Is pharma R&D earning its investment?

It’s no secret that in the past decade the pharmaceutical industry has been spending more and more on research and getting less and less in return.

One consequence has been the many and varied attempts to remodel R&D operations and to pull in more innovation from universities and young biotech companies.

This is now raising the question of whether there is more value in sourcing early-stage assets externally than doing the work in house, challenging corporate R&D operations to show they are worth the huge amounts of cash invested in them.

In 2010 the consultants Deloitte set out to lend a hand in helping heads of R&D to justify the investment in R&D, carrying out a benchmark assessment of the value of all the drugs in the pipelines of the 12 leading pharma companies and how much had been spent on them to date.

Snapshot approach

The assessment is based on published, historic data. While Deloitte acknowledges there are shortcomings in this snapshot approach the firm claims it does make it possible to identify encouraging signs and to shine a light on areas of concern. Given this, Deloitte’s second annual pharmaceutical R&D survey, ‘Measuring the Return from Innovation: is R&D earning its investment?’ released towards the end of last year, makes for glum reading.

It shows the average cost of successfully bringing a product to market increased by more than 25 per cent, from $830 million in 2010, to $1.048 million in 2011. And note: the commercial value of these drugs is no greater than a year earlier.

In the space of the year, the number of late-stage compounds in development fell from an average of 23 per company, to 18 per company,  showing that despite the recent and continuing turmoil of portfolio pruning and restructuring, the world’s leading pharmaceutical companies are still flummoxed as to how to maintain momentum in their pipelines.

Overall, there was a decrease in the internal rate of return on investment in the 12-strong cohort, from 11.8 per cent in 2010, to 8.4 per cent in 2011. As the Deloitte report notes, “This only increases the pressure from the rest of the business and shareholders to justify continued investment in the business of R&D.”

Underlying successes

While all of this reflects the very real productivity issues the industry is facing, it also, “belies some underlying successes,” according to Julian Remnant, Head of Deloitte’s European R&D Advisory Practice. Of the 12 companies in the survey, “nearly two thirds succeeded in realising more value from product commercialisation than has been lost from late-stage failures,” Remnant says.

Given the length of time it takes to develop a new drug, it will take several years before measures taken to reduce attrition start to have a positive effect on the costs of developing a new product.

As the Deloitte research demonstrates, pharma companies need to commercialise more products of greater value, faster and at less cost. Despite ongoing transformation efforts, greater emphasis needs to be placed on the systemic and relentless pursuit of improved R&D returns, the report says.

Collaboration delivers

On the brighter side, Remnant says the increasing levels of collaboration in the industry are delivering. “Taking a more innovative approach through greater collaboration has already proved successful.  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 a particular disease area or indication,” says Remnant.

At the same time, companies are striving to work more closely with payers at an earlier stage in development, to ensure that their investments in innovation are directed towards treatments and propositions that are attractive to payers.

“Having said this, 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,” Remnant believes.

Similarly, Remnant anticipates R&D organisations will in future come together to simplify and share capabilities in non-competitive areas of the R&D operation, thereby reducing cost. “Shared drug development models will remove duplication, maximise capacity utilisation, and drive scale economies within service providers. We see R&D leaders beginning to raise their level of ambition and take the lead in this type of cross-company collaboration,” says Remnant.

Manufacturing efficiency

The annual review includes a return on investment simulation for a typical pharmaceutical company, to help in selecting priorities for change in R&D. This analysis highlights how all corporate functions have a role to play in helping R&D earn its investment. For example, even modest efforts to improve manufacturing efficiency would, over time, have a profound effect on R&D returns.

Given the greater focus on the economics of pharmaceutical R&D, Remnant says, “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.”

Measuring the Return from Innovation: is R&D earning its investment?