Pharmaceutical R&D continues to perform, albeit against strengthening headwinds
All corporate functions have a role to play in ensuring R&D earns its investment, according to Deloitte and Thomson Reuters
21 November 2011
R&D Internal Rate of Return (IRR) drops year-on-year from 11.8% to 8.4%;
Average cost of successfully bringing a product to market has increased by more than 25% (from $830 million in 2010 to $1,048 million in 2011);
Number of late stage compounds in development reduced from 23 to 18 on average per company;
Collaboration, simplification and value discipline are fundamental to increasing R&D returns.
Leading pharmaceutical companies are struggling to deliver improved R&D returns in the face of rising development costs, stagnating revenue forecasts and continued late stage terminations. This is according to the findings of Deloitte's 2011 annual review, ‘Measuring the Return from Innovation', conducted in collaboration with Thomson Reuters.
Julian Remnant, head of Deloitte's European R&D advisory practice, comments: "While this picture reflects a snapshot of the very real productivity challenges the industry is facing, it belies some underlying successes. Of the 12 companies we analyse each year - the top 12 research-based pharmaceutical companies globally - nearly two-thirds succeeded in realising more value from product commercialisation than has been lost from late stage product failures. Also, across the 12 companies, non-R&D costs have declined, resulting in a higher operating margin - which helps to free up cash flow that could be reinvested in R&D."
This year's annual review looks at dynamic returns to provide further insight into the movements in the year-on-year (static) Internal Rate of Return (IRR) measure, which has decreased from 11.8% to 8.4%. "Dynamic returns provide valuable insights into pipeline momentum and cost management," explains Remnant. "Although we believe dynamic returns should be looked at over a four to five year minimum period, reflective of the time to progress a product through late stage development.
"Taking a more innovative approach through greater collaboration has already proved successful. The walls of secrecy are coming down in some cases and there are increasing numbers of players within the industry forming alliances and joint ventures to pool research knowledge in particular disease area or indication. Similarly, companies are striving to work more closely with payers at an earlier stage in development, to ensure that their innovation investments are directed towards therapies and propositions that are attractive to payers.
"Having said this, the pharmaceutical R&D sector can do more to work together, for example sharing knowledge on the science behind failed molecules and studies will help improve success rates, and ultimately bring down the cost to develop new medicines."
Similarly, Remnant anticipates R&D organisations in the future coming together to simplify and share capabilities in non-competitive areas of the R&D operation thereby reducing cost. "Shared drug development models will remove duplication, maximise capacity utilisation, and drive scale economies within service providers. We see R&D leaders beginning to raise their level of ambition and take the lead in this type of cross-company collaboration."
The annual review includes a return on investment simulation for a typical pharmaceutical company to help select priorities for change in R&D. Of note, the analysis shows that all corporate functions have a role to play in helping R&D earn its investment. Simulating the impact on R&D IRR of improvements in gross profit margin, for example, showed that even modest efforts to improve manufacturing efficiency would, over time, have a profound effect on R&D returns.
With greater focus on the economics of pharmaceutical R&D, Remnant says; "We're likely to see companies establishing centres of excellence which bring together value analytics, simulation and modelling expertise, and finance and portfolio management capabilities to inform capital allocation decisions during drug development." The successful adoption and implementation of such capabilities will better position R&D leaders to make the case for investment in ‘the business of R&D', and continue to develop medicines for the benefit of patients and society.
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Notes to editors:
About the report
Deloitte and Thomson Reuters have collaborated in this study of R&D value measurement combining Deloitte's R&D advisory experience and financial expertise with Thomson Reuters R&D data and business insights.
In this press release, references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.
Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited ("DTTL"), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.
The information contained in this press release is correct at the time of going to press.
For more information, please visit www.deloitte.co.uk.
Member of Deloitte Touche Tohmatsu Limited.
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Last Updated: Monday, November 21, 2011