Appendix A

The Food, Drug, and Cosmetic Act (the Act) specifies three major conditions that must be met each year before prescription drug user fees can be collected and spent. A summary of these conditions and how they were met was provided earlier on page 2. A more detailed presentation of each of these conditions is provided below, along with an explanation of how the condition was met in FY 2002.

For making the comparisons to determine if statutory conditions are met, FDA’s 1997 Salaries and Expenses appropriation must be adjusted each year by an adjustment factor, which is defined in section 735(8) of the Act. It states:

The term 'adjustment factor' applicable to a fiscal year is the lower of-

(A) the Consumer Price Index for all urban consumers (all items; United States city average) for April of the preceding fiscal year divided by such Index for April 1997, or
(B) the total of discretionary budget authority provided for programs in the domestic category for the immediately preceding fiscal year (as reported in the Office of Management and Budget sequestration preview report, if available, required under section 254(c) of the Balanced Budget and Emergency Deficit Control Act of 1985) divided by such budget authority for fiscal year 1997 (as reported in the Office of Management and Budget final sequestration report submitted after the end of the 105th Congress, 1st Session).

The first calculated factor is the consumer price index of April 2001 (176.9), which is the fiscal year immediately preceding FY 2002, divided by the consumer price index for April 1997 (160.2). The result of this division is a factor of 1.1042.

The second calculated factor is the domestic discretionary budget authority for FY 2001 ($339.4 billion)¹ , the fiscal year immediately preceding FY 2002, as it would have been reported in the final sequestration report submitted after the end of the 107th Congress, 2nd Session, divided by the domestic discretionary budget authority for FY 1997, as reported in the final sequestration report submitted after the end of the 105th Congress, 1st Session ($253.5 billion). The result of this division is a factor of 1.339.

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¹ The amount of domestic discretionary budget authority for the previous year is no longer included in the final sequestration report, and has not been required by law since 1999. The figure used above ($339.4 billion for FY 2001) was provided by Office of Management and Budget staff in January 2003 as the amount that would have been included in the final sequestration report for non-defense discretionary spending had the requirement to report it still been in effect.

The lower of these two numbers is the first factor, 1.1042. Accordingly, the adjustment factor to be used for FY 2002 is 1.1042.

The first condition comes from section 736(f)(1) of the Act. It states:

Fees may not be assessed under subsection (a) for a fiscal year beginning after FY 1997 unless appropriations for salaries and expenses of the Food and Drug Administration for such fiscal year (excluding the amount of fees appropriated for such fiscal year) are equal to or greater than the amount of appropriations for the salaries and expenses of the Food and Drug Administration for fiscal year 1997 (excluding the amount of fees appropriated for such fiscal year) multiplied by the adjustment factor applicable to the fiscal year involved.

This requires that FDA’s total Salaries and Expenses appropriation (excluding user fees) each year must be greater than or equal to FDA’s FY 1997 Salaries and Expenses appropriation (excluding user fees) times the adjustment factor. FDA’s total FY 1997 Salaries and Expenses appropriation, excluding fees, was $819,971,000. Multiplying this amount by the adjustment factor of 1.1042 results in an adjusted FY 1997 Salaries and Expenses Appropriation, excluding fees, of $905,411,978.

For FY 2002, FDA’s total Salaries and Expenses appropriation, excluding user fees, and excluding rent to GSA, which was also not included in the FY 1997 appropriation amount, was $1,083,854,000. Since the FY 2002 appropriation amount exceeds the FY 1997 adjusted amount, the first condition was met.

The second condition comes from Section 736(g)(2)(A). It states that fees “shall be collected in each fiscal year in an amount specified in appropriation acts, or otherwise made available for obligation, for such fiscal year….” Without a specific appropriation, no fees may be collected.

The Appropriation Act (Public Law 107-76) specifying amounts collectable from fees during FY 2002 was signed by the President on November 28, 2001. It provided $161,716,000 to come from fees collected. Thus, the second condition was met, and fees may be collected.

The third condition in the Act, in Section 736(g)(2)(B), states:

Fees shall only be collected and available to defray increases in the costs of the resources allocated for the process for the review of human drug applications (including increases in such costs for an additional number of full-time equivalent positions in the Department of Health and Human Services to be engaged in such process) over such costs, excluding costs paid from fees collected under this section, for fiscal year 1997 multiplied by the adjustment factor.

In FY 1997, FDA’s actual obligations for the process for the review of human drug applications, excluding obligations paid from user fees, was $147,959,689, as reported in the FY 1997 Financial Report to Congress. Multiplying this amount by the adjustment factor of 1.1042 derived above, FDA’s 1997 adjusted minimum spending for the process for the review of human drug applications from appropriations, exclusive of fees, $163,377,089 in FY 2002.

