Letter from the Secretary, HHS

Executive Summary

Background

Meeting the Legal Conditions for User Fees in FY 2002

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 2003

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

Honorable Richard Cheney
President of the Senate
United States 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) 2002, 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 2002, comparative data for earlier periods, and details the amounts carried over at the end of each year that remain available. For FY 2002, FDA collected $143 million in user fees, and spent $162 million. The spending included balances collected in earlier periods that remained available. Almost 70 percent of the fees was 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.

We are pleased that Congress enacted the reauthorization of PDUFA (PDUFA III) through FY 2007 last June, well in advance of the expiration of PDUFA II. Beginning in FY 2003, PDUFA III authorizes higher levels of fee revenue to support the drug approval process.

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 or PDUFA II). This report covers fiscal year (FY) 2002.

The PDUFA II 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 2002. The statements and tables included in this report also provide information on the user fee revenues and expenditures in FY 2002, and on the carryover balance. Comparative data for earlier periods are also provided.

For FY 2002, FDA collected $143.3 million in fees and, at the end of the year, FDA also had receivables of $1.8 million.

In FY 2002, FDA spent $161.8 million from PDUFA revenues—$18.5 million more than its net collections for the year. This resulted from planned spending of carryover balances in order to fund staffing levels to permit FDA to meet increasingly challenging PDUFA goals that involve a wide range of activities, not just review of the types of applications for which fees were paid.

A drop in fee-paying applications in FY 2001 caused the projected level of fees to be collected for FY 2002 to drop by about $22 million below earlier projections. This drop in revenue is not an indication that the overall FDA review workload has declined—only that a large and increasing number of industry submissions were in categories for which fees were not paid. However, the drop in projected revenues forced FDA to constrain expenditures in FY 2002 in order to assure that funds would be sufficient to pay employees working in the drug review process.

Recognizing the necessity of reauthorizing PDUFA before the end of FY 2002 to assure continuity of operations, Congress enacted the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which includes the Prescription Drug User Fee Amendments of 2002 (PDUFA III) reauthorizing user fees through FY 2007. The President signed PDUFA III into law on June 12, 2002. Challenges facing FDA in FY 2003 include hiring and training additional staff to meet the PDUFA III goals. Until the FY 2003 appropriation was enacted, however, spending under terms of a series of continuing resolutions delayed the hiring of additional staff.

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

Under PDUFA II an application fee must be submitted when certain new drug applications (NDA’s) or biologic license applications (BLA’s) 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. PDUFA II 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 II 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 2002 PDUFA Performance Report, which discusses FDA’s progress in meeting the goals referred to in PDUFA II, is being separately transmitted to Congress. This is FDA’s FY 2002 PDUFA Financial Report, covering the period October 1, 2001 through September 30, 2002.

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 2002. This report also presents FY 2002 revenues and obligations from user fees and a summary statement of user fees by source (application, establishment, or product fees). The total costs of the process for the review of human drug applications, as defined in PDUFA II, are also presented—both the costs paid from fee revenues and the costs paid 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 issued unqualified audit opinions on FDA’s financial statements for fiscal years 1998 through 2002. This is the most favorable category of audit opinion.

PDUFA II 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 2002 are summarized below and presented in more detail in Appendix A.

The first condition is that FDA's overall Salaries and Expenses Appropriation (excluding user fees) must meet or exceed FDA's overall FY 1997 Salaries and Expenses Appropriation (excluding user fees and adjusted for inflation). In FY 2002, FDA’s overall Salaries and Expenses Appropriation (excluding user fees and excluding rent to GSA, which was also not included in the FY 1997 Appropriation amount) totaled $1,083,854,000. FDA’s FY 1997 total Salaries and Expenses appropriation, excluding user fees, and adjusted as required by the statute, was $905,411,978. Therefore, since the FY 2002 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 2002, FDA’s Appropriation Act specified that $161,716,000 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 $163,377,089. In FY 2002, FDA obligated $185,815,399 from appropriated funds for the review of human drug applications. Since this amount exceeds the specified minimum amount, the third condition has been met.

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

PDUFA II 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 II, 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 2001, even if it is received in FY 2002, is attributed to FY 2001 revenues. Totals reported for each year are net of any refunds for that year.

The Fees Receivable for FY 2001 of $289,848 include deferred collections of $116,779, pending final resolution of waiver requests. Most of the FY 2002 accounts receivable are product and establishment fees billed near the end of the fiscal year. Fees receivable for FY 2002 also include deferred collections of $253,424 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 PDUFA II. Allowable and excludable costs for the process for the review of human drug applications are defined in Appendix C. In FY 2002, FDA obligated $161,812,100 from user fee revenues.

