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Five strategies that could help biopharma firms get more ROI bang for their R&D buck
Health Care Current | January 22, 2019
This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies, and provides updates and insights on policy, regulatory, and legislative changes.
Five strategies that could help biopharma firms get more ROI bang for their R&D buck
By Greg Reh, vice chairman, US and Global Life Sciences leader, Deloitte LLP
The US Food and Drug Administration (FDA) approved 59 new drugs in 2018—the most approvals in more than a decade. Almost one-quarter of these drugs received “Breakthrough Therapy” designation, and 41 percent received “Fast Track” designation, according to data the agency released in January.1
Despite the number of approvals last year, biopharmaceutical firms are finding it increasingly difficult to replenish late-stage pipelines. Moreover, while clinical cycle times and research and development (R&D) spending have been increasing, returns over the past eight years have steadily declined, according Deloitte data based on information from 12 large biopharmaceutical firms. During the same period, clinical cycle times (the time it takes to bring a drug through clinical development) have increased.
In 2018, the average cost of developing a new drug and bringing it to market topped $2.1 billion—up $362 million from 2017, and almost double the average cost in 2010, according to our most recent research. While the 12 companies we track have increased R&D spending by an average of 15 percent, their return on investment (ROI) fell from 10.1 percent in 2010 percent to 1.9 percent in 2018—the lowest percentage we have seen since we started tracking it. In addition, peak sales per asset totaled $407 million in 2018—about half what it was in 2010, and these companies also have fewer late-stage assets in their pipelines. Since we began our series, the number of late-stage pipeline assets has fallen 23 percent—from 206 in 2010 to 159 in 2018.
Can companies reverse this trajectory? Balancing the risk-reward equation will likely require a multi-faceted approach, including new development paradigms, evidence-generation techniques, and productivity-enhancing technologies. Technologies such as artificial intelligence (AI) and machine learning algorithms can streamline processes, sift through the mountains of data generated during the R&D process, and enable much more efficient drug discovery and development. Our recent report, Unlocking R&D Productivity, discusses some strategies for reversing the declining ROI.
More biopharma firms are focusing on oncology
In response to shrinking revenues from other segments, as well as opportunities from advancing science, many biopharmaceutical manufacturers have shifted their focus to oncology. In 2010, oncology made up 18 percent of late-stage pipelines among the 12 large biopharma companies we track. That percentage climbed to nearly 40 percent by 2018. This shift toward oncology has led to an increasingly crowded clinical research space and longer development timelines, which has lowered returns. According to the Cancer Research Institute, more than 2,000 immunotherapies were being marketed or were in development in 2017.
Clinical development of oncology therapies is complex and typically targets small numbers of patients. If multiple companies target the same patients, or the same types of tumors, they could find it more difficult to find and enroll participants in clinical trials. This can delay trials and increase costs. Case in point: Clinical cycle times for cancer therapies have increased from an average of 6.16 years in 2015 to 6.61 years in 2018, according to our research. Moreover, biopharma companies are taking longer than ever to develop drugs—particularly cancer therapies. One reason for this could be an insufficient number of patients who are eligible to register in clinical trials.
How can biopharma companies improve their R&D ROI?
As long as the numerator (the value of assets) decreases, while the denominator (R&D costs) increases, biopharma companies will see declining returns. To reverse this trend, biopharma companies should consider the following five strategies to create a transformational change in R&D productivity:
- Embrace technology: Technologies such as robotic process automation, natural language processing, and natural language generation can help automate tasks so that they can be done faster, cheaper, and more accurately. Incorporating these technologies can lead to a more productive and cost-effective workforce. Other technologies, such as machine learning, can be used to support and improve R&D decision-making and clinical-trial design, and could transform drug discovery and business development. Drug development is a heavily regulated process, and companies must file documents throughout the R&D process. Some of this paperwork could be automated, which would free up employee capacity. R&D leaders should consider how other work processes could be automated. The process to deliver the clinical supply for CAR-T therapies, for example, is fundamentally different from processes used to develop traditional small-molecule drugs and biologics. By using technology to automate repetitive and administrative tasks, R&D teams could spend more time on higher-value activities. Moreover, applying machine learning to data gathered from electronic health records (EHRs), for example, could help biopharma companies design more realistic inclusion/exclusion criteria for clinical trials.
- Recruit people who have a background in new technology: Increasingly complex R&D processes, combined with sophisticated technologies, require biopharma companies to improve their technical and analytical skills. For companies to tap the potential of big data, they will need employees with data science skills who can clean and analyze data. These employees also need to be able to frame the right questions, identify correct hypotheses, and accurately interpret the strategic and clinical significance of the results.
