Leading research-based pharmaceutical companies have seen the average number of compounds in their late-stage development pipelines fall by 22% this year, while R&D costs have ballooned by more than 25%, a new study has found.

According to the latest annual review of pharma R&D value by Deloitte and Thomson Reuters, Measuring the Return from Innovation, the average cost of bringing a new product successfully to market among the top 12 research-based pharmaceutical companies worldwide increased by 26.3% from US$830 million in  2010 to US$1,048 million in 2011.

Over the same period, the number of late-stage compounds in development dropped from 23 on average per company to 18 per company. Moreover, the average R&D Internal Rate of Return (IRR) among the companies analysed was down from 11.8% in 2010 to 8.4% this year.

In a study released late last year, Deloitte and Thomson Reuters suggested that, against a backdrop of declining productivity, pharmaceutical companies should be setting performance targets and driving R&D strategy around output-based measures such as IRR.

Historically, that study noted, pharmaceutical companies had relied on input-based measures for R&D investment, such as expenditure as a percentage of sales revenue.

At the time, the Deloitte/Thomson Reuters analysis found that the top 12 research-based pharmaceutical companies by R&D investment should be generating a positive IRR, ranging from 8.4% to 18.4%, from the investment required to develop each of their late-stage product portfolios.

These returns were all above the estimated Weighted Average Cost of Capital of 7% for the basket of pharma leaders.

Cause for optimism

Despite the declines in average IRR and the number of compounds in late development, as well as R&D cost escalation in 2011 versus 2010, the latest Deloitte/Thomson study found some cause for optimism.

For example, nearly two thirds of the 12 companies reviewed managed to realise more value from product commercialisation than they had lost as a result of late-stage pipeline failures.

And non-R&D costs across the 12 companies have eased, lifting operating margins and helping to free up cash flow that could be reinvested in R&D, Deloitte/Thomson observed.

Innovation through collaboration

Innovating through collaboration has already proved a fruitful strategy, said Julian Remnant, head of Deloitte’s European R&D advisory practice.

“The walls of secrecy are coming down in some cases and there are increasing numbers of players within the industry forming alliances and joint ventures to pool research knowledge in particular disease area or indication,” he commented.  

Companies are also making efforts to work more closely with payers at an earlier stage of drug development, so they can ensure investments in innovation are directed at therapies and propositions that are attractive to the payer community.

All the same, Remnant cautioned, 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”.

In future he envisages R&D organisations joining forces to simplify and share capabilities in non-competitive areas of R&D, thereby reducing costs.

“Shared drug development models will remove duplication, maximise capacity utilisation, and drive scale economies within service providers,” Remnant predicted. “We see R&D leaders beginning to raise their level of ambition and take the lead in this type of cross-company collaboration.”

Role to play

A return-on-investment simulation for a typical pharmaceutical company in the annual review showed that all corporate functions have a role to play in helping R&D earn back its investment, Deloitte/Thomson noted.

Simulating the impact on R&D IRR of improvements in gross profit margin, for example, illustrated that “even modest” efforts to improve manufacturing efficiency “would, over time, have a profound effect on R&D returns”.  

With a tighter focus on the economics of pharmaceutical R&D, Remnant believes, “we’re likely to see companies establishing centres of excellence which bring together value analytics, simulation and modelling expertise, and finance and portfolio management capabilities to inform capital allocation decisions during drug development”.

Successful adoption and implementation of these capabilities will better position R&D leaders to make the case for investment in “the business of R&D”, while continuing to develop medicines for the benefit of patients and society, Deloitte/Thomson suggest.