Posted: 04 Feb. 2020 12 min. read

A decade of shrinking returns might be prompting pharma to adopt new business models

By Mike DeLone, vice chairman, US life sciences leader, Deloitte LLP

Each January, the life sciences industry gathers in San Francisco for the J.P. Morgan Healthcare Conference. Executives from a wide range of pharmaceutical companies highlight their portfolio strategies, strategic investments, and innovative partnerships. New partnerships were announced, and sessions highlighted new vaccines, cutting-edge immune-inflammation drugs, and advances in cell and gene therapies. But there was a palpable feeling of caution in the air.

This feeling isn’t surprising. As pharmaceutical companies have touted scientific breakthroughs, experienced exceptional returns in some areas, and enjoyed access to abundant capital over the past 10 years, they also have seen their rates of return steadily decline, according to Deloitte’s annual Measuring the Return from Pharmaceutical Innovation report. During that time, the cost to develop a new product has nearly doubled while the time to bring it to market has increased substantially. It’s not that this industry is slow to respond to changes. On the contrary, the pharmaceutical industry is working to overcome challenges that may be more complex than anything any industry has ever been asked to overcome. 

Here’s a look at three key stats from our report… 

  • Returns continue to shrink: We have been monitoring 12 large pharmaceutical companies since our first report in 2010. Ten years ago, those companies reported average returns on innovation of 10.1 percent. That percentage has since fallen to less than 2 percent. During the same period, the cost to bring an asset to market has jumped 67 percent—from $1.18 billion to $1.98 billion. 

  • Clinical cycle times are getting longer: Clinical development cycle times have increased since 2014 despite the advent of accelerated approval pathways around the world. This is being driven, at least in part, by a shift toward oncology and targeted therapies where there is intense competition for patients. Increased use of digital tools might help to improve cycle times, but a radical reduction will likely require transformative approaches including greater reliance on RWE to design synthetic control arms, simulate clinical trials for rare diseases, identify high-responder sub-populations, and pursue label expansion.

  • There are more biologics in the pipeline: The era of small-molecule blockbuster drugs that can treat a large population might be over as the industry turns its attention to personalized cell and gene therapies. A decade ago, small molecules made up 67 percent of the drug pipeline. That percentage has since fallen to 43 percent and we expect it will continue to decrease due to reimbursement pressure and a shift to biologics that target smaller patient populations. Biologics now make up 37 percent of the drug pipeline—up from 15 percent in 2010. Cell and gene therapies, however, can add a new level of complexity to processes that were built around small-molecule or biologic drugs.

…And three trends we expect to shape the sector 

First the good news: Many pharma companies have introduced new business models aimed at improving efficiencies, speeding innovation, reducing costs, and creating more targeted therapies. These changes have the potential to favorably impact returns. Moreover, the US Food and Drug Administration (FDA) has been approving more products in recent years. In 2019, 48 new drugs and 10 biosimilars were approved, according to FDA’s annual report of drug approvals. That’s a significant change from most of the past 10 years when FDA typically approved between 20 and 25 new products a year. Now the bad news: The pharmaceutical sector as a whole has been hamstrung by outdated legacy systems and inefficient processes. This is a situation that can’t continue, and change seems critical for the survival of pharmaceutical companies. Here’s a look at three key trends that are shaping pharmaceutical companies:

  • More M&A and partnerships, particularly in oncology: The pharma sector continues to rely heavily on external innovation—more than half of the pipeline is now sourced externally. This trend is likely to increase as large pharmaceutical companies try to achieve growth on an already sizable revenue base. We could see more waves of consolidation and new collaborations in the near future. Case in point: In January, Roche and Illumina announced a 15-year partnership that they expect will help drive adoption of next-generation sequencing assays for oncology.1 The ability to spot the best science in the world—whether internally or externally—will be an increasingly important skill set for pharmaceutical companies—especially the largest organizations. 

  • Greater use of RWE: 2020 should be the year that the industry moves from talking to action. Last spring, FDA announced its 2019 strategic framework, which outlines how RWE and RWD will be used to make regulatory decisions—as called for by the 21st Century Cures Law. The agency acknowledged the importance of RWD and RWE and called it a top strategic priority. I have seen a good bit of experimentation, but I generally have not seen the level of commitment that I expect will be needed. The traditional research and development (R&D) model is expected to shift from a focus on discovery and trial execution to a process driven by RWE health datasets, investments in interoperability, and advanced computing power and cloud data storage. We are beginning to see more companies discuss partnerships that will allow them to access RWD, and we expect to see increased funding in analytics capabilities like machine learning to analyze this data. 

  • More applications for AI: Each year that we attend this conference, there are noticeably more technology firms that are playing a role in the pharma sector. We believe natural language processing, machine learning, and other cognitive technologies should be leveraged in every part of the process—from early research all the way through pricing and market access. These technologies could lead to greater efficiencies, more effective business development, and deeper insight, which could accelerate drug discovery. While AI applications in the pharmacy sector are largely focused on transforming the process of small molecule research, they are also showing potential in the identification of new biologics such as therapeutic antibodies against cancer, fibrosis and other diseases, according to Deloitte's recent paper on intelligent drug discovery.

When we began measuring the returns from pharmaceutical innovations a decade ago, there was a general acknowledgement that the sector would soon incorporate digital technologies to reduce costs and streamline the drug discovery process. Several conference speakers noted that the transition to digital has been much slower than anticipated. Small tweaks to existing processes are no longer a viable solution, and bold moves are becoming essential. While this isn’t a new issue for the sector, I think it is going to feel much more real in 2020. This industry is infinitely complex, particularly as we learn more about the human genome and what precision medicine might really look like in the future. We are at a point in history unlike any other period before. The ability to effectively treat a patient can require an understanding of immensely complex processes. 

Endnotes

1. Roche and Illumina partner to broaden patient access to genomic testing, press release, The Roche Group, January 13, 2020

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Mike DeLone

Mike DeLone

US Life Sciences Sector Leader

Mike, a principal in Deloitte Consulting LLP, is the national sector leader for Deloitte’s Life Sciences practice. In this role, he leads a multi-disciplinary team who serves clients in the pharmaceut