These numbers from Deloitte are not very reassuring. They do an annual survey of spending and returns on investment in the drug industry, and this year’s estimated return on R&D is down to 3.7%, which looks like the lowest yet. Back in 2009, another vast consulting house (McKinsey) estimated that returns were around 7.5% during the early 2000s. Deloitte has the figure at around 10% in 2010, but dropping pretty steadily ever since (and this is with the same cohort of companies).
Their take is that there hasn’t been enough M&A in recent years, which may come as a surprise to some folks:
Since 2013 there has been a steady decrease in the proportion of projected late-stage pipeline revenue derived from externally-sourced assets, a trend which accelerated in 2016 as more of the assets acquired as part of large-scale M&A in the late 2000s leave the late-stage pipelines. This trend, together with the decrease in returns, indicates that companies are struggling to replace pipeline value through self-originated assets.
One response to this is that productive mergers and acquisitions assume that there are things out there that can productively be bought. What if some of the big companies have been completely open to the idea of supplementing their in-house research but haven’t found as much that looks worth buying? Or have been buying stuff but having less of it pay off than formerly? Those are even less appealing answers, but they can’t be ruled out. At any rate, Deloitte sees a return to more acquisitions:
We anticipate that the coming years will see increasing M&A activity in a quest for higher R&D returns through R&D cost synergies or the acquisition of valuable assets. However the costs, both financial and otherwise, of these transactions are likely to be high and could place further pressure on R&D organisations that seem ‘too big to succeed’.
Gosh, that sounds fun, too (note this discussion from 2014 about spending money on acquisitions versus internal research). This would be a good time to mention that last year’s hefty number of FDA approvals appears to have been an outlier; a smaller number will go through for 2016 regardless of what the FDA pulls out of the regulatory hat the rest of this month. And some of the approvals have been impressive, but that (according to this report) doesn’t mean that the underlying trends are good:
In response to the continual decline in returns, there is a tendency within the industry to use examples of successful launches to cite healthy R&D productivity. The original cohort of companies has been highly successful at commercialising their collective late-stage pipelines and launching new assets, with 233 assets launched since 2010 with total forecast lifetime sales of $1,538 billion. The past year has been no exception, with 45 approvals totalling $280 billion of forecast lifetime sales. However this commercial success releases value from late-stage pipelines into the commercial portfolio, and companies are struggling to bring forward new assets to replace those that are released into the market. Terminations and the rising costs of R&D have further exacerbated the fall in returns.
Gosh, where are all those drugs that we were assured a few years ago could be (in fact, were) developed for only $43 million or so? That would provide you with returns you could write home about, but it’s almost as if that figure is completely wrong or something.
That 2009 link back in the first paragraph mentioned that the R&D returns seen then were not comparing well with the capitalization needed to achieve them, and this report highlights the same problem. Deloitte estimates that the average cost of capital across the industry is about 8.4%, which means that for the last few years we’ve been increasingly running on fumes. They do mention, though, that smaller companies are in a much more favorable situation on average. I’d interpret this as the mean of a data set with a lot of variance, ranging from “spectacular returns” to “out of business entirely”, but overall looking sustainable (although sustainable on average – any individual company in this group can be a wild ride). Meanwhile, the cohort of 20 large companies they’ve been following also varies, but not by as much, and with averages that look, well, unsustainable they way they’re going.
I find the latter half of the report less compelling – that’s where there are recommendations being made about improving success rates and lowering costs. From what I can see, most of these sound quite sensible, sensible enough that you’d think that most people are doing them already, or attempting to. Focusing more thoroughly on specific therapeutic areas, looking carefully at the competition and the payment environment, designing clinical trials more efficiently – who’s against this stuff? If these were enough of an answer, you’d think that we wouldn’t be in the shape we’re in. And if they’re not?
Well, I realize that this is not exactly a feel-good post for the holidays. But the numbers are out there, and I don’t think that they’re likely to be so wildly off the mark that we can ignore them. They shouldn’t come as a total surprise, though – people have been saying for many years now that these various trends (success rates, R&D costs, pricing) are heading in the wrong direction, and this is just another indicator that yes, they still are. . .