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FY 2003 PDUFA
FINANCIAL REPORT

REQUIRED BY THE

PRESCRIPTION DRUG USER FEE
ACT OF 1992

AS AMENDED BY THE

FOOD AND DRUG ADMINISTRATION
MODERNIZATION ACT OF 1997

AND BY THE

PRESCRIPTION DRUG USER FEE
AMENDMENTS OF 2002

March 24, 2004

The 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. This is the first financial report under PDUFA III, which authorizes higher levels of fee revenue to support the drug approval process. This report covers fiscal year (FY) 2003, 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 2003 and comparative data for earlier periods, and details the amounts carried over at the end of each year that remain available. For FY 2003, FDA collected $210 million in user fees, and spent $200 million. Almost 60 percent of the fee revenue 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.

Enclosure

Executive Summary

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 amended. This report, covering fiscal year (FY) 2003, is the first report that issued since the enactment of the Prescription Drug User Fee Amendments of 2002 (PDUFA III).

PDUFA 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, within certain tolerances.

This report describes how those specific statutory conditions or “triggers” were met in

FY 2003. The statements and tables included in this report also provide information on the user fee revenues and expenditures in FY 2003, and on the carryover balance. Comparative data for earlier periods are also provided.

For FY 2003, FDA collected $210 million in fees. FDA also had receivables of $6 million. At the beginning of the year FDA had projected collecting $222.9 million, but fewer fee-paying applications than projected were received in FY 2003. This realization of less revenue than projected is not an indication that the overall FDA review workload has declined—only that an increasing number of industry submissions were in categories for which fees were not paid.

In FY 2003, FDA spent $200 million from PDUFA revenues—about $10 million less than net collections for the year, increasing the balance of funds collected and appropriated in previous years, and still available for obligation, to $32 million at the end of FY 2003.

Challenges facing FDA in FY 2004 include hiring and training additional staff to meet the PDUFA III goals, even though spending under terms of a series of continuing resolutions delayed the hiring of additional staff by almost four months.

Contents

Background

Meeting the Legal Conditions for User Fees in FY 2003

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 2004

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

Background

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, other stakeholders, and the Administration, Congress amended and extended it through FY 2007 (PDUFA III).

Under PDUFA III one third of the fee revenue each year comes from application fees, a third from establishment fees, and a third from product fees. An application fee must be submitted when certain new drug applications (NDA’s) or biologic license applications (BLA’s) are submitted, and product and establishment fees are due annually on October 1. The total revenue amounts to be derived each year from each category—application fees, product fees, and establishment fees—are set by statute. Those statutory amounts are then adjusted each year both for cumulative inflation since FY 2003 and for changes in drug review workload. PDUFA III authorizes FDA to set fees each fiscal year so that the total revenue FDA receives from each category equals the statutory amount after adjustment for inflation and workload.

PDUFA III 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 2003 PDUFA Performance Report, which discusses FDA’s progress in meeting the goals referred to in PDUFA III, is being separately transmitted to Congress. This is FDA’s FY 2003 PDUFA Financial Report, covering the period October 1, 2002 through September 30, 2003.

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 2003. This report also presents FY 2003 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 III, 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 all of 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 2003. This is the most favorable category of audit opinion.

Meeting the Legal Conditions for User Fees in FY 2003

PDUFA III 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 2003 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 2003, 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 $ 1,268,098,000. FDA’s FY 1997 total Salaries and Expenses appropriation, excluding user fees, and adjusted as required by the statute, was $ 920,253,453. Therefore, since the FY 2003 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 2003, FDA’s Appropriation Act specified that $222,900,000 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 $166,055,159. In FY 2003, FDA obligated $209,287,410 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.

User Fee Revenues

PDUFA III specifies that fee revenues are to be collected from establishment, product, and application fees. The statute specifies revenue amounts for each of these fee categories, and that these revenue amounts are to be adjusted each year for inflation and workload. Fees for each category are set each year so that the total amount of revenue collected from each category (application fees, establishment fees, and product fees) equals the statutory revenue target as adjusted for inflation and workload.

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 collected by fee category 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 2002, even if it is received in FY 2003, is attributed to FY 2002 revenues. Totals reported for each year are net of any refunds for that year.

The Fees Receivable for FY 2002 of $113,315 are all deferred collections, pending final resolution of waiver requests. Most of the FY 2003 accounts receivable are product and establishment fees billed near the end of the fiscal year . Fees receivable for FY 2003 also include deferred collections of $573,789 pending final resolution of waiver requests. A summary of exemption and waiver actions is included in Appendix B.

Obligation of User Fee Revenues

User fee revenues are expended only for costs necessary to support the process for the review of human drug applications, as defined in PDUFA III. Allowable and excludable costs for the process for the review of human drug applications are defined in Appendix C. In FY 2003, FDA obligated $200,154,500 from user fee revenues.

FDA dedicated 1,277 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 personnel 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 2003, PDUFA fees and appropriations paid for 1,201 more staff years 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 2003 represented almost 60 percent of the funds expended. This includes all pay and benefits for the additional personnel.

