This week, we published our eighth annual report on Measuring the return from pharmaceutical innovation. Our report tracks the annual return on investment that the 12 leading biopharma companies (by 2009 R&D spend) might expect to achieve from their late-stage pipelines, as well as tracking the performance of an extension cohort of four mid-to-large cap biopharma companies for the third consecutive year. This week's blog by Matthew Thaxter, an analyst at the centre, gives his take on the findings from this year’s report.
A new future for R&D?
This is the second year in which I have been part of the project team involved in producing the report, but the first in which I have been involved from the outset (having joined mid-way through last year’s project). Being involved from the off gave me a deeper insight into the R&D expenditure and forecast sales data underpinning our analysis. During this period of data collation and analysis, my awareness of the complexity involved in calculating the return on investment in pharmaceutical research and development (R&D) grew significantly, as did my appreciation of the value offered by our consistent and objective measure of industry performance.
Our modelling of this year’s data revealed that the projected returns for our original cohort of 12 biopharma companies had declined again, coming in at 3.2 per cent - down from 3.7 per cent last year. The extension cohort once again outperformed the original cohort, seeing an improvement of 2 percentage points on 2016 in its forecast returns to 11.9 per cent, but still down on the 2014 high of 17.7 per cent (see Figure 1 below).
Figure 1 – Return on late-stage portfolio, 2010-17 – original and extension cohort
Source: Deloitte research, 2017
While a record low of projected returns has been set by the original cohort, a more striking data point for me from this year’s analysis is the decline in the number of late-stage assets for the original cohort to a new low of 159 (down from 189 in 2016). During the reporting period of 1 May 2016 to 30 April 2017, there was a 21 per cent decline in the number of new Phase III trials commenced by the original cohort. This, in addition to a greater number of late-stage terminations in comparison to last year, have contributed to a much smaller late-stage pipeline this year. These trends in new and terminated assets are both results of the original cohort’s ongoing strategic switch towards drug development for more niche indications and rarer diseases. Despite the higher attrition rates for these therapeutic areas, the higher price tags and associated returns are significant pull factors for R&D-based companies.
On a more positive note for the original cohort, peak sales per asset have risen for the first time since 2014, now standing at $465m - up from $394m in 2016. The aforementioned strategic switch from the original cohort has resulted in fewer late-stage pipeline assets, but greater forecast value per asset. It is also a possibility that in the past year, a number of assets have been purposefully removed from pipelines that were not expected to either obtain regulatory approval or achieve sufficient levels of reimbursement. The extension cohort has also seen an improvement in its projected peak sales per asset back to blockbuster levels at $1.13bn – up from $801m in 2016.
However, the focus on developing assets with higher peak sales potential is counterbalanced by a higher likelihood of failure, and the cost of bringing these assets to market is still disproportionately high at $1,992m - up from $1,539m in 2016. This figure is largely impacted by the number of late-stage assets, however, even at a constant asset number the cost of developing an asset from discovery to launch would have come in at $1,676m. Escalating R&D costs is a trend shared by the extension cohort, which has seen a more modest increase in its cost to bring an asset to market from $1.98bn in 2016 to $2.17bn this year.
It would be a mistake to use these projected financial returns as the only measure of pharmaceutical innovation, and as such, in this year’s analysis we tracked a number of metrics to assess product innovation. New molecular entity (NME) approvals are a commonly used metric, and our analysis demonstrated that the number of NME approvals from the FDA and EMA in 2017 has already surpassed last year’s total, with levels expected to reach those last seen in 2014. For both the original and extension cohorts, the percentage of launched and late-stage pipeline assets that are first-in-class has declined over the past three years, but at 50 per cent of approvals and 46 per cent of the late-stage pipeline in 2017, this still represents a significant amount. Conversely, the proportion of drugs with orphan/fast-track/breakthrough designation has increased to 70 per cent of peak sales for approved assets, demonstrating that innovation in biopharma is contributing significant patient value, as those with limited or no treatment options gain access to effective therapies.
Ultimately it is clear that the biopharma industry continues to face an incredibly difficult R&D environment, facing many challenges including increased competition and cycle times, shorter time in market, expiring patents, declining peak sales and pressure around reimbursement and regulatory scrutiny. However, there is significant technological innovation in the industry which is starting to be used to drive efficiency, replenish pipelines and bend the cost curves that have been rising since our series began. These technologies, including artificial intelligence, robotic and cognitive automation and real world evidence are the focus of the second section of this year’s report. Going forward, it will be interesting to track the adoption of these technologies among our original and extension cohorts, and the impact that they have on these companies’ R&D efficiency and productivity.