Pharma R&D returns continue to decline

The projected rate of return on pharmaceutical R&D has more than halved since 2010, from 10.1% to 4.2%, according to an annual study by the Deloitte Centre for Health Solutions. This is largely due to the growing imbalance between declining forecast peak sales and increasing asset development cost, with peak sales per asset falling by almost 50% while 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.”

In addition to the 12 pharma companies included in Deloitte’s original cohort, four mid- to large-cap companies were this year added to the study for the first time. Interestingly, 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% lower and forecast peak sales per asset are 130% higher.

While the overall projected rate of return on R&D is at its lowest since the study began, 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.

The findings indicate the following strategic factors may also have an impact on R&D returns:

• Specialty therapeutics offer opportunity across all therapeutic areas. There is an increasing focus on specialised therapeutics, with opportunities in both specialty and primary care therapy areas. Companies need to ensure any shift to specialty care is not at the expense of potential opportunities within primary care markets.
• Companies with consistent therapy area focus are delivering higher value assets. Companies in the study who maintain a consistent therapy area footprint are forecast to deliver higher R&D returns.
• Smaller companies are projected to deliver higher R&D returns. This shows any economies of scale from bigger portfolios have been offset by infrastructure and complexity costs. The analysis shows it costs larger companies more to develop their assets, which reduces their returns.
• External innovation is important for all sizes of company. The original and extension cohort’s forecast late-stage pipeline values are both heavily reliant on external sources of innovation.

“While the outlook shows uncertain times for the industry, the solutions appear to be relatively straightforward,” said Neil Lesser, principal and life sciences R&D strategy lead at Deloitte US. “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.”

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.