Clinical News | November 22, 2011
Leading research-based pharmaceutical companies have seen the average
number of compounds in their late-stage development pipelines fall by 22% this
year, while R&D costs have ballooned by more than 25%, a new study has found.
According to the latest annual review of pharma R&D value by Deloitte and
Thomson Reuters, Measuring the Return from Innovation, the average cost
of bringing a new product successfully to market among the top 12
research-based pharmaceutical companies worldwide increased by 26.3% from
US$830 million in 2010 to US$ 1,048 million in 2011.
Over the same period, the number of late-stage compounds in development
dropped from 23 on average per company to 18 per company. Moreover, the average
R&D Internal Rate of Return (IRR) among the companies analyzed was down
from 11.8% in 2010 to 8.4% this year.
In a study released late 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 IRR. Historically,
that 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
Deloitte/Thomson Reuters analysis found that the top 12 research-based
pharmaceutical companies by R&D investment should be generating a positive
IRR, ranging from 8.4% to 18.4%, from the investment required to develop each
of their late-stage product portfolios. These returns were all above the
estimated Weighted Average Cost of Capital of 7% for the basket of pharma
leaders.
Cause for optimism
Despite the declines in
average IRR and the number of compounds in late development, as well as R&D
cost escalation in 2011 versus 2010, the latest Deloitte/Thomson study found
some cause for optimism.
For example, nearly two thirds
of the 12 companies reviewed managed to realise more value from product commercialization
than they had lost as a result of late-stage pipeline failures. And non-R&D
costs across the 12 companies have eased, lifting operating margins and helping
to free up cash flow that could be reinvested in R&D, Deloitte/Thomson
observed.
Innovation through
collaboration
Innovating through
collaboration has already proved a fruitful strategy, said Julian Remnant, head
of Deloitte’s European R&D advisory practice.
“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 commented.
Companies are also making
efforts to work more closely with payers at an earlier stage of drug
development, so they can ensure investments in innovation are directed at
therapies and propositions that are attractive to the payer community.
All the same, 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 organizations joining forces to
simplify and share capabilities in non-competitive areas of R&D, thereby
reducing costs. “Shared drug development models will remove duplication, maximize
capacity utilization, 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.”
Role to play
A return-on-investment
simulation for a typical pharmaceutical company in the annual review showed
that all corporate functions have a role to play in helping R&D earn back
its investment, Deloitte/Thomson noted. Simulating the impact on
R&D IRR 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 centers of excellence which bring together value
analytics, simulation and modeling expertise, and finance and portfolio
management capabilities to inform capital allocation decisions during drug
development”. Successful adoption and
implementation 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, Deloitte/Thomson
suggest.