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 in Appendix D.

In FY 2002, PDUFA fees and appropriations paid for 1,060 more FTE’s than were used in 1992 for the process for the review of human drug applications. FDA’s payroll costs paid from user fee funds in FY 2002 represented over 70 percent of the funds expended. This includes all pay and benefits for the additional FTE’s and costs of the FY 2002 payroll increases for all drug review process 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 investigational new drugs (IND’s) and human drug applications, as defined in PDUFA, and related submissions.

The major ERSR project areas and FY 2002 activities are described below.

• Standards and Guidance. These projects promote consistent exchange of electronic information between the FDA and external constituents. In FY 2002, FDA continued participation in the International Conference on Harmonization (ICH) expert working groups focusing on electronic standards for transmission of regulatory information. Development of the electronic common technical document for the technical content of sections relevant to the IND/NDA/BLA was initiated. Similar development was also started on general administrative information and labeling. The FDA participated in international standards development organizations working on data standards for clinical study data.
• Capability to Receive Electronic Submissions. These projects implement procedures and technology to support electronic submissions in lieu of paper. In FY 2002, written guidance was provided for industry to follow in preparing various types of electronic submissions. Additional work was done toward improving the efficiency of electronic submissions for both industry and the agency by harmonizing the technology used for submission of human drug applications with the submission of exemptions for IND’s and other related submissions. Industry training was provided at technical workshops and IT conferences hosted by third-party organizations. Working collaboratively with program staff, IT staff provided input and assistance for these activities.
• Electronic Review. These projects enable FDA reviewers and field inspectors to conduct review activities in an electronic environment. In FY 2002, electronic submissions that conform to the established standards and industry guidance were transmitted via acceptable media to FDA. In FY 2002, major enhancements were initiated to systems developed to provide an automated means for creating, managing, and archiving internally generated review documents. In addition, enhancements continued on systems that track the status and progress of submissions sent to FDA, generate mandatory user fee reports, and enable tracking of milestones and workload statistics for improved management and accountability.
• Updated Infrastructure. These projects include the implementation of underlying technologies required to support the transition to a paperless review environment. In FY 2002, FDA’s PDUFA IT systems were supported by an infrastructure including standard hardware and software (i.e., desktops, networks, office automation tools, servers). FDA’s standard desktop software suite for the reviewer community is in compliance with FDA’s information systems architecture initiative. In addition, foundational support, such as training and technical support, was provided to the FDA review community.

The total expenditure of $161,812,100 in FY 2002 is an increase of less than 1 percent over FY 2001 amounts spent from fee revenue. This spending amount is about $25 million lower than the latest PDUFA II Five-Year Plan Update, but is still in excess of the revenues FDA collected in FY 2002. This change in the spending plan in FY 2002 was necessary because FDA collected less revenue than expected in FY 2001 due to a drop in application fee revenues causing PDUFA II formulas that projected revenue in FY 2002 to drop by an additional $22 million below earlier projections. In response to these financial realities, FDA constrained expenditures in FY 2002, in order to assure that funds would be available to continue to pay existing staff working on the drug review process for the entire year. The formulas that caused much of this reduction in fee revenues in FY 2002 have been amended in the PDUFA III reauthorization for the next 5 years that was signed by the President on June 12, 2002.

Under PDUFA and PDUFA II 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 2002 decreased the carryover balances by $12,733,161.

The table below captures the changes in carryover balances from FY 1993.

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 2002 of $149,078,939 is substantially more than the FY 2002 collections balance on page 3 of $143,331,211. Most of this difference is the result of collections during FY 2002 of amounts applicable to earlier cohort years.

There are also a number of claims on these carryover funds. Those claims are explained below.

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 must be refunded. A total of $6.3 million surplus collections from this period were refunded in FY 2000 and FY 2001.

Under PDUFA II, collections in excess of amounts stated in appropriations after FY 1997 may be kept, and used to reduce fees that would otherwise be assessed in a later fiscal year. The following table depicts net collections since FY 1993, collection ceilings specified in appropriations, and amounts that may be either refunded or used to offset future collections.

RESERVE FOR REFUNDS AND OFFSET FOR FUTURE COLLECTIONS

As of September 30, 2002, collections have exceeded appropriations in FY’s 1994 ($277), 1996 ($3,488) and 1997 ($126,312). Further refunds of remaining pre-1998 balances will not be made until all pending appeals from this period are resolved, but $130,077 must be kept in reserve for potential refunds until these appeals are resolved or refunds are made.

