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Balancing the R&D equation

Measuring the return from pharmaceutical innovation 2016

The seventh annual report from Deloitte Centre for Health Solutions explores the performance of the pharmaceutical industry and its ability to generate returns from its annual investment in new product innovation.

The subject of projected returns on R&D investment remains as critical as ever for the industry. For investors, they present an objective performance measurement tool, help demonstrate shareholder value and justify the allocation of capital to R&D. They also provide a sound starting point for the ongoing dialogue between payers, Health Technology Assessment (HTA) groups and the biopharma industry, to help determine value for money from innovative medicines and understand the impact of declining incentives for innovation.

In this report we continue to look beyond the analysis to consider actions that can be taken to improve returns in the context of today`s industry challenges.

Key findings and trends

The biopharma industry continues to face a challenging environment
Few of the external challenges faced by the industry that have been documented in our previous reports are going away, and in many cases are increasing. Pricing is perhaps the most publicised challenge, with political und public scrutiny intensifying. Addressing unmet clinical needs is a growing challenge, especially in the view of the availability of first- or second-line treatments already available that reduce or eliminate both the disease and its symptoms.

Overall performance continues to decline
Since 2010, our original cohort of 12 companies has launched 233 products with projected total revenues of $1,538 billion. Over the same period, the R&D divisions of these companies have progressed 376 assets into late-stage pipelines, with total forecast sales of $1,697 billion. Despite these successes, overall returns on pharmaceutical innovation continue to fall.

Trends linked to increased returns continue
Therapy Area (TA) focus is linked to higher peak sales. Companies that have lower volatility in TA make-up of their third-stage development portfolio outperform those that are continually changing the focus of their drug development efforts. We believe this is due to the depth of knowledge and scientific expertise needed to develop and successfully market products becoming embedded within the organisation. In comparison, companies that constantly change focus or are spread too thinly to foster depth of expertise may require higher investment to achieve similar future revenues.

M&A may be about to increase
Since 2013 there has been a steady decrease in the proportion of projected late-stage pipeline revenue derived from externally-sourced assets, a trend which accelerated in 2016 as more of the assets acquired as part of large-scale M&A in the late 2000s leave the late stage pipelines. This trend, together with the decrease in returns, indicates that companies are struggling to replace pipeline value through self-orientated assets. We anticipate that the coming years will see increasing M&A activity in a quest for higher R&D returns through R&D cost synergies or the acquisition of valuable assets. However the costs, both financial and otherwise, of these transactions are likely to be high and could place further pressure on R&D organisations that seem ‘too big to succeed’.

Strategic choices during R&D can positively or negatively impact long-term commercial value
Research into outperforming brands shows that leading companies tend to make a series of strategic decisions which collectively increase the commercial value of assets. These companies have explicit TA focus and expertise; target populations where value can be maximised; develop and adhere to a robust Target Product Profile (TPP); and generate evidence supporting the needs of all stakeholders.

Companies can improve R&D efficiency, regardless of scale
With scale acting as a barrier to creating value within R&D organisations, we have observed that companies are able to achieve greater efficiency in drug development through nimble decision-making: empowering key decision-makers, accepting greater risk, making quick kills, and embedding a rigorous but dynamic process for funding projects. We outline some ways in which these can be applied across the industry.

 

For further information download the full report.