Pharma’s productivity challenge: R&D returns continue to fall
13 December 2016
- Annual projected returns on R&D investment continue to decline to 3.7 per cent
- Projected peak sales per product have fallen 11.4 per cent year-on-year since 2010 to $394m
- Costs to bring a product to market steady at $1,539m in 2016
Projected returns on investment in research and development (R&D) for the top 12 pharma companies have fallen to just 3.7 percent this year, from a high of 10.1 per cent in 2010, according to an annual study by Deloitte’s Centre for Health Solutions.* This is the lowest point since the study began six years ago.
Since 2010, the top 12 pharma companies have launched 233 products. Over the same period, their R&D divisions have progressed 376 products into late stage pipelines, with total forecast sales of $1,697 billion.** Although in the last year costs to bring each drug from discovery to launch have stabilised, moving from $1,576 million in 2015 to $1,539 million in 2016, peak sales per product have continued to fall. They have now dropped 11.4 per cent year-on-year since 2010, to an average of $394 million this year.
Colin Terry, consulting partner for European life sciences R&D at Deloitte, explains: “Overall projected returns on R&D continue to fall, highlighting a real issue for the leadership of the world’s largest pharma companies. In addition to being an objective performance management tool for investors, measuring R&D investment also provides a starting point for the dialogue between payers, Health Technology Assessment (HTA) groups and the industry, to determine the value of innovative medicines.
“Pricing is perhaps the most publicised challenge, with political and public scrutiny on the topic intensifying. The majority of companies are struggling to achieve historical peak sales despite continuing to launch many new products. They are also increasingly looking for returns from treatments in smaller patient groups. As costs per product remain high, sales projections decline, and given it now takes the industry over 14 years to launch a drug, real questions should be raised about productivity and returns on innovation.”
‘Measuring the return from pharmaceutical innovation 2016: Balancing the R&D equation’ has been produced by Deloitte, using data from GlobalData. The findings indicate that the following strategic factors may also have an impact on R&D returns:
- End of the blockbuster: While the number of products has remained relatively consistent, in 2016 far fewer (21) would be considered “blockbusters” – products with forecast peak sales greater than one billion US dollars. In 2010 there were 55. This has led to an environment in which blockbuster costs do not produce blockbuster revenues, an equation which does not add up for long-term stakeholder value.
- Focused therapy areas: When a company focuses its attention on a particular therapy area in order to treat a disease or illness, it tends to produce higher peak sales. Companies which have less volatility in therapy area makeup of their late-stage development portfolio out-perform those who are constantly changing the focus of their drug development efforts.
- Learning from the small: There is a negative correlation between company size and both predicted returns and cost per product. Lessons can be learned from smaller companies, as they are able to achieve higher R&D productivity.
- Increase of M&A: Since 2013 there has been a steady decrease in the proportion of projected late-stage pipeline revenue derived from externally sourced products. This is a trend which has accelerated in 2016 as more of the products acquired as part of large-scale M&A in the late 2000s leave late-stage pipelines. The decrease in returns highlights how companies are struggling to replace pipeline value through self-originated products. As such, Deloitte anticipates that in the coming years there may be increasing M&A activity in a quest for improved R&D returns.
Neil Lesser, US principal and life sciences R&D strategy lead at Deloitte, concludes: “As patients, the health of pharma R&D is important to us all. The global pharma industry continues to face regulatory and reimbursement hurdles that make the operating environment increasingly difficult. While innovative deal-making and pre-competitive collaborations continue to evolve and spark innovation, the pharma industry needs to find a way to address structural and productivity challenges in order to grow and produce new medicines.
“With pharma R&D returns continuing to fall, our analysis shows that the current model is not sustainable. What is clear is that fundamental change may no longer be an option, but a necessity for the industry.”
Notes to editors
About the report
*‘Measuring the return from pharmaceutical innovation 2016: Balancing the R&D equation’ has been produced by Deloitte, using data from publicly-available audited annual reports and forecasts provided by research and consulting firm GlobalData. The report features 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.
**Forecast sales are calculated based on a time period of approximately 21 years.
About the Deloitte Centre for Health Solutions
The Deloitte UK Centre for Health Solutions generates insights and thought leadership based on the key trends, challenges and opportunities within the healthcare and life sciences industry.
Working closely with the US Center for Health Solutions 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. The US Center conducted a series of interviews for this report with lead executives across a number of biopharma companies.
Together we aim to bring a unique perspectives to support the various organisations in the industry to drive better patient outcomes, sustain a strong health economy and enhance the reputation of the industry.
GlobalData is a leading global research and consulting firm offering advanced analytics to help clients make better, more informed decisions every day. Our research and analysis is based on the expert knowledge of over 700 qualified business analysts and 25,000 interviews conducted with industry insiders every year, enabling us to offer the most relevant, reliable and actionable strategic business intelligence available for a wide range of industries.
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