FDA’s FY 1998 collections currently exceed the appropriations limit by $634,061. 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. Therefore, this $634,061 must be kept in reserve as an offset for future collections until these requests are settled.

The table below provides a summary of carryover balances as of September 30, 2002. Due to a change in PDUFA III law requiring establishment and product fees to be paid for FY 2003 and future years by the first of the fiscal year, FDA no longer needs to have at least a 3-month reserve for future operations at the end of each fiscal year—at least until FY 2007. The carryover amount shown as available for allocation in the table below is enough to fund estimated FY 2003 operations for approximately 1.2 months.

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.

At the end of FY 2002, in addition to the cash collected, FDA had receivables totaling $2,863,469. An allowance for loss on accounts receivable has been recorded at $557,159, which consists of $120,366 of accounts receivable greater than one year in arrears, and $436,793 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 or from available carryover balances. Given past experience, amounts received from accounts receivable balances and available carryover 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 2001 and 2002 by organization 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 except Field Inspection and Investigation rose slightly in FY 2002. This increase primarily reflects mandatory increases in pay rates for federal employees. The decrease in field inspection and investigation costs is due to the recent decrease in the number of applications submitted, and increased reliance on recently completed inspection reports, if they are satisfactory, instead of automatic new pre-approval inspections.

The Agency General and Administrative Costs, though up slightly from FY 2001 levels, have declined over the 5 years of PDUFA II as a percent of total spending on the drug review process. As reflected in Appendix D, the percent of drug review process costs devoted to agency general and administrative costs since 1998 has been reduced by 21 percent.

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 U. S. market, has led to an increase in the number of new drugs launched first in the U. S. 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.

The agency is gratified that Congress and the Administration have worked together with the agency and its stakeholders to achieve timely reauthorization of PDUFA for the next 5 years. On June 12, 2002, the President signed the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which includes the Prescription Drug User Fee Amendments of 2002 (PDUFA III) reauthorizing user fees and assuring the continuation and enhancement of the of prescription drug user fee program through FY 2007.

Under PDUFA III a number of changes were made to PDUFA II. A more stable fee structure and increased fee revenues should provide FDA with the resources needed both to continue to meet PDUFA II goals and to embark on several new PDUFA III initiatives aimed at further enhancing the drug review program.

The most significant tactical challenge facing FDA in FY 2003 is the need to hire additional staff for the drug review process, as authorized under PDUFA III. FDA must move quickly to hire additional staff now that FY 2003 appropriations which permit spending fee revenues at the higher levels authorized under PDUFA III have been enacted. The President signed the appropriation act permitting FDA to spend at the higher rates authorized under PDUFA III on February 20, 2003—almost 5 months into the fiscal year. As a result FDA will be able to utilize fewer additional staff years on the drug review process in FY 2003 than originally planned. This reduction in available human resources will challenge FDA in meeting performance goals for FY 2003.

In FY 2003, FDA will continue working toward the goal of receiving more applications, and more parts of applications, electronically. 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, constant monitoring, and vigilance with respect to newly emerging technologies.

After substantial deliberation, and in an effort to achieve a more efficient, effective, and consistent review program for human drugs and biologics, FDA has decided to move the review of therapeutic biologics from CBER into CDER. The employees to be transferred as a result of this reorganization represent about 31 percent of the CBER employees working on the process for the review of human drug applications, as defined in PDUFA. By organizing the drug development and review process around the disease being treated, informed by specific product and technology expertise, the Agency decision process for these products can be made not only more consistent, but also more patient-centered and science-based. As anyone who has gone through organizational changes knows, the initial process creates understandable anxieties and uncertainties. In FY 2003 we will be challenged to prepare for the implementation of this reorganization, and actually begin the process, while maintaining and improving review quality, consistency and integrity. The Commissioner is committed to the enhanced review process that will result from this organizational change.

In FY 2003, FDA will also begin the implementation of the new provisions of PDUFA III that permit using fee revenue to support certain risk management activities. This represents a change in how these revenues may be used, and an opportunity for the agency to enhance patient safety and work proactively to manage risks and reduce preventable adverse events.

FDA will continue to be challenged by the need to hire, train, and retain qualified reviewers in FY 2003. FDA’s experienced reviewers are in demand and have excellent employment opportunities available to them. The agency experienced staff attrition of over 9 percent in FY 2002 in some major review disciplines in CDER (medical officers, consumer safety officers, and microbiologists). FDA has implemented a number of initiatives to reduce this attrition, including not only retention bonuses for reviewer mathematicians and statisticians but also 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 FDA’s recognized gold standard in new product safety. Recruiting and retaining top rate professional staff is among the Commissioner’s highest priorities.

Appendices