Pharma R&D Investments Moderating — But Still High

Pharmaceutical drug discovery and development have grown increasingly difficult over the years. Yes, there have been great breakthroughs in technology that can facilitate research processes and the explosion of science in understanding the causes of diseases has made target selection more rational than ever. But these pluses have been balanced by the challenges of coming up with new drugs that are superior to the good drugs that already exist. Proving that your new medicine is better than existing therapies is now a must and head-to-head clinical trials to prove superiority are time consuming and costly. Thus, drug R&D is more expensive than ever before. Furthermore, high attrition is still a fact of life: only one of ten compounds that enter human trials ever results in an FDA approval.

There are some who believe that these challenges foretell the decline of the pharmaceutical industry as we now know it. Counted among these critics is Kelvin Stott whose piece in Endpoint News entitled “Pharma’s broken business model: An industry on the brink of terminal decline” provided provocative data to make his case.

“Like many industries, pharma’s business model fundamentally depends on productive innovation to create value by delivering greater customer benefits. Further, sustainable growth and values creation depend on steady R&D productivity with a positive ROI in order to drive future revenues that can be reinvested back into R&D. In recent years, however, it has become clear that pharma has a serious problem with declining R&D productivity.”

After making his case with an extensive analysis focused on IRR (Internal Rate of Return), Stott comes to this ominous conclusion.

“What we have here is an industry that is entering a vicious cycle of negative growth and terminal decline as its fundamental business model has run out of steam by the Law of Diminishing Returns: diminishing R&D productivity and return on investment leads to a diminishing growth in sales. Eventually, growth turns negative and sales start to contract. Reduced sales then reduces the amount of money available to invest back into R&D, which causes sales growth to decline even further. And so on, until the industry is gone altogether.”

So, how has the pharmaceutical industry adjusted? One major approach has been to try to invest in areas where the odds of success may be higher. The large increase in research on rare diseases is a great example of this. Rare diseases offer the opportunity to bring meaningful new therapies to patients in need. These medicines generally emerge from clinical trials involving only hundreds (not thousands) of patients. Plus, such treatments usually can garner high prices. All of this makes for attractive areas that pharmaceutical companies can capitalize on. This rationale also explains why enormous resources have been invested into cancer research which, in reality, is a collection of rare diseases. The industry has also slimmed down efforts in areas where differentiation from existing therapy is difficult and costly such as diabetes, heart disease, psychosis and depression. Yes, there are still medical needs in these areas, but better opportunities exist elsewhere. Furthermore, the industry is also reducing efforts in Alzheimer’s disease, certainly an area of major medical need and where pricing for a new drug would be highly favorable but where clinical trials are long, very expensive and involve a high degree of risk.

But what about Big Pharma’s internal investment in R&D? Traditionally, this has been relatively high, running at approximately 15% of top line revenues. Will this level of spend – higher than any other industry – be sustainable?

A new analysis, “World Preview 2018, Outlook to 2024” newly issued by EvaluatePharma provides guidance on this. Interestingly, EvaluatePharma is predicting accelerating sales for the pharmaceutical industry with annual compound growth of 6% between now and 2024.