Testing times for pharma: R&D returns challenged by drag of high costs

• Annual projected pharma R&D returns continue to decline, to 4.2% this year from 10.1% in 2010

• Since 2010, original cohort launched 186 products forecast to be worth c. $1,258bn, and their R&D divisions progressed 306 assets into late stage pipelines, projected to be worth c. $1,414bn*

• 2014 was a headline year for approvals, with 43 products approved globally

The projected rate of return on pharmaceutical research and development (R&D) has more than halved since 2010, from 10.1 per cent to 4.2 per cent, according to an annual study by the Deloitte Centre for Health Solutions.**

This is largely due to the growing imbalance between declining forecast peak sales and increasing asset development costs. Since 2010, while forecast peak sales per asset have fallen by almost 50%, the average cost of developing an asset has climbed by a third.

Julian Remnant, head of Deloitte’s EMEA R&D advisory life sciences practice, explains: “The decline in peak sales of assets has had the greatest negative impact on R&D returns since our study began. We have seen macroeconomic pressure continuing to reduce R&D returns in the life sciences sector and specific questions being raised over the pricing of innovative medicines across the world. These external factors have combined with internal productivity challenges, meaning life sciences R&D is not currently generating a significant return on investment. We are now seeing a trend for companies to return more money to shareholders through dividends and share buybacks than they are investing in the future through R&D, licensing and acquisitions.”

The report, ‘Measuring the return from pharmaceutical innovation 2015: Transforming R&D returns in uncertain times’, has been produced by Deloitte in collaboration with research and consulting firm GlobalData. It is the latest unique analysis from Deloitte of the life science industry’s performance in generating a return from its significant annual investment in new product innovation.

In addition to the 12 pharma companies included in the cohort, four mid- to large-cap companies have been added to the study for the first time. This recognises the increasing value produced by such companies and their importance in the life sciences industry. Interestingly, between 2013-15 using three-year average data, this extension cohort has a projected internal rate of return that is triple the original cohort. Additionally, their costs to develop an asset are 25 per cent lower and forecast peak sales per asset are 130 per cent higher.

While the overall projected rate of return on R&D is at its lowest since the study began, there are still some promising signs across the industry. These include: assets retaining or marginally increasing their forecast revenues as they progress through late stage development, the negative impact of terminations falling significantly this year, and 2014 being a headline year for approvals, with 43 products approved.

Since Deloitte’s study began in 2010, the original cohort has launched 186 products with estimated total revenues of $1,258bn. The R&D divisions of these companies have progressed 306 assets into late stage pipelines, with total forecast lifetime revenues of $1,414bn.

The findings indicate that the following strategic factors may also have an impact on R&D returns:

• Speciality therapeutics offer opportunity across all therapeutic areas – There is an increasing focus on specialised therapeutics, with opportunities in both specialty and primary care therapy areas. Companies need to ensure that any shift to specialty care is not at the expense of potential opportunities within primary care markets.
• Companies with consistent therapy area focus are delivering higher value assets – Companies in the study who maintain a consistent therapy area footprint are forecast to deliver higher R&D returns.
• Smaller companies are projected to deliver higher R&D returns – The larger companies in our cohort have struggled to generate returns as effectively as their smaller counterparts. This shows that any economies of scale from bigger portfolios have been offset by infrastructure and complexity costs. The analysis shows it costs larger companies more to develop their assets, which reduces their returns.
• External innovation is important for all sizes of company – The original and extension cohort’s forecast late-stage pipeline values are both heavily reliant on external sources of innovation.

Neil Lesser, Principal and Life Sciences R&D Strategy lead at Deloitte US, concludes: “This year’s report highlights that it’s a testing time for pharma R&D. While the outlook shows uncertain times for the industry, the solutions appear to be relatively straightforward. Focusing on fewer core therapy areas, and building end-to-end scientific, regulatory and commercial capabilities in those areas, may provide the greatest chance of holistically addressing the complexity of successfully bringing a drug to market.

In these focus areas, employing a host of external innovation mechanisms as a core part of the R&D model is vital to creating a sustainable pipeline. Finally, being bold to reduce development complexity, streamlining functions and addressing unproductive infrastructure, should allow pharma to improve R&D returns.”

End

Notes to editors

*The “original” cohort refers to the 12 pharma companies usually included in Deloitte’s annual report, excluding the four new mid- to large-cap biotechnology companies in the overall 2015 figures.
**This is for the world’s highest R&D spending pharmaceutical companies.

About the Deloitte Centre for Health Solutions
The Deloitte Centre for Health Solutions, part of Deloitte UK, generates insights and thought leadership based on the key trends, challenges and opportunities within the healthcare and life sciences industry. Working closely with other centres in the Deloitte network, including the US centre in Washington, our team of researchers develop ideas, innovations and insights that encourage collaboration across the health value chain, connecting the public and private sectors, health providers and purchasers, and consumers and suppliers.

About Deloitte
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.

Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

The information contained in this press release is correct at the time of going to press.

Member of Deloitte Touche Tohmatsu Limited.

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