By Emily May, Manager, and Ditto Antony, Analyst, Centre for Health Solutions

Since 2010, our Measuring the return from pharmaceutical innovation report series has analysed biopharma R&D productivity. Our first report focused on the potential return on investment for 12 large-cap biopharma companies based on their late-stage pipelines. Over time, our cohort has expanded and, since 2020, has encompassed the top 20 companies by 2020 R&D spend. This week, we released the 15^th edition of this series titled Be bold, be brave, which reveals a notable increase in the internal rate of return (IRR) to 5.9 per cent for 2024, continuing the upward trend from 4.3 per cent in the previous year. Our report provides unique insights into the critical drivers of this performance. This week’s blog highlights insights from our analysis, the key trends shaping the productivity and efficiency of biopharma R&D, and the bold actions needed to sustain and improve performance. 

Although the composition of our cohort has expanded, we apply a consistent approach, centred on evaluating each company's late-stage pipeline (assets in phase II with pivotal or breakthrough designation, phase III, or filed for regulatory approval) to determine the IRR. We factor in R&D expenditure (from company reports and third-party data) and the impact of terminations, in-licensing and mergers and acquisitions (M&A) on R&D costs. We use forecasts of expected revenue generated from the launch of late-stage assets (using data provided by Evaluate Pharma), and apply adjustments based on anticipated success rates, royalties and clinical trial cycle times. While we continually refine our methodology, modelling, and scope for greater accuracy and more comprehensive insights, we maintain a consistent and objective approach across the companies in our cohort.

Forecast returns from innovation are on an upward trajectory

Our analysis shows that the cohort’s 2024 IRR increased by 1.6 percentage points to 5.9 per cent, continuing the upward trend from the previous year (see Figure 1). Thirteen of the 20 companies in our cohort experienced growth, ranging between 0.4 and 6.9 per cent, with three exceeding a five per cent increase.

The IRR depends on both efficiency (cycle times and costs) and value creation (risk-adjusted forecast sales), each of which has multiple parameters that can improve outcomes. While R&D costs and cycle times have continued a year-on-year upward trend, the IRR has nevertheless increased due to new high-value products entering the late-stage pipeline and increased commercial forecasts for late-stage assets due to promising trial results.

The cost of developing a drug from discovery to launch remains high

Figure 2 shows that the average cost to develop an asset from discovery to launch rose to $2.23 billion (from $2.12 billion in 2023). Moreover, 12 of the 20 companies in our cohort saw an increase. Although reported pharma R&D costs continue to rise annually, since 2020 our cohort has slowed their average spending increase to a 6.44 per cent compound annual growth rate (CAGR), compared to 7.69 per cent CAGR between 2013 and 2020. This reflects the industry’s focus on improving R&D spending efficiency.

Several interrelated factors contribute to the rising R&D costs, including the complexity and high attrition rates of developing treatments for diseases like Alzheimer's and cancers, meeting evolving regulatory standards and recruiting eligible patients for clinical trials. Cycle times now exceed 100 months from phase I through to filing. While all development phases lengthened over the past five years, time in phase III increased the most, (up 12 per cent). To mitigate these challenges, the biopharma industry should consider embracing strategic diversification, adopting innovative technologies, challenging conventional approaches, and collaborating with research institutions and regulatory bodies. While investments in technological solutions like AI and automation can increase costs in the short-term, they promise longer-term efficiencies.

Increases in forecast peak sales are driving the growth in IRR

The cohort's average forecast peak sales per asset rose to $510 million in 2024 with two companies’ forecast average peak sale projected to surpass $2 billion, see Figure 3. The resurgence of potential blockbusters in the late-stage pipeline contributes significantly to this improved IRR, specifically the increasing number and high-value of GLP-1s. Indeed, excluding GLP-1s from our model reduces the average peak sale to $370 million and lowers the 2024 IRR to 3.8 per cent (from 5.9 per cent) and the 2023 IRR to 3.4 per cent (from 4.3 per cent), highlighting their substantial market impact.

Figure 3. Average forecast peak sales per pipeline asset, 2013-2024

To sustain this uptick in forecast sales, companies should consider adopting a proactive and bold approach to replenishing their pipelines which drives differentiation.

This involves:

• actively seeking out promising assets in high-growth therapeutic areas to address unmet needs, both through internal development and external sourcing (e.g., mergers, acquisitions, partnerships)
• employing data-driven decision-making to ensure existing pipeline candidates align with market dynamics and strategic priorities, while minimising late-stage terminations.

