Pharmaceutical Productivity Unstable as R&D Costs Escalate

A new study has found that leading research-based pharmaceutical firms have seen the average quantity of compounds in their late-stage development pipelines drop by 22% this year, while R&D costs have increased by over 25%.

According to the 2011 yearly review of pharmaceutical R&D value, Measuring the Return from Innovation, by Deloitte and Thomson Reuters, the average cost of successfully bringing a new product to market among the top 12 research-based pharmaceutical companies worldwide increased by 26.3% between 2010 and 2011.

The number of late-stage compounds in development also dropped from 23 on average per company to 18 per company.  Moreover, the average R&D Internal Rate of Return among the companies analysed was down from 11.8% in 2010 to 8.4% this year.

Previous study

In a study released last year, Deloitte and Thomson Reuters suggested that, against a backdrop of declining productivity, pharmaceutical companies should be setting performance targets and driving R&D strategy around output-based measures such as Internal Rate of Return.

Historically, last year’s study noted, pharmaceutical companies had relied on input-based measures for R&D investment, such as expenditure as a percentage of sales revenue.

At the time, the analysis found that the top 12 research-based pharmaceutical companies by R&D investment should be generating a positive Internal Rate of Return, ranging from 8.4% to 18.4%, from the investment required to develop each of their late-stage product portfolios.

Reason for optimism

Despite the declines in average Internal Rate of Return, the decline in the number of compounds in late development, and the R&D cost escalation in 2011 versus 2010, the latest study found some reason for optimism.

For example, nearly two thirds of the companies reviewed managed to realise more value from product commercialisation than they lost as a result of late-stage pipeline failures.

Also, non-R&D costs across the 12 companies have reduced, lifting operating margins and helping to free up cash flow that could be reinvested in R&D.

Collaboration benefits innovation

Julian Remnant, head of Deloitte’s European R&D advisory practice, observed that innovating through collaboration has already proved a fruitful strategy.

“The walls of secrecy are coming down in some cases and there are increasing numbers of players within the industry forming alliances and joint ventures to pool research knowledge in particular disease area or indication,” he added.

Companies are also making efforts to work extra closely with payers at an earlier stage of drug development, so they can guarantee investments in innovation are directed at therapies and propositions that are attractive to the payer community.

Still, Remnant cautioned, the pharmaceutical R&D sector “can do more to work together, for example, sharing knowledge on the science behind failed molecules and studies will help improve success rates and ultimately bring down the cost to develop new medicines”.

In future he envisages R&D organisations joining forces to simplify and share capabilities in non-competitive areas of R&D, resulting in a reduction of costs.

“Shared drug development models will remove duplication, maximise capacity utilisation, and drive scale economies within service providers,” Remnant predicted.  “We see R&D leaders beginning to raise their level of ambition and take the lead in this type of cross-company collaboration.”

All functions have a role to play

A return-on-investment replication for a typical pharmaceutical company in the annual review demonstrated that all corporate functions have a role to play in helping R&D earn back its investment, Deloitte/Thomson observed.

Mimicking the impact on R&D Internal Rate of Return of improvements in gross profit margin, for example, illustrated that “even modest” efforts to improve manufacturing efficiency “would, over time, have a profound effect on R&D returns.”

With a tighter focus on the economics of pharmaceutical R&D, Remnant believes, “we’re likely to see companies establishing centres of excellence which bring together value analytics, simulation and modelling expertise, and finance and portfolio management capabilities to inform capital allocation decisions during drug development.”

Successful adoption and execution of these capabilities will better position R&D leaders to make the case for investment in “the business of R&D”, while continuing to develop medicines for the benefit of patients and society.


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