The FDA costs (obligations) from appropriations for the process for the review of human drug applications for FY 2002 was $185,815,399. Since this is greater than the adjusted FY 1997 amount ($163,377,089) the third condition was met.

The table below shows amounts FDA spent on the process for the review of human drug applications in FY 2001 and 2002 and also shows the adjusted FY 1997 amount that had to be spent from appropriations. It also shows the amount of these costs that was charged to appropriations and the amount met from user fee revenues each year.

Appendix B

Beginning in FY 1993, PDUFA directed FDA to waive or reduce fees in five different circumstances:

• when a waiver is necessary to protect the public health;
• when a fee is a significant barrier to innovation;
• when the fees paid exceed FDA's costs of reviewing a firm's human drug applications;
• when imposition of the fee creates an inequity between certain 505(b)(1) and 505(b)(2) human drug applications and;
• when a sponsor withdraws a pending human drug application after FDA has filed it, but before FDA has performed substantial work on the marketing application.

In addition, PDUFA II new exemptions from fees were added beginning in FY 1998. These specific exemptions are automatic and do not require a waiver request. They include:

• human drug applications for designated orphan products (designated for rare diseases or conditions affecting fewer than 200,000 patients in the United States);
• supplemental applications for pediatric indications for use. (Statutorily repealed by section 5 of Public Law 107-109 effective January 4, 2002).

Beginning in FY 1998, PDUFA II also provided a waiver for certain small businesses for the full application fee for the first application submitted. Before FY 1998, only half of the application fee was waived for small businesses.

The additional statutory exemptions in FY 1998 resulted in a loss of revenue. The increased number of exemptions required by PDUFA II reduced the number of applications that paid fees.

Fees may be waived or reduced under the waiver provisions of the statute. Many of the application fee waiver requests FDA received through FY 1997 pertained to orphan products; since designated orphan products are now given automatic exemptions, the number of waiver requests for application fees has decreased substantially.

The tables on the following page summarize the exemption and waiver actions taken by FDA for fees payable in FY’s 1998, 1999, 2000, 2001, and 2002, and pending waiver requests for fees payable from the same periods.

¹Applications counted in full fee equivalents.
²The exemption for pediatric supplements was repealed by P.L. 107-109 effective January 4, 2002.
³Prior to FY 2002 these were included in the total for Miscellaneous waivers.
⁴Prior to FY 2002 this category was included in counts of applications for which fees were exempted.
⁵Prior to FY 2002 this category also included counts of applications for which fees were exempted because applications had been submitted previously or which were not inlcuded in the definition of applications that paid fees.

Appendix C

PDUFA, PDUFA II, and the related House of Representatives Report 102-895 ("House Report"), defines the process for the review of human drug applications and the costs which may be included in that process. Using these definitions (and further refinements identified below) and the methodologies described in this report, the Agency identified those activities that were applicable to the process for the review of human drug applications.

Over 96 percent of amounts obligated are expended within two years. Therefore, obligations represent an accurate measure of costs.

User Fee Related Costs

Section 735(6) of the Act defines in general terms the activities necessary for the review of human drug applications (the "human drug review process"). In summary, costs related to the following process activities have been attributed to the process for the review of human drug applications.

• All investigational new drug (IND) review activities, including amendments
• All review activities for new drug applications (NDA’s), biologic license applications (BLA’s), and product license applications (PLA’s), including supplements and amendments and biologic establishment license applications (ELA’s) and amendments
• Regulation and policy development activities related to the review of human drug applications
• Development of product standards for products subject to review and evaluation.
• Meetings between the Agency and the sponsor of a covered application or supplement
• Review of labeling prior to approval of a covered application or supplement and the review of the initial pre-launch advertising
• Review of post-marketing studies that have been agreed to by sponsors as a condition for approval
• Inspections of facilities undertaken as part of the review of pending applications or supplements
• Lot release activities for covered biological products
• Assay development and validation to ensure batch-to-batch consistency and reliability for covered biological products
• Monitoring of clinical and other research conducted in connection with the review of human drug applications
• User Fee Act implementation activities
• Research related to the human drug review process—although under PDUFA II FDA agreed to phase out research supported by fee revenues

All user fee related costs represented by the above activities are collectively referred to in this report as costs for the process for the review of human drug applications.

