUFA II performance goals do not, themselves, generate fees, yet the workload in these areas has been substantial. For example, the numbers of commercial IND's and manufacturing supplements have increased, and the number of meetings, responses to clinical holds and special protocol assessments, all of which have specific PDUFA II performance goals, have been higher than anticipated. The new pediatric and fast track provisions of FDAMA, which were not supported by additional funding, have also contributed significantly to this increased workload. FDA does not foresee any performance gains in the absence of resources to meet the increased workload.

FDA efforts to meet the new PDUFA II goals with less resources than the goals require has led to an unintended consequence regarding approval times of standard new drug applications and biologic license applications. Approval times have begun to increase as a result of the fact that more applications are taking multiple review cycles to reach approval. The causes are multi-factorial. In a number of cases, FDA believes the delays may be due to the fact that reviewers, pressed to meet the new PDUFA II goals for drug development (e.g., meetings, special protocol assessments, and responses to clinical holds), have had less time to devote to resolving problems with these standard applications in time to meet the action goal date. As a result, the application must undergo an additional review cycle with its attendant timeframes and goals. Our statistics on this trend are preliminary and we must watch it closely. However, we must make sure that if our user fee program is to continue, it must be on a sound financial footing and based on reliable estimates of workload and resources.

Assuring that enough appropriated funds are spent on the process for the review of human drug applications to meet requirements of PDUFA, and at the same time spending our resources in a way that best protects the health and safety of the American people has been difficult. Each year, PDUFA triggers require the amount that FDA must spend on the drug review process to be increased by an inflation factor, whether or not FDA's appropriation has been increased to cover the cost of mandatory Federal pay raises. Spending enough from appropriations on the drug review process to meet the PDUFA triggers challenges FDA in managing the resources available in a way that best protects the public health and merits public confidence.

In FY 2002 FDA will continue working toward the goal of receiving applications electronically by the end of the fiscal year. This major change in how FDA does business should provide significant savings to industry. Setting standards and sequencing the development and implementation of the necessary infrastructure to achieve this goal demands careful planning, vigilance with respect to newly emerging technologies, and constant monitoring.

Finally, in FY 2002 FDA will continue to be challenged by the need hire, train, and retain qualified reviewers. FDA's experienced reviewers are in demand and have excellent employment opportunities available to them. The Agency continued to experience review staff attrition of about 10 percent in FY 2001. FDA implemented a number of initiatives to reduce this attrition, including both retention bonuses for reviewer mathematicians and statisticians and efforts to facilitate review work from alternative work sites. Retaining review staff and recruiting and training new review staff is a constant challenge. Yet the agency's ability to attract and retain the best and the brightest in medicine and science is critical to maintaining the agency's recognized gold standard in new product safety.

Appendices