The R&D Decline Is Worse Than Thought, Says Oliver Wyman

The troubled future of new drug development in biopharma is a topic of endless discussion in industry circles; even as R&D budgets have climbed (until recently), approved new products are less frequent, and their revenue outlook is less bright. Three analysts at Oliver Wyman, a New York management consulting firm, have run the numbers somewhat differently (looking at revenues five years out from product launch) to show that the plunge in R&D productivity is even worse than generally thought.

But the analysts—Jeff Hewitt, J. David Campbell and Jerry Cacciotti, all partners in the firm—are not “bearish” on the industry, they say. “All industries go through cycles; there is no reason why pharma shouldn’t, and no reason that successful companies won’t emerge. The critical choices in the near future, they say, lie in reshaping the R&D function to recognize both the scientific and the commercial environment that the industry now operates in.

Defining eras

Here are the R&D productivity figures: Oliver Wyman evaluated 450 new drugs approved by FDA between 1996 and 2010, by year approved, by value generated in the fifth year after launch, and by the total amount invested in R&D each year (all in 2010 dollars). The result is two segments (Fig. 1): an “Era of Abundance (1996-2004) and an “Era of Scarcity” (2005-2010) with fewer approvals, weaker sales and lower return on capital. Interestingly, the Vioxx scandal of 2004 is a rough line of demarcation between the two.

Comparing the two eras, drug approvals dropped by 40%; each new drug generated less revenue ($515 million dropping to $430 million), and overall value (average sales times number of new drugs) dropped by 50%, from $18.3 billion to $9.4 billion. At the same time, R&D spending “skyrocketed,” doubling from $65 billion/yr on average in the Era of Abundance to $125 billion/yr in the Era of Scarcity. By this measure, R&D productivity has declined by more than 70%—in the Era of Abundance, manufacturers produced an average of $275 million in fifth-year sales for every $1 billion spent in R&D, but only $75 million per $1 billion spent in the Era of Scarcity (Fig. 2). “The economics of spending $1 billion on R&D and generating $75 million in fifth-year sales are not sustainable,” they conclude.

Besides the poor choices in choosing and managing drug-development programs, Oliver Wyman points to a couple seemingly inescapable truths: new drugs need to be demonstrably better than existing ones, which isn’t scientifically possible, forever; and an increased standard of care (an aftereffect of the Vioxx scandal) is inevitably going to lead to more difficult, or less profitable, drug launches.

Mindset shift

A way forward is possible with recognition of four shifts in mindset:

• Raise the bar on product innovation, factoring such consideration as increased safety or the value of biomarker-defined target populations for a drug (and accepting the smaller number of potential patients) • Do more to solve the payer’s problem; as Oliver Wyman puts it, “Pharma has to stop treating payers like the enemy in pricing and rebating strategy, and get on the same side of the table in helping them manage cost.” • Treat drugs not as predictable or abundant, but as rare, with the implication that speed to market during the R&D phase might be inappropriate, and being more open to partnering with other companies in the same therapeutic area • Make concrete moves toward differentiation and focus, concentrating in specific therapeutic areas and benchmarking competitor actions more closely.

Oliver Wyman makes the point that today’s equity markets favor pharma companies that cut back on R&D spending, but to achieve category leadership, companies may need to spend more, or spend in innovative ways. One example the authors cite is Lilly’s CHORUS program, which leverages externally developed R&D to expand access to that science. Pooled R&D efforts are also possible. And, while acknowledging that many pharma companies have been revamping their research and business development processes, a renewed examination may be in order.