Section 735(7) of the Act defines the "costs of resources allocated for the process for the review of human drug applications" as the expenses incurred in connection with this process for:

User Fee Excluded Costs

The User Fee Act excludes costs related to the following:

Excluded Products

• Generic drugs
• Over-the-counter drugs not associated with an NDA or NDA supplement
• Large volume parenterals approved before 9/1/92
• Allergenic extract products
• Whole blood or a blood component for transfusion
• In vitro diagnostic biologic products
• Certain drugs derived from bovine blood

Excluded Process Activities

• Enforcement policy development
• Post-approval compliance activities
• Advertising review activities once marketing of the product has begun
• Inspections unrelated to the review of covered applications
• Research unrelated to the human drug review process

These inclusions and exclusions required accounting for a newly created subset of FDA activities after the fact. It was necessary to develop and implement a methodology that would allow the Agency retrospectively to capture the FY 1992 costs for the newly defined "process for the review of human drug applications," and apply that same methodology for future years. In 1995, Arthur Andersen & Company independently reviewed FDA procedures in doing this and found the methodologies reasonable.

Appendix D

GENERAL METHODOLOGY

The costs associated with the process for the review of human drug applications are based on obligations recorded within FDA’s Center for Biologics Evaluation and Research (CBER) and the Center for Drug Evaluation and Research (CDER), Office of Regulatory Affairs (ORA), and the Office of the Commissioner (OC). These organizations correspond to the cost categories presented on the Statement of Costs for the Process for the Review of Human Drug Applications as follows:

The costs were accumulated using a variety of methods including time reporting, management surveys, and detailed interviews. Using the definitions of costs and activities included in the "process for the review of human drug applications" in the Act, a portion of the costs within each of the four organizations listed above was identified as part of the human drug review process.

CENTER COSTS

Costs are accumulated in CDER and CBER in cost centers corresponding to the organizational components within the centers. Most FDA components involved in the human drug review process perform a mixture of activities--some included in the definition of the process for the review of human drug applications, and some not included. These components fall into three categories: 1) review and laboratory components; 2) indirect review and support components; and 3) user fee excluded components. Costs are accumulated by cost centers. The allocation of costs for the three categories and center-wide expenses are discussed below.

Review and Laboratory Components:
The review and laboratory components, as organized during FY 2002, have the primary responsibility for the review of human drug applications and supplements. Below is a list of these direct review and laboratory components in CDER and CBER.

A total time reporting study was conducted from July 18, 1993 to November 6, 1993, as part of a contract with Arthur Andersen & Company, to measure the level of user fee related costs for each of the CBER and CDER review components. Over 1,000 staff participated in the 16-week study. Time sheets were designed to capture information on activities based on the definitions for the process for the review of human drug applications in the Act. Using the results of the time reporting study, a user fee related percentage was calculated for each participating division and applied to the total FY 1992 costs for each division to determine its costs for the process for the review of human drug applications.

The results of the 16-week time reporting exercise are representative of the activities during FY’s 1992, 1993, and 1994 in CDER, and were used to calculate process costs for CDER each year. The results of the Arthur Andersen & Company 16-week total time reporting study were used to measure CBER's FY 1993 user fee costs. A pre-existing CBER workload measurement procedure, which was validated by the results of the Arthur Andersen study, was used to measure CBER’s FY 1992 and FY 1994 user fee costs.

Center Indirect Review and Support Components
Indirect review and support components provide the infrastructure for the review process. In CDER, these components include portions of the Office of the Center Director, the Office of Regulatory Policy, the Office of Information Technology, the Office of Management, the Office of Training and Communications, the Office of Medical Policy, and the Office of Compliance. In CBER, these components include portions of the Office of the Center Director, Office of Management, Office of Technology Management, and the Office of Communications, Training, and Manufacturers Assistance.

In CDER, detailed interviews were conducted with the division directors or their designees for each of the divisions classified as indirect review and support for the human drug review process. The first step of the interviews was to identify the activities in the division and classify these as user fee related or user fee excluded activities based on the definitions in the Act. Then, using information provided by the division directors, the number of full time equivalent (FTE) employees involved in these activities was estimated. With this information, an overall user fee applicable percentage was calculated for each division.

In CBER, the workload measurement procedures were used to measure the level of effort of user fee related activities in the compliance divisions. Most of the Office of the Center Director, Office of Management, Office of Information Management, and the Office of Communications, Training, and Manufacturers Assistance are considered support organizations to CBER, therefore a percent of their time is added to each activity.

User Fee Excluded Components
Based on a review of a component's activities and the definitions in the Act, some organizations within the centers were completely excluded from the calculation of costs related to the process for the review of drug applications. An example of a user fee excluded component is the Office of Generic Drugs in CDER. In CBER, all cost centers perform some PDUFA work, although it can be as little as 5 percent.