- Invest in innovation hubs: Certain places can be important sources of both innovation and talent. Some biopharma companies that invested in innovation hubs are expanding that footprint to access people who can work on digital innovation. Relationships with local universities, academic medical centers, and biotech and digital health start-ups can support two-way learning and faster innovation cycles.
- Collaborate with external stakeholders: A collaborative approach to drug development—known as master protocols—could allow non-profits, academia, drug-makers, and other stakeholders to share infrastructure (including analytical capabilities and costs) and test clinical hypotheses in parallel. A recent paper from the Deloitte Center for Health Solutions estimates that such collaborative clinical studies could reduce oncology trial costs by as much as 15 percent and cut study time by between 15 and 21 weeks. For collaborations like master protocols to succeed, however, participating companies should define new operating models and governance structures.
- Consider new sources of talent: R&D leaders should consider new sources of talent outside of their four walls. For example, companies might be able to gain more insight from patients who are treated as collaborators, rather than subjects, in the research process. Patients can participate on advisory boards, study pilots, surveys, focus groups, and can offer input through crowdsourcing. Company leaders might want to consider crowdsourcing input on other aspects of drug development from external stakeholders or leveraging gig workers to help manage capacity constraints.
We believe it is imperative that biopharmaceutical companies develop a strategy to reverse the trend of declining returns. They should find ways to collaborate—with other companies and with stakeholders, including patient advocacy groups and academic entities. Company leaders also should ensure they are connected to technology companies that are working on products and services that could help improve their R&D. But they should begin with a clear vision for how digital transformation can improve returns. Digital transformation can be a multi-year process, and people who possess backgrounds in technology and data analytics are in high demand across all industries. Biopharma companies have a real opportunity to streamline R&D processes, reverse declining returns, and focus on developing new cures.
1 2018 New Drug Therapy Approvals, FDA Center for Drug Evaluation and Research, January 2019 (https://www.fda.gov/downloads/Drugs/DevelopmentApprovalProcess/DrugInnovation/UCM629290.pdf)
In the News
In proposed payment notice for exchange plans, CMS looks to change prescription drug benefit, seeks comments on silver-loading
On January 17, the US Centers for Medicare and Medicaid Services (CMS) released its proposed Notice of Payment and Benefit Parameters for 2020. The proposed rule sets provisions for federal and state-based exchanges, health plans in the individual, small-group, and large-group markets, and self-funded group health plans. The major provisions include:
- Request for comments on how to end “silver-loading:” CMS expressed support for a legislative solution to appropriate cost-sharing reduction (CSR) payments to help end silver-loading, where higher premiums for silver-tier plans sold through an exchange result in larger federal subsidies for enrollees.
- Request for comments on the auto re-enrollment process: CMS is seeking public comment on ways to enhance the auto-enrollment process to reduce errors and potential misspending. According to CMS, consumers aren’t aware of changes to their health coverage and might not update their tax-credit eligibility if they are automatically re-enrolled.
- Changes to the prescription drug benefit: The proposed rule would give tools to health plans to manage drug costs, including:
- Allowing health plans to make mid-year formulary changes when the generic equivalent of a prescription drug becomes available. Plans would have to allow enrollees to request coverage for brand-name drugs that were removed from formularies when this formulary change happened.
- Permitting health plans to exclude certain cost-sharing toward a patient’s annual limit if the patient elects a brand-name drug when a medically appropriate generic is available.
- Permitting plans to exclude drug manufacturer coupons from counting toward patients' annual limitations on cost-sharing if a medically appropriate generic drug is available.
- Changing calculation of the “premium-adjustment percentage:” CMS proposes to modify the annual premium-adjustment percentage to reflect individual and small-group plan premiums instead of employer-sponsored premiums. CMS uses this figure to adjust premium subsidies, maximum out-of-pocket caps, and more. This change could reduce subsidy payments if finalized.
- Updates to the risk-adjustment program: The proposed rule would recalibrate the risk-adjustment model using a combination of data sources and would transition away from commercial data.
(Source: CMS, CMS issues the proposed Payment Notice for the 2020 coverage year, January 17, 2019)
New GAO report highlights EHR interoperability issues
Discrepancies in electronic health record (EHR) demographic information can make it difficult for health systems to electronically match patient records, according to a recent Government Accountability Office (GAO) report. Health systems use patient demographic information (e.g., name, date of birth, and sex) to match patient EHRs—both manually and automatically. However, this information might not be recorded in the same format across health information technology (HIT) systems and providers, resulting in interoperability challenges.
