R&D returns challenged by high costs

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Pharmaceutical industry returns continue to decline according to a new report from the Deloitte Centre for Health Solutions.

According to the report, the projected rate of return on industry R&D has more than halved since 2010, from 10.1 per cent to 4.2 per cent.

The report, ‘Measuring the return from pharmaceutical innovation 2015: Transforming R&D returns in uncertain times’, has been produced by Deloitte in collaboration with research and consulting firm GlobalData.

It says this is largely due to the growing imbalance between declining forecast peak sales and increasing development costs. Since 2010, while forecast peak sales per asset have fallen by almost 50 per cent, the average cost of developing an asset has climbed by a third. 

“The decline in peak sales of assets has had the greatest negative impact on R&D returns since our study began," said Julian Remnant, head of Deloitte’s EMEA R&D advisory life sciences practice.

"We have seen macroeconomic pressure continuing to reduce R&D returns in the life sciences sector and specific questions being raised over the pricing of innovative medicines across the world. These external factors have combined with internal productivity challenges, meaning life sciences R&D is not currently generating a significant return on investment. We are now seeing a trend for companies to return more money to shareholders through dividends and share buybacks than they are investing in the future through R&D, licensing and acquisitions.”

While the overall projected rate of return on R&D is at its lowest since the study began, the report says there are some promising signs across the industry.

These include: assets retaining or marginally increasing their forecast revenues as they progress through late stage development; the negative impact of terminations falling significantly this year; and, 2014 being a headline year for approvals, with 43 products approved.

Since Deloitte’s study began in 2010, the original cohort has launched 186 products with estimated total revenues of UD$1,258bn. The R&D divisions of these companies have progressed 306 assets into late stage pipelines, with total forecast lifetime revenues of UD$1,414bn.

In addition to the 12 pharma companies included in the cohort, four mid-to large-cap companies have been added to the study for the first time. Deloitte says this recognises the increasing value produced by such companies and their importance in the life sciences industry.

Importantly, between 2013-15 using three-year average data, this extension cohort has a projected internal rate of return that is triple the original cohort. Additionally, their costs to develop an asset are 25 per cent lower and forecast peak sales per asset are 130 per cent higher.

 The report finding identified four strategic factors that may have an impact on R&D returns: speciality therapeutics offer opportunity across all therapeutic areas; companies with consistent therapy area focus are delivering higher value assets; smaller companies are projected to deliver higher R&D returns; and,  external innovation is important for all sizes of company. 

Neil Lesser, Principal and Life Sciences R&D Strategy lead at Deloitte US, said: “This year’s report highlights it’s a testing time for pharma R&D. While the outlook shows uncertain times for the industry, the solutions appear to be relatively straightforward. Focusing on fewer core therapy areas, and building end-to-end scientific, regulatory and commercial capabilities in those areas, may provide the greatest chance of holistically addressing the complexity of successfully bringing a drug to market.

"In these focus areas, employing a host of external innovation mechanisms as a core part of the R&D model is vital to creating a sustainable pipeline. Finally, being bold to reduce development complexity, streamlining functions and addressing unproductive infrastructure, should allow pharma to improve R&D returns.”