In December 2015 we launched our sixth annual report on ‘Measuring the return from pharmaceutical innovation’. Our research highlights the difficulties that the largest pharmaceutical companies face in delivering sustainable returns on their late stage R&D pipelines. Indeed, while the cost to develop an asset has increased by a third since we started our analysis six years ago, forecast average peak sales has declined by half. Additionally, our measure of forecast R&D return on investment (RoI) has also shown a significant downward trend, with the average across the 12 companies declining from over ten per cent in 2010 to just over four per cent in 2015.
But it’s not all doom and gloom. These averages hide a range of individual company results which vary significantly. Specifically, for the period 2013-15, three-year average returns ranged from -1.4 per cent to 10.2 per cent across the 12 companies. This year we also analysed four mid- to large-cap companies who, over the same time period, delivered average returns of 17 per cent. This highlights not only the different journeys that R&D companies are taking but also that they are using different operating models to deliver their pipelines.
A combination of factors continue to create difficult market conditions for pharmaceutical R&D:
- the global economic crisis in 2008 and resulting healthcare austerity measures
- increasing market entry hurdles put in place by pricing and reimbursement bodies
- the challenge of identifying commercial opportunities which will deliver sustainable returns
- emergence of developing economies exhibiting different medical needs from traditional markets.
One of the challenges driving R&D transformation is the realisation by all stakeholders that healthcare budgets struggle to afford the myriad of expensive new medicines coming to market. New drugs are increasingly focussed on smaller patient populations, each with discrete clinical needs that require specific interventions – limiting the available patient pool for new drug launches and, ultimately, the levels of return that can be derived from a new drug development.
The industry is arguably a victim of its own success. Diseases that have previously exerted a huge toll on society: diabetes, asthma, and increasingly many cancers, are generally well controlled. This is due to the plethora of effective drugs that are now available to physicians which have delivered improvements such as reduced mortality and morbidity. There is a growing body of evidence quantifying the impact of medical innovations on life expectancy:
- new chemical entity launches (drugs with a new active ingredient which has not previously been available) have been credited with increasing life expectancy by 0.8 years, almost three weeks, between 1986-2000 across 52 countries
- the reduction in deaths from heart disease in the US by almost 70 per cent, between 1950-2010 is attributed to the introduction of new chemical entities targeting heart disease between 1950-1980.
The industry is now having to focus more of its efforts on addressing the most complex, difficult-to-treat, niche patient populations and/or diseases which are poorly understood – both carrying a higher risk of drug failure, potentially higher development costs and higher market access hurdles. In addition, these also comprise areas of unmet clinical need that society desperately needs new medicines to address. Alzheimer’s is one such condition where, between 2000 and 2012, 244 drugs were undergoing clinical trials for Alzheimer’s yet only one received marketing approval. This level of failure is simply unsustainable for an industry that needs sufficient revenue to be generated through product sales for investors to reinvest into developing the drugs of the future. It is also sobering for the many individuals around the globe currently caring for sufferers, or entering the latter stages of their life and likely to suffer from the condition in the near future, that no effective treatments exist or are even in late stages of development.
So what is industry doing to address these challenges? There are a number of strategies that we see being followed, each with its own merits, including:
- Focus - some companies are divesting or swapping non-core business units and therapy areas to allow them to deliver a more focussed portfolio of assets. Our analysis indicates that this should drive better levels of success and returns – those companies with more stable portfolios tend to deliver more, higher value assets. R&D teams can develop a better, detailed understanding of a disease or pathway over a period of time, as well as learning from projects which have failed, which is more likely to deliver commercial success.
- Collaboration – between peers, other large pharmaceutical companies, and with academia and healthcare providers, is providing additional opportunities to deliver exciting innovations to patients.
- Regulatory engagement - open dialogue between regulators and the pharmaceutical industry is increasing, aimed at expediting the launch of new drugs so that patients can realise the benefits of medical innovations faster.
- Streamlining R&D operations – companies are seeking to arrest burgeoning drug development costs by targeting unproductive infrastructure, seeking to become more nimble and agile like their smaller counterparts, and tapping into emerging technologies such as remote clinical trial monitoring to reduce costs.
There are a number of diseases currently posing a significant threat to society: the Zika virus, multi-drug resistant bacterial infections and dementia to name just a few. Without a healthy pharmaceutical industry we will struggle to address these threats and continue to enjoy healthy, productive lives. Without sustainable returns, life sciences companies will not have the capacity to invest in developing and launching the medicines of the future. All stakeholders within the healthcare ecosystem are starting to align their thinking and realise that they need to work together to sustain the stream of innovative medicines that have fundamentally changed our lives. Despite the recent and on-going challenges, there are signs that pharmaceutical R&D remains relatively healthy.
Senior Research Manager, Centre for Health Solutions
i The impact of new drug launches on longevity: evidence from longitudinal disease-level data from 52 countries, 1982-2001, Frank R. Lichtenberg, June 2003. NBER Working Paper No. 9754. See also: http://www.nber.org/papers/w9754.pdf
ii The Value of Medical Innovation: Power of Medical Innovation. See also: http://valueofinnovation.org/power-of-innovation/#ref2
iii Alzheimer’s disease drug-development pipeline: few candidates, frequent failures, Jeffrey L Cummings, Travis Morstorf and Kate Zhong, 3 July 2014, Alzheimer's Research & Therapy 2014 6:37. See also: http://alzres.biomedcentral.com/articles/10.1186/alzrt269#B13