Diversification of portfolios and focusing on less saturated therapy areas can improve returns

Within the top 20 cohort, all but one company is active in five or more of the 15 therapy areas analysed. This diversification is not evenly distributed. Oncology, for example, attracts significant investment (37 per cent of all pipeline assets), leading to intense competition; only two of the analysed companies do not operate in the oncology space. Additionally, 15 companies compete in the highly competitive infectious disease space, with over 10 per cent of pipeline assets concentrated in this therapy area.

Forecast revenue from obesity indications has grown significantly, from one per cent of forecast revenue in 2022 to 16 per cent in 2024. Replicating this success in other areas with high unmet needs, such as Alzheimer's disease, coronary heart disease and stroke prevention, and multiple sclerosis, presents a significant opportunity for the industry to improve patient outcomes and boost the industry’s IRR.

Conscious investment in novel mechanisms of action enables both patient benefit and higher returns

The success of GLP-1s, especially in the obesity market, highlights the potential of addressing unmet needs on a population health level. The significant opportunity for higher returns through diversifying pipelines to address unmet needs is further enhanced by pioneering novel mechanisms of action (MoAs). While therapeutic area concentration is evident within the top 20 cohort, this pattern extends to MoAs and drug targets. Over half of the companies have late-stage PD-1 antibody assets, indicating further potential saturation in oncology.

Although novel and fast-follower MoAs represent a four-year average of 23.5 per cent of all MoAs in development, their projected revenue share is significantly higher at 37.3 per cent, see Figure 4. Prioritising novel MoAs, despite inherent risks, offers advantages like improved efficacy, reduced competition, and higher ROI. To balance the risks, companies should consciously allocate resources to both novel and established areas, leverage existing knowledge to identify promising MoAs, and implement strong governance with rigorous risk assessment and flexible decision-making.

Strategic, early engagement M&A builds a robust and diversified pipeline

Biopharma companies are increasingly turning to external innovation in response to the potential revenue loss of $200 billion due to patent expirations in the coming decade. This is reflected in the rising number of externally sourced assets in late-stage pipelines (61 per cent, up from 59 per cent in 2023) and a predicted increase in M&A activity, particularly bolt-on acquisitions. However, our analysis reveals a consistently higher termination rate for externally sourced compared to internally developed assets. Building a sustainable M&A strategy that focuses on longer-term revenue boosts is therefore crucial. While large, late-stage acquisitions can provide immediate returns, a more sustainable approach would be to prioritise smaller, early-stage M&A that targets promising innovations.

Brave companies taking bold action should improve returns

To sustain this growth in returns and meet the demand for novel therapies, a bolder approach is needed:

• Prioritise high unmet needs: Focusing on diseases with significant unmet needs and targeting novel MoAs over incremental improvements can mitigate challenges in crowded therapeutic areas, streamline development, and improve both returns and global health outcomes.
• Embrace cutting-edge technologies: Investing in and scaling up emerging fields like gene editing, AI-powered drug development, and building advanced labs can lead to breakthrough therapies, attract top talent, and provide a first-mover advantage.
• Adopt data-driven decision-making: Utilising automation, advanced analytics, cloud-based data management, and connected lab instruments enhances efficiency and collaboration.
• Pursue novel collaboration models: Moving beyond traditional partnerships by engaging in open innovation with academia, pre-competitive collaborations, and patient-centric networks provides access to diverse expertise, accelerates research, and identifies critical unmet needs.

To embrace bold decision-making, companies should first address their risk tolerance, ensuring they have the resources for higher-risk ventures. They need organisational agility, with a flexible structure and bold leadership, to adapt to new technologies and a clear long-term vision and commitment are essential, as transformative R&D requires time to yield results.

Emily May, Research Manager, Centre for Health Solutions

Emily is a manager in the Centre for Health Solutions where she applies her background in both scientific research and pharmaceutical analytics to produce supported insights for the Life Sciences and Healthcare practice. Emily leads the research and publication of the life sciences insights, performing thorough analysis to find solutions for the challenges impacting the industry and generating predictions for the future. Prior to joining the centre, Emily worked as an Analytical Scientist conducting physical chemistry analysis on early stage drug compounds and previously lived in Antwerp, Belgium where she researched and developed water-based adhesive films.

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Ditto Antony, Research Analyst, Centre for Health Solutions

Ditto is a Research Analyst within the Insight team based in Hyderabad, India. He supports Deloitte’s UK Centre for Health Solutions by analyzing the Life Sciences and Healthcare industry and providing insights into the trends. He has a background in Commerce and Management. His expertise includes market research, data interpretation, and delivering actionable intelligence to stakeholders.

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