Posted: 20 Jul. 2021 10 min. read

Measuring the return from pharmaceutical innovation 2020: Have the seeds of change been sown?

By Dr. Maria João Cruz, Ph.D., assistant manager, UK Centre for Health Solutions, and Sonal Shah, senior manager, US Center for Health Solutions, Deloitte Services, LP

The global biopharmaceutical (biopharma) industry has achieved many breakthroughs in innovative research and development (R&D) over the past decade, which, in turn, continue to fuel innovation and shape health care globally. Most recently, the industry came together to address the COVID-19 pandemic with new life-saving treatments and vaccines. However, alongside the growing complexity of development, biopharma R&D is under mounting pressure to optimize processes and to improve returns from their investments.

We recently launched our 11th report in the Measuring the return from pharmaceutical innovation series. Since 2010, this report has provided insights into the state of biopharma R&D by projecting the internal rate of return (IRR) on investments that world-leading biopharma companies might expect to achieve from their late-stage pipelines. Additionally, this year’s report, Seeds of change: Measuring the return from pharmaceutical innovation 2020, explores how the pandemic both disrupted and accelerated clinical development. It also looks at how companies can build upon the current momentum for a productive future for drug development.

In 2010, we started by tracking the performance of an original cohort of 12 biopharma companies and, in 2015, we introduced an extension cohort of four more specialized companies (which we back tracked to 2013). Over time, our analysis has shown a convergence in the performance of the original and extension cohorts, likely because the extension cohort companies can no longer be distinguished from the original cohort companies in scale or R&D spending. In addition, in the past year, one of the companies in our original cohort acquired one of the extension cohort companies. For these reasons, we decided to do things differently this year and analyze the performance of the two cohorts as a single combined one.

After a decade of decline, are investment trends improving?

In 2020, the projected IRR for the combined cohort was 2.5%, 0.9 percentage points higher than in 2019. For the first time since 2014, the average IRR has had an uptick from the previous year, showing signs of a potential reversal in the declining trend. However, the projected returns achieved in 2020 are still 4.7 percentage points lower than the peak in 2014. In addition, while 10 of the 15 biopharma companies in the combined cohort improved their average IRR from 2019, all but one are below the industry cost of capital.

In measuring IRR as a proxy of R&D productivity, we factor in the average cost to develop the assets in each company’s pipeline and the expected sales from these assets once launched:

  • For the seventh year since 2013, the average cost to develop an asset, including the cost of failure, increased for the combined cohort. In 2020, the average cost to develop an asset was $2,442 million, a small increase of $51 million compared to 2019. However, the average cost has nearly doubled from $1,327 in 2013.
  •  In 2020, our combined cohort saw a modest increase in average forecast peak sales per pipeline asset to $421 million from $357 million in 2019. 

Sources of innovation are increasingly external

We have also seen a shift toward more external innovation across the original and extension cohorts. Until recent years, over half of the late-stage pipelines of both cohorts were sourced through internal innovation. Over the past three years, however, the original cohort companies have relied on external sources for more than 50% of their late-stage pipeline, through acquisitions, co-development, and in-licensing deals. Over the past two years, we have also seen the same trend in reliance on external innovation in the extension cohort. Interestingly, this further supports our observation that the extension cohort companies have become more like the ones in the original cohort over time and are now more likely to partner to access capability and innovation.

Cycle times continue to have a negative impact on R&D productivity

This year’s analysis shows that clinical-trial cycle times continue to get longer. The average clinical cycle time (from the start of Phase I to completion of Phase III) for the combined cohort reached 7.14 years in 2020—a seven-year high. This was despite an increase in the number of assets receiving special designations, which regulators intended to expedite the development and approval of new drugs. This continued trend toward longer cycle times has been driven by: 

  •  The growing complexity of drug development
  •  Increasing competition in enrolling participants for clinical trials
  • Difficulties in retaining trial participants
  • The complex data capture, collection, and management often needed to satisfy regulatory requirements 

In addition, most company pipelines have a strong focus on oncology. Cycle times in oncology are typically twice as long as those for other therapy areas, mainly because oncology trials involve complex protocols with stringent selection criteria. This can make it difficult to identify and recruit eligible patients.

Scaling the use of digital technologies to improve R&D productivity

The overall decline in IRR and rising cycle times come at a time when emerging technologies and transformative approaches to drug development are showing signs of success. Over the past few years, many biopharma companies have begun tapping the potential of digital transformation through the application of artificial intelligence (AI) and other digital technologies in clinical development. As highlighted in our reports, Intelligent drug discovery: Powered by AI and Intelligent clinical trials: Transforming through AI-enabled engagement, most biopharma companies are attempting to integrate AI into drug discovery and development processes to transform many of the key steps in clinical trials, from protocol design to study execution. Upscaling their use can be essential to reduce cycle times and improve productivity altogether.

In 2020, the COVID-19 pandemic disrupted clinical trials across the globe and forced the industry to adopt innovative approaches to R&D, accelerating rate of adoption of digital technologies in trial operations. The pandemic also led to the development of novel COVID-19 vaccines and therapies in record time through extraordinary collaboration and partnerships. Despite some disruptions, there were some silver linings during the pandemic that might have sown the seeds of change for a more productive future for biopharma R&D. Moreover, we expect the investment in the accelerated development of COVID-19 therapies and vaccines could potentially uplift the industry IRR in the coming years, while leading to a greater focus on preventative therapies in the future.

What’s next for biopharma R&D and how should companies prepare?

We predict that seeds of change will continue to accelerate the transformation of the industry toward a new future for R&D, in which wider use of technologies and innovative development approaches could reverse the decline in IRR. However, the seeds of change sown during the pandemic should be nurtured. This will likely require companies to continue to collaborate, invest in technology infrastructure (such as real-world evidence platforms and AI) to increase data utility, expand the use of digital technologies to run decentralized and virtual clinical trials, and adopt transformative approaches to expedite drug development at scale. Moreover, companies will have to attract and retain people with relevant skills and talent, including data scientists and bioinformaticians, and skilled interdisciplinary leaders who are AI-friendly and tech-savvy. By being willing to embrace new business and operating channels, the industry can be well-positioned to look optimistically for a future with higher returns on pharmaceutical innovation.

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