The 21st Century Cures Act requires GAO to study patient record-matching, and this report describes various approaches to patient record-matching and efforts to improve the system, according to stakeholder interviews and reports from the Office of the National Coordinator (ONC) for Health Information Technology (HIT). Several stakeholders say they are trying to improve EHR interoperability, but note that a multi-faceted approach is needed. Strategies include standardizing the way demographic information is recorded, using algorithms to improve record-matching, and forging public-private collaborations.
Related: ONC HIT recently released its Annual Report to Congress for 2018. This report highlights nationwide progress for health IT infrastructure, electronic access, and use of data to improve care delivery from November 2016 through October 2018. According to the report, 96 percent of non-federal acute-care hospitals, and 78 percent of office-based physicians, have adopted health IT. While most patient health data is recorded electronically, it is not always accessible across systems. Patients who manually enter login information through portals, for example, could find it difficult to access their own health data, and providers might face interoperability barriers when trying to share data, the report noted. According to Deloitte’s 2018 Survey of US Physicians, 62 percent of physicians who responded said that interoperability needs improvement.
Blue Cross Blue Shield of North Carolina announces new payment model
On January 15, Blue Cross Blue Shield of North Carolina (BCBSNC) announced it now has value-based payment contracts with most of the state’s major health systems. A year from now, half of the plan’s 4 million customers will have a physician or hospital that is directly responsible for the cost and quality of their care, the company predicts. Within five years, BCBSNC expects all of its members will have coverage that is part of a value-based contract. According to BCBSNC CEO Patrick Conway, who previously ran the CMS Innovation Center, the arrangement with the state’s largest health systems is similar to Medicare’s Next Generation accountable-care organization (ACO) model, which requires participants to share financial risk (see the January 8, 2019 Health Care Current).
Five of the state’s seven largest health systems, representing about $4.5 billion in claims, will participate in the shared-risk payment model. Health systems will share in cost savings if they meet goals to improve the health of patients, or share in the losses if they fall short, according to the Blues plan.
Hospital megamergers increase in size, value
In 2018, the number of hospital mergers dropped by 22 percent, but the overall size of the deals increased as part of a “megamergers” trend, according to an analysis from management consulting firm Kaufman Hall. The report noted that the industry saw 90 transactions in 2018—down from 115 in 2017. These deals have increased in value, with the average seller size growing by a compound annual growth rate (CAGR) of almost 14 percent per year, reaching a high of $409 million in 2018. Deloitte previously discussed the factors that drove hospital mergers and acquisitions—and increased post-transaction value.
Related: Acquisition of physician practices by private-equity firms has increased significantly during the past few years, according to a study published on January 15 in the Annals of Internal Medicine, the American College of Physicians’ (ACP’s) medical journal. According to the report, private-equity firms acquired more than 100 practices in 2017, though this might not include smaller practices.
Consumer Electronics Show 2019: Digital health roundup
Every January, innovators from around the world descend upon Las Vegas for the Consumer Electronics Show (CES) where they show off the latest technologies that could make the lives of consumers easier and better. Here are some of the digital health innovations that were revealed at this year’s event:
- Stress reducer: The impact of stress on our lives and health is well documented. A company called Touchpoints Solutions introduced two watch-sized wearables developed by a neuropsychologist. The devices emit vibrations at different intensities. It is designed to reduce the physical effects of stress in just 30 seconds, in part by slowing the wearer’ heart rate.
- Home diagnostics: Testcard’s home-testing cards allow consumers to test for pregnancy, urinary tract infections, and glucose levels at home. Consumers put the thin cards in urine and then scan them with an app through their mobile phones, which sends results to them quickly.
- Wearable pain device: The opioid epidemic in the US has made chronic pain front-page news for the past few years. Quell has a wearable device that provides mild shocks to disrupt pain signals. Users wear the small device on their legs. It comes with an app that allows users to tailor how they manage their pain.
- Digital vision assistant: Israel-based OrCam showcased its OrCam MyEye 2, a small device developed for the visually impaired. It can be attached to the side of eyeglasses, and can read aloud text, recognize faces, and identify products.
- Wearable calorie counter: Healbe, a Russian startup, displayed a fitness band that tracks calorie intake automatically with 90 percent accuracy. This can save consumers from having to manually enter their food intake on an app. The bracelet has sensors that measure, in real time, the behavior pattern of interstitial fluid released during digestion. By tracking this activity, the device can interpret how many calories the wearer ingested.
RELATED: For more on the latest technology trends in health care, including those that can transform the way organizations run their businesses, check out Deloitte’s latest technology trends report.