Center-wide Expenses
A number of center-wide expenses are collected in central accounts rather than being charged directly to a specific division. These costs include rent, utilities, some computer equipment, facilities repair and maintenance, and extramural and service contracts. Many of these costs could be traced back to the specific division that generated the cost and were assigned the user fee related percentage calculated for the division to which the expenditure related. For the costs that benefited the center as a whole and could not be traced to a specific division, a weighted average user fee percentage was calculated based on the level of user fee related costs to total costs in the center.

CENTER TIME REPORTING ENHANCEMENTS

In May 1995, CDER conducted an internal time reporting study of all CDER units previously surveyed by Arthur Andersen in 1993. This internal study enabled CDER to update user fee percentages on a one-time basis. In FY 1996, CDER implemented quarterly on-line time reporting. These quarterly updates facilitated timely reporting of user fee percentages by the various components of the Center.

In FY 1995, CBER began quarterly collection of actual hours worked over a 2-week period. Time was reported for 43 functional activities, by 9 product classes. Research time was reported for specific numbered research projects. These quarterly surveys were used to calculate the percent of CBER staff time expended for PDUFA work in each component for each reporting period. That percentage was then applied to the total quarter’s costs of that component to calculate its total expenditures for the process of reviewing human drug applications. By mid-1995, CBER had begun a pilot computer-based reporting system (mirroring the paper submissions), that was accessed through the network (paperless.) By the end of the fiscal year, CBER designed, with the assistance of Arthur Andersen, an on-line reporting system called the “Resource Reporting System”, that made it easier for employees to report and provide more data to management.

Beginning in FY 1996, the CBER time reporting system was enhanced to collect on-line time reports for all employees for a two-week period each quarter of the year. The enhanced system reports time for 70 possible functional activities, by 10 product classes.

In November 1997, CDER initiated an on-line time reporting survey of each employee within the Center. Beginning in FY 2001, this survey captures the expenditure of time on PDUFA-related activities and all other CDER mission-oriented activities for two four-week periods—one in each half of the fiscal year.

CENTER RESEARCH COVERED BY THE PRESCRIPTION DRUG USER FEE ACT

The research activities described in this section were included when FDA originally calculated base costs for the process for the review of human drug applications for FY 1992. Under PDUFA, from FY 1993 through FY 1997 both appropriated funds and user fee revenues were used to fund research activities supporting the drug review process, just as was the case with all other PDUFA activities. During informal discussions that led to the extension of PDUFA, FDA agreed to phase out the use of fee revenues to support these research costs. The phase-out was complete in FY 2001. The remaining research related to drug review is now supported solely by appropriated funds, just as it was prior to FY 1993.

The FDA performs research to determine the risks and benefits of pharmaceutical agents and to set appropriate standards and methods for analysis. These activities include research on specific products or product classes that are approved or under review. Research is carried out in biomedical areas to develop expertise necessary to address new technologies, issues and emerging areas, develop and validate testing methodologies, and to establish drug and biologic standards. All of these activities are fundamental to the evaluation of human drugs and biological products. Research activities that directly support the process for the review of drug and biologic applications are described below.

Laboratory activities that are included in the drug review process also include activities necessary for the analysis and release of individual lots of biologic products (under section 351 of the Public Health Service Act) and development and validation of assays to ensure batch-to-batch consistency and reliability.

FDA defined research activities associated with the review of new drugs and biologics such as research to: (1) facilitate review of clinical and product testing, (2) support policy development, (3) validate assays, and (4) develop standards. These research activities are focused on approved products or product classes, or products or product classes under review or investigation.

Laboratory activities not considered a part of the process for the review of human drug application as defined in PDUFA include laboratory work associated with generic drugs, over-the-counter monographs, allergenic extracts, in vitro diagnostics, whole blood or blood components, or large volume parenterals approved prior to September 1, 1992.

Types of Research

User fee related research is categorized based on its impact on the drug approval process:

Review of the Manufacturing Process
The evaluation of new biological and drug products requires a careful review of the manufacturing process. The process of manufacture can potentially result in subtle changes in the product characteristics that could affect safety and efficacy of the product. This review is especially critical in the evaluation of new products manufactured using new technologies.

Development and Validation of Test Methodologies
Standards for testing must be set for each drug or biologic product in order to ensure its identity, purity, and potency prior to approval. Frequently, test methods are developed and validated in FDA laboratories. These tests are used for biologic lot release and for characterizing qualification lots of products submitted for approval.

