What can Gilead, Biogen and Celgene teach Big Pharma about R&D?

Deloitte's Neil Lesser

For the past 5 years the biopharma experts at Deloitte have been keeping an eye on a disturbing trend that shows no sign of letting up anytime soon. The biggest players in pharma have been seeing a steady erosion in their return on investment from research; peak sales estimates for what they're spending more on are plunging as the cost of commercialization is rising.

To be specific, Neil Lesser and Colin Terry estimate that the cost of development for Big Pharma has climbed by a third in the past 5 years, while the peak sales projections for what they have been working on plunged 50%, driving the projected rate of return on their R&D budgets from 10.1% to a thin 4.2%.

This year, Deloitte added an extension cohort of four companies--Celgene ($CELG), Biogen ($BIIB), Gilead ($GILD) and AbbVie ($ABBV)--that helps put the numbers at Big Pharma in better context. 

"The largest companies tended to be the poorest performers in the study," says Lesser. "Smaller companies have less complexity and infrastructure." A heightened focus on select drug assets managed by an R&D group with a coherent long-term development plan has created a much better model for the industry, offering a lesson the biggest companies would be foolish to ignore.

Deloitte's Colin Terry

"They are spending less to get more valuable assets to market," Terry says about the comparison group. And they are winning the race on returns by gaining greater value from external partners, bringing in new assets for late-stage development, which essentially allows them to operate with a much leaner infrastructure.

Simply put, they can make focused choices without adding complexity and unnecessary costs to their research group.

Says Terry: "Many specialty biotechs are operating in the most complex arenas, but their cost structure is much, much lower."

Big Pharma companies typically enjoy none of the economies of scale you would expect to see from a global outfit, with little evidence that one of the biggest trends in R&D for the past decade--breaking down internal research silos in favor of seeking external innovation--has worked as expected. Research costs tend to get lost inside larger companies, making it harder to achieve greater efficiency. The comparison group, though, buys what they need, when they need it.

And just getting a batch of new drugs approved is no sign of success.

As a result I see companies like GlaxoSmithKline ($GSK) trumpet approvals for a slate of 5 new drugs, without moving the dial significantly on revenue. Pfizer ($PFE) has been mired by poor performance in R&D for more than a decade. A company like Sanofi ($SNY) gets little out of its internal research operations but enjoys great returns in its partnership with Regeneron ($REGN)--another one of those very focused biotech companies like Celgene, Gilead and Biogen.

Big companies that can get focused can also take advantage of their size and ability to move fast in big and extraordinarily expensive Phase III programs, like Merck's ($MRK) work on Keytruda.

A few days ago the FDA approved the 42nd new drug of the year, beating a chart-topping 2014 and making 2015 the best year for new approvals since 1996. It's not how many drugs you get approved, but the standouts in terms of development cost and market potential that mark the dividing line between success and failure in the drug development world today.

- here's the release
- here's the report

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