The value generated by a dollar invested in pharmaceutical R&D has fallen by more than 70% in recent years, and the industry is in worse shape than many realise.

They are some of the key points to come out of a new study from the consulting firm Oliver Wyman, which looked at the 450 new molecular entities approved by the US Food and Drug Administration between 1996 and 2010. The report claims that this period covers an 'era of abundance'  from 1996 to 2004 and an 'era of scarcity' from 2005 to 2010, divided by the September 2004 withdrawal of Merck & Co's Vioxx (rofecoxib).

The consultant notes that there were striking differences between the two eras, firstly reflected in fewer new drugs in 2005-2010 (22 NMEs approved) compared to 36 in the era of abundance, a drop of 40%. It also points out the lower sales per new drug.

Oliver Wyman states that "to get a sense of the economic value created by each drug, the study used a common industry metric", namely sales in the drug's fifth year on the market, in constant dollars. Forecasts were used for treatments that have not yet hit the five-year mark.

This figure dropped from an average of $515 million for a single drug in the era of abundance to $430 million in the era of scarcity, a decrease of more than 15%. Taken together, the impact of fewer drugs per year and lower sales per drug meant that the average fifth-year sales produced by the industry as a whole went from $18.3 billion a year to $9.4 billion, a drop of almost 50%.

The report goes on to say that even with recent reductions, R&D expenditures almost doubled over the study period, from an average of $65 billion per year in the good times to $125 billion per year. However, "those dollars produced significantly less" and in the era of abundance, drug companies made an average of $275 million in fifth-year sales for every $1 billion they spent on R&D. In the era of scarcity, the figure was $75 million.

Jerry Cacciotti, a partner at Oliver Wyman, noted that "drug companies are clearly doing a lot of things right” and "most have maintained strong net income levels". The industry as a whole has grown at 6% a year for the last five years, but the study "shows that in the activity that counts the most - bringing valuable new drugs to market - the industry is in worse shape than has been publicly acknowledged”, he added.

Mr Cacciotti said that now pharma has clearly entered a different era, "R&D needs a new mindset for drug development”. Drugs will "remain rare, strategy will be set differently, the bar on innovation is higher and drugs must be used to reduce overall cost in the healthcare system", he concluded.