A large percentage of the remaining funds were used to support information technology (IT) investments. FDA continues to transition from a largely paper-based regulatory submission and review environment to an electronic environment through the Electronic Regulatory Submission and Review (ERSR) program. The ERSR program is described in the PDUFA III IT Five-Year Plan. In addition, Section XII of the PDUFA III goals letter, signed by the Secretary on June 4, 2002 , describes the Electronic Applications and Submission Goals, also referred to as the PDUFA IT goals. These goals, in summary, require the FDA to:

1. Centralize accountability and funding for all PDUFA IT initiatives/activities under the Agency Chief Information Officer (CIO);
2. Hold quarterly briefings with Industry and provide annual progress reports to FDA Commissioner;
3. Ensure common solutions for secure exchange and submission of application components;
4. Provide a single point of entry for FDA for all electronic submissions within a highly secure environment;
5. Implement the electronic common technical document (eCTD), which is a common format for electronic submissions in support of marketing applications to be used worldwide. It is developed under the auspices of the International Conference on Harmonization. The Agency must provide format specifications for eCTD’s;
6. Conduct an objective analysis for consolidation of PDUFA III IT infrastructure and desktop management services;
7. Implement a software development process improvement initiative consistent with the concepts and requirements provided by the Capability Maturity Model (CMM) framework;
8. Ensure that PDUFA organizations use the same software applications (e. g., eCTD, COTS) for common business needs where appropriate; and
9. Publish a PDUFA III 5-year Plan within 6 months of authorization.

As stated in the PDUFA IT Five-Year Plan, “FDA considers the first year of the PDUFA III timeframe to be a period of considerable transition.” Given this background, over the first year of PDUFA III the FDA has made significant progress in addressing the PDUFA IT goals. In this first year, working with each of the FDA organizations that plays a role in PDUFA, the FDA CIO has established the PDUFA IT investment governance process, allowing the FDA to:

• Review, prioritize and fund new PDUFA investments
• Review and authorize adjustment to existing PDUFA investments
• Review and authorize PDUFA maintenance and operations funding, and
• Maintain and update the PDUFA IT 5-Year Plan to ensure linkage to Agency strategic goals.

Major accomplishments of FY 2003 include: the initial production release of the eCTD software; the establishment of an Agency Project Management Office; and the establishment of the IT Shared Services organization to address the infrastructure consolidation requirements.

Carryover Balances

Under PDUFA 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 2003 increased the carryover balances by $9,512,551.

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 net collections balance shown above for FY 2003 of $209,667,051 is a little more than the FY 2003 collections balance on page 3 of $209,371,005 . Most of this difference is the result of collections during FY 2003 of amounts applicable to earlier cohort years.

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

Collection Ceilings, Potential Refunds and Offsets

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 and III, collections in excess of fee amounts appropriated 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, 2003 , 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 $727,016. 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 $727,016 must be kept in reserve as an offset for future collections until these requests are settled.

Reserve for Future Operations

The table below provides a summary of carryover balances as of September 30, 2003, and anticipated claims on those balances. Included in those claims is also a requirement, from the congressional action on the agency’s FY 2004 appropriation, to spend $3.6 million of the carryover funds to support a move of CDER drug review staff into the new White Oak facility in FY 2004.

Due to a change in PDUFA III law requiring establishment and product fees to be paid for FY 2003 and subsequent 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 2004 operations for approximately 1.4 months.

Summary of Receivables and Payments Deferred and
Refunds of Fees Paid But Pending Waiver Resolution

At the end of FY 2003, in addition to the cash collected, FDA had receivables totaling $6,628,759. An allowance for loss on accounts receivable has been recorded at $670,473, which consists of $120,366 of accounts receivable greater than one year in arrears, and $550,107 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.

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

The following table presents the costs for the review of human drug applications for FY 2002 and FY 2003 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 rose in FY 2003. This increase primarily reflects enhanced spending made possible by the additional resources in FY 2003 and increases in pay rates for federal employees.

The Agency General and Administrative Costs, though up slightly from FY 2002 levels, declined as a percent of total spending on the device review process. T he percent of device review process costs devoted to Agency General and Administrative costs decreased from 8.6 percent in FY 2002, to only 7.3 percent in FY 2003.

Management Challenges for FY 2004

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.

Under PDUFA III, a more stable fee structure and increased fee revenues provide FDA with the resources needed to meet PDUFA III performance goals and to embark on several new PDUFA III initiatives aimed at further enhancing the drug review program.

It will be a substantial challenge both to restructure the delivery of administrative services and to consolidate information technology agency-wide. The FY 2004 Performance Plan assumes increased efficiencies through administrative and information technology reforms. If these efficiencies do not materialize as planned, FDA’s ability to maintain the very high performance levels of the past several years will be challenged. Given the magnitude of the savings planned for information technology consolidation and administrative consolidation, managing the PDUFA program without compromising staffing and performance levels will be a sizable challenge.

The second major resource challenge relates to user fee funding. Under the provisions of PDUFA, funds from user fees are to increase from $222.9 million in FY 2003 to well over $240 million in FY 2004. However, under a series of continuing resolutions, FDA had to keep its user fee spending for FY 2004 at the previous year’s levels for the first 4 months of FY 2004. This limitation in the availability of user fee resources for the first one-third of FY 2004, and lower than requested final appropriations, have challenged the drug review program.

In FY 2004, a key PDUFA IT investment is the development of a common electronic submission solution for CBER and CDER. This includes the establishment of a cross Agency team to develop a target electronic submission architecture. A cross-Center group has been established to pilot a common portal for electronic submissions. In addition, the integration of the CBER and CDER systems will be a major activity due to the biologic therapeutic product transfer effective October 1, 2003 . As part of the integration an analysis will be done to determine the feasibility of consolidating tracking and document management systems to meet the business needs of both CBER and CDER.

In FY 2004, FDA will also continue 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 2004. FDA’s experienced reviewers are in demand and have excellent employment opportunities available to them. 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. Continuing to recruit and retain top rate professional staff is among the Commissioner’s highest priorities.

Appendices

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