Return on R&D among the world's largest pharma companies are still in free fall with no signs of a recovery, says Deloitte.
An uptick in the number of new active substances being approved for marketing in the last couple of years has prompted speculation that things are improving, but the underlying trend is still a downward spiral, according to the latest annual report from Deloitte's Centre for Health Solutions.
The figures make for grim reading. This year, the projected return on investment (RoI) for the top 12 drugmakers is just 3.7%, down from a high of 10.1% in 2010 when Deloitte published its first R&D productivity report.
In the meantime, the cost of developing a drug has escalated from an average of a little under $1.2 billion to $1.54 billion, and it now takes the industry over 14 years to launch a new product, it says. And smaller companies are also affected—RoI for midtier biopharma companies has shrunk from 17.4% in 2013 to 9.9% this year.
Colin Terry, a partner at Deloitte, says that a factor in the declining RoI is that companies are not able to sell new products at the price premiums that were achievable in the past.
"Pricing is perhaps the most publicized challenge, with political and public scrutiny on the topic intensifying," he said. "The majority of companies are struggling to achieve historical peak sales despite continuing to launch many new products."
In fact, average peak sales for new launches have shrunk to $394 million this year, down from $816 million in 2010, according to Deloitte's research, a fall of more than 11% year-on-year. In other words, companies are now facing "blockbuster costs, without balancing blockbuster revenues."
Meanwhile, this year's tally of FDA approvals for new drugs—currently at 19—isn't likely to come close to the highs of 2014 and 2015 where new registrations were in the 40s, says Reuters. Analysts at Credit Suisse are currently predicting this year's haul will be around 22.
One of the ways drugmakers can improve R&D returns is to adopt a "think small, win big" mentality, helped by narrowing focus onto a few specific disease areas that translates to higher peak sales. That is a trend that is already evident among most big pharma companies, leading to divestments and asset swaps such as GlaxoSmithKline's trade of cancer products for Novartis vaccines portfolio.
Some of the lessons of Deloitte's earlier reports continue to hold true, including that larger companies fare more poorly in R&D RoI than smaller firms, although it says improvements can come from a willingness to be more nimble and flexible, embracing risk and putting in place a "dynamic process for funding projects."
Interestingly, despite assertions by pharma companies that they are stepping up licensing, acquisition and partnering deals to swell pipelines, that is yet to yield a top-line benefit. In fact, Deloitte found there has been a steady decrease in the proportion of projected late-stage pipeline revenue derived from externally sourced products since 2013.
This trend accelerated in 2016 because more of the products acquired as part of large-scale M&A in the late 2000s are leaving late-stage pipelines, it says. With companies struggling to replace pipeline value through self-originated products, it predicts increasing M&A activity in pursuit of improved R&D returns.
"While innovative deal-making and precompetitive collaborations continue to evolve and spark innovation, the pharma industry needs to find a way to address structural and productivity challenges in order to grow and produce new medicines," comments Neil Lesser, US principal and life sciences R&D strategy lead at Deloitte.
"With pharma R&D returns continuing to fall, our analysis shows that the current model is not sustainable."