Safety and Toxicity
New drugs and biological products are evaluated for safety and toxicity. Frequently, a product will represent a new class whose toxicity profile is not well established. In these cases, it may be necessary for FDA to conduct studies to gain information in order to establish policy and safety standards for similar products in the new class.

Pharmacology
The pharmacology of drugs and biological products must be understood in order to evaluate potential toxicities and measures of potency. In some cases a detailed understanding of the mechanisms of action, metabolism, distribution, and excretion is critical to establish tests for potency and to better understand toxicity. It may also be necessary for pharmacodynamic endpoints to establish appropriate product dosing and to develop in-vivo and in-vitro standards for evaluating manufacturing changes.

Clinical
The study of drugs and biological products in human subjects is an important component of FDA research. Many important questions related to the optimal use of a given drug in human subjects or patients may not be part of the standard drug development process. However, such data would facilitate optimal use of the product. Further, some of these research questions impact on regulatory review policy for the product class being studied. Examples of such research include the study of drugs in special populations (e.g. women, the elderly, patients with renal or hepatic impairment), evaluation of drug interactions and the development of pharmacokinetic/pharmacodynamic correlations, or safety of combination vaccines.

CENTER TIME REPORTING RESULTS FOR FY 2002

The time reporting systems operated by CBER and CDER indicated the 66 percent of all time spent in CBER and 74 percent of all time spent in CDER in FY 2002 was dedicated to the process for the review of human drug applications as defined in PDUFA.

FIELD INSPECTION AND INVESTIGATION COSTS

All field inspection and investigation costs are incurred by FDA's Office of Regulatory Affairs (ORA). ORA costs are incurred in both district offices (the "field") and headquarters support offices. In FY 2002 the Agency began tracking accumulated ORA costs through the use of the Field Accomplishment and Compliance Tracking System [FACTS]. FACTS is a time and activity tracking system which captures time in a variety of categories, including pre-approval inspections of manufacturing facilities, investigations of clinical studies, and analytical testing of samples--which are included in the process for the review of human drug applications.

Total direct hours reported in FACTS are used to calculate the total number of staff-years required by ORA to perform these activities. In addition to the direct time, an allocation of support time is also included to represent the work done by the ORA administrative and management personnel. The Agency then applies the total number of user fee related staff years to the average salary cost in ORA to arrive at ORA user fee related salary costs. The final step is to allocate ORA obligations for operations and rent to the human drug review process based upon the ratio of user fee related staff years to total ORA staff years. The following table summarizes the calculation for the FY’s 2001 and 2002, respectively.

The ORA costs for the process for the review of human drug applications described above include total process costs, including costs paid from appropriations and costs paid from fee revenues. The substantial reduction in ORA staff-years dedicated to the review of human drug applications is a result of two factors. First, ORA increasingly is relying on the latest data in its files, if an inspection has been completed recently, rather than initiating a new inspection prior to a drug approval. Second, the decrease in the number of new drug and biologic applications in FY 2001 resulted in fewer assignments to the field for pre-approval inspections.

AGENCY GENERAL AND ADMINISTRATIVE COSTS

The Agency general and administrative costs are incurred in the FDA's Office of the Commissioner (OC). During most of FY 2002, OC was comprised of the following offices:

• Immediate Office of the Commissioner
• Office of the Chief Counsel
• Office of Equal Opportunity
• Office of the Administrative Law Judge
• Office of Science Coordination and Communication
• Office of Communications and Constituent Relations
• Office of International Affairs
• Office of Policy, Planning and Legislation
• Office of Management and Systems

The OC costs applicable to the process for the review of human drugs were calculated using a method prescribed by the Division of Cost Determination Management, Office of Finance, Office of the Secretary, Department of Health and Human Services. The method uses the percentage derived by dividing total Office of the Commissioner costs by the total salary obligations of the Agency, excluding the Office of the Commissioner. That percentage is then multiplied by the total salaries (excluding benefits) applicable to the process for the review of human drugs in CDER, CBER, and ORA to arrive at the total General and Administrative Costs.

Using this process, $25,773,229 and $28,563,982 in general and administrative obligations were dedicated to the human drug review process in FY’s 2001 and 2002, respectively. These are total costs, including funds obligated both from appropriations and from fees. The Agency general and administrative obligations in FY 2002 accounted for about 8.2 percent of the total FY 2002 cost of the process for the review of human drug applications. This is up slightly from 8.0 percent in FY 2001, but is still down substantially from the 10.4 percent in FY 1998 at the beginning of PDUFA II. This means that the percent of process costs devoted to overhead has been reduced by 21 percent since 1998. This remarkable sustained reduction in overhead is the result of FDA’s commitment to increase efficiency in its operations.

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