In just one year, Big Pharma's average cost of bringing a new drug to the marketplace has shot up 23%, soaring from $830 million to more than a billion dollars this year, according to a new report from Deloitte. Analyzing the internal rate of return for the world's 12 largest pharma R&D operations, Deloitte concluded that the rise in development costs has a lot to do with the massive shakeup that has been underway in many--though not all--of the biggest groups, with the average number of late-stage compounds in development plunging from 23 to 18.
Taking stock of the new math at the Big Pharma companies, Deloitte concluded that the internal rate of return has dropped from 11.8% to 8.4%, a 29% drop, though Deloitte analysts carefully note that the slide has a lot to do with a higher rate of return that's been garnered for commercial products. By squeezing more value from product commercialization than has been lost to failures, the industry has seen success. But the combination of drug program attrition and a legacy of trial failures have conspired to generate some bleak numbers for the industry.
"When we look at the internal rate of return," says Julian Remnant, head of Deloitte's European R&D advisory practice, "it is still positive. But the headwinds are increasing." And there are hopeful signs of an eventual turnaround.
"What we're seeing based on some of the other changes within the organizations is the first sign of the investment in quality," explains Remnant. "There are fewer assets with a higher technical possibility of success."
The industry has undergone enormous change in a short period, says Remnant, citing a shift in research from West to East. Another big change: There are signs that Big Pharma companies are following through on their pledge to break down some of the high walls built around R&D as they go out and work more with academic investigators, biotech companies and other pharma outfits in the much heralded "open innovation" model that is being fostered worldwide. That new approach to discovery and development is crucial to Big Pharma's ability to change the equation on its return on investment.
"We see an increased appetite for organizations to work together," says Remnant, as Big Pharma reaches toward the "next level of cost efficiency."
In part that next level will arrive as investigators join hands on areas of drug R&D where they aren't competing; helping in early-stage R&D, for example, and in fields where the companies have much to gain by working together.
"The sharing of clinical and scientific data will not come easy to these guys," says Remnant. "That's a big move, as we see how the story plays out in terms of a return on investment."
There are other areas where the companies can help each other, and reduce everyone's overhead.
"As an example, of the 12 companies how many are sending clinical monitors to the same (clinical trial) site week in and week out?" asks Remnant. "That's duplication that can be stripped out. I think we will see companies buying as one from the CRO marketplace as we see the scale of economies built up in the service provider market shared back with their customers." That trend is also likely to spur yet another round of consolidation in the CRO sector, which has already been undergoing a big round of mergers.
Another potential bright spot: As pharma companies find new ways to make their R&D work more efficient, new savings could be used to expand their pipeline with new programs. But don't look for the overall numbers to start improving overnight. If anything, they will get worse before they get better.
"I think we will continue to see a reduction, to be brutal," says the analyst. "We're not going to bend the curve next year or the year after. If this is an investment in quality, we may see another reduction in assets next year. The light shone on industry will grow even brighter, but you can't turn the ship around in a one- or two-year period."
- here's the press release
Special Report: Top 15 R&D Budgets