A new report on pharma’s investment in research and development shows that despite a continued drop in the rate of return, pharma should be optimistic about the future.

This is according to the annual ‘Measuring the return from pharmaceutical innovation 2012’ report by analysts at Deloitte and Thomson Reuters. 

First to the bad news: pharma’s internal rate of return (IRR) – which measures how much return pharma has got back from its total R&D investment in one year – has dropped from 7.7% in 2010/2011, to just 7.2% this year. However, the good news is that indications this decline is beginning to stabilise as pharma companies have improved the upstream movement of compounds into the late-stage pipeline.

The further good news is that new drug compounds entering the late-stage pipeline - and their corresponding value - have doubled between 2010-11 and 2011-12. The average cost of successfully bringing a product to market has also remained relatively constant at $1.1 billion, Deloitte and Thomson Reuters say.

Of the 12 companies considered in the report, ten have improved the replenishment of their late-stage pipelines. The number of new compounds entering the late-stage pipeline has more than doubled from 35 in 2010-11, to 78 in 2011-12.  The forecast value of these assets has also doubled, from $193 billion in 2010-11 to $378 billion in 2011-12.

Julian Remnant, head of Deloitte’s European R&D advisory practice, said: “While the number of compound approvals has increased by approximately 30% in the last 12 months, the expected revenue has also declined by 30%. Time will tell whether the encouraging wave of new late stage compounds is able to reverse this trend and achieve an increase in returns in future years.”

However, the group of 12 companies analysed for the report seem to be struggling to make headway in terms of reducing the impact of late-stage terminations, which has remained relatively static.

Comparing 2010-11 and 2011-12, the number of terminations was 19 and 22, respectively.  The value of revenue lost due to late stage terminations was $73 billion in 2010-11 and $77 billion in 2011-12.

Remnant says: “Seven of the 12 companies have seen value eroded due to the increased influence of late stage terminations relative to successful product launches.  Earlier and increased rigour on defining unmet need and gathering evidence of value are key to driving improved returns. Once a compound proceeds to late stage development, the cost of failure increases significantly.”

Pharma has historically not been willing to release their IRR calculations, although GlaxoSmithKline has recently started to do this, with some other firms now beginning to follow suit.

More time needed to assess R&D health

Remnant concludes that “overall, our findings suggest a mixed picture of performance in 2012 relative to 2011.  It will take a number of years for the full picture on R&D productivity to emerge and definitive conclusions to be drawn.”