Those Returns On R&D Are Falling Fast

Those Returns On R&D Are Falling Fast

November 22nd, 2011 // 2:30 pm @

It is no secret that every big drugmaker is struggling to transform research and development in the wake of the infamous patent cliff and accompany pipeline problems. But how have they been faring? A new report suggests what investors have largely known – not so well. Of a dozen big drugmakers analyzed, 10 showed a decline of nearly 29 percent in their internal rate of return on R&D.

Specifically, the internal rate of return on R&D fell to 8.4 percent this year from 11.8 percent in 2010 from 8.4 percent the year before. Meanwhile, the average cost of successfully bringing a drug to market rose by more than 25 percent, from $830 million in 2010 to $1.05 billion in 2011, although there was a wide variation among companies, ranging from $439 million to $2.5 billion.

As if this is not sobering enough, the number of late-stage compounds in development fell from 23 to 18, on average, per drugmaker. And the cost of developing each compound rose, on average, by 25 percent, but their underlying values have not increased. When factoring out attrition, this amounted to a 21 percent increase in cost.

These are the take-away findings from a report by the Deloitte consulting firms and Thomson Reuters. On the bright side, though, they also found that cost not related to R&D declined at 10 of the 12 companies, and nearly two-thirds succeeded in realizing more value from product commercialisation than has been lost from late stage product failures.

Another nugget revealed how costs are being allocated for drug development. From 2010 to 2011, expenses for the earlier phase – drug discovery to first toxicity dose – remain unchanged at 25 percent. But costs for the next stage – pre-clinical to Phase II – rose from 20 percent to 29 percent. And costs for the last stage – Phase III and submission – fell from 55 percent to 46 percent.

How to cope? “the pharmaceutical R&D sector can do more to work together, for example sharing knowledge on the science behind failed molecules and studies will help improve success rates, and ultimately bring down the cost to develop new medicines,” says Julian Remnant, head of Deloitte’s European R&D advisory practice, in a statement.

What else? He foresees more alliances since the “walls of secrecy are coming down.” And he also expects more drugmakers will create so-called centers of excellence to transform value analytics, simulation and modeling in order to enhance portfolio management and capital allocation decisions during drug development.

The study calculated internal rates of return by estimating the future value of sales from products in final-stage Phase III clinical trials, or those submitted for regulatory approval, using standard industry benchmarks for success rates. The drugmakers studied were Pfizer, Roche, Novartis, Sanofi, Amgen, GlaxoSmithKline, Johnson & Johnson, AstraZeneca, Merck, Eli Lilly, Bristol-Myers Squibb and Takeda.


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