Pharma R&D Productivity Drops 70%

By Cindy Dubin, Contributing Writer

You have to spend money to make money. But, for the pharma industry, the return has been less than robust these last six years. According to a new study from consulting firm Oliver Wyman, the value generated by $1 invested in pharma R&D has fallen by more than 70%. Yet, it appears that pharma is not addressing what the study authors say is an urgent situation.

“We entered the analysis with the understanding that R&D productivity had declined,” says Jeff Hewitt, a partner at Oliver Wyman’s Health and Life Sciences Practice. “The R&D problem was stated as an accepted fact — one that we’ve certainly known about for years — and without much acknowledgement of the severity or the urgency to respond.  When I compare the sense of urgency and willingness to make big changes, it’s out of proportion with the seriousness of the situation. The environment has changed so dramatically that R&D has not been able to catch up. This is not to say that pharma isn’t taking actions; the industry certainly is. It’s just that the pace of change doesn’t match the severity of the problem.”

The purpose of the study was to better understand how and why R&D was changing and how life science leaders can use this information to improve their decision making in R&D. The study, “Beyond the Shadow of a Drought: The Need for a New Mindset in Pharma R&D,” looked at the 450 new molecular entities (NMEs) approved by the FDA between 1996 and 2010. “Our hypothesis in quantitatively analyzing these drugs was that recent drug approvals were less valuable to society and not generating the same revenue as drugs approved in the earlier portion of the 15-year period,” says Hewitt.

What the data bore out was that two eras occurred during those 15 years: “The Era of Abundance” (1996-2004) and the “Era of Scarcity” (2005-2010), which continues to exist. In the Era of Abundance, 36 NMEs were approved per year, compared with 22 in the Era of Scarcity, a 40% drop. “This is a different era of drug discovery for the pharmaceutical industry, requiring pharma to change its approach to developing drugs to fit into the current era and do so quickly,” says Hewitt. The solution is a new R&D mindset, which will depend on drugs that bring value to the market while at the same time reducing overall cost in the healthcare system.

Is Pharma A Victim Of Its Own Success?
While drug expenditures are up, the value of produced drugs is down. The cost of developing a single drug has a price tag these days of $1 billion. But, the economic value created by a drug has dropped. The study looked at each drug’s fifth-year sales and found that a single drug in the Era of Abundance produced an average of $515 million in sales compared with $430 million in the Era of Scarcity, a 15% decrease. Thus, the impact of fewer drugs approved each year, and the lower sales per drug, resulted in an average fifth-year sales for the industry dropping almost in half, from $18.3 billion to $9.4 billion.

Despite these reductions, R&D expenditures actually doubled over the 14 years of the study period, from around $65 billion per year in the Era of Abundance to $125 billion per year in the Era of Scarcity. And, those dollars produced significantly less. In the abundant years, drug companies produced $275 million in fifth–year sales for every $1 billion spent on R&D. In the Era of Scarcity, the figure was $75 million.
 

The irony is that for many pharma companies, they are their own competitors. According to the study, after decades of abundant discovery, many disease categories are well supplied with safe and effective therapies. And many are inexpensive: In the United States, overall penetration by generic drugs reached 78% of prescription volume last year, up from 63% in 2006.

So, developing a blockbuster is proving more difficult, with the number being developed dropping from 12 to 6 per year. Unfortunately, says Hewitt, the nonblockbuster drugs have not done much to bridge that gap in the drop-off — they only closed the gap by about 5% — because there just weren’t enough of them being developed.

The bar on innovation is being raised, and pharma leaders could consider taking new approaches to drug delivery for already-approved drugs as one way to boost their pipelines. But, Hewitt warns that this can only be a successful strategy if the new drug delivery method has a valuable and meaningful impact to the patient and to the cost of the care. “If payers push the choice to patients, and it is less expensive to take the drug packaged in the less convenient delivery system, the patient will probably choose price over convenience,” he says.

Additionally, the goal of development should be finding and targeting patients for whom the drug has the greatest benefit. This reverses the classic approach of targeting the mass population. Biomarkers and patient stratification can bolster the value proposition to the healthcare system. Hewitt says payers are likely to accept high prices for drugs that significantly improve the standard of care for a clearly identified set of target patients.

Partner With Payers And Other Pharma
There is still opportunity for medicine to change lives, but the companies focused on this goal should do so while reducing costs in the healthcare system, states the study. Payers are scrutinizing every category of expenditure, including drug spend, and they are aggressive about using their purchasing power to push back on prices.

And while the Supreme Court has yet to hear the case on the constitutionality of the Affordable Care Act (ACA), often referred to as “Obamacare,” Hewitt does expect healthcare reform to have a significant impact on pharma. If the ACA is implemented, enormous pressures will be placed on payer margins. The typical payer margin will decrease by at least 35% and possibly by more than 50%, states the study. “It will vary by disease area, and it won’t happen right away, but providers and payers will look to take costs out of the healthcare system, whether ACA passes or not,” says Hewitt.

The key is for pharma companies to shift from thinking of payers as customers and instead consider them partners and work together to provide continuity of quality care to patients. Hewitt says it is no stretch of the imagination for pharma, private payers, and government payers to collaborate and begin dialogue earlier in the drug development process. Savvy companies will actively consider risk and value to payers when setting a new drug’s development system.

“There is opportunity for pharma to understand how payers view the cost challenges associated with treatment,” he says. “This gives pharma a clearer picture of how to reduce costs in the healthcare system.” This can result in fewer trips to the emergency room and expensive diagnostics. “An accelerated shift to reduce costs and still offer the best treatment means everyone wins, but it has to start with pharma.”

A pharma company will need to prove the safety of the newly developed drug and prove that the drug is better than the current standard of care. And while payers will continue to voice their power to control costs, the complexity of the science being pursued by pharma will be greater than ever, says Hewitt.

In addition to partnering with payers, Hewitt recommends that in these times of financial constraint, life science leaders seek out partnerships with multiple pharma companies to expand access to new science. Companies can pool R&D efforts to decrease cost and risk of developing high-value products. Currently, only about 20% of pharma companies explore such partnerships.
“We believe the industry will see more collaboration in R&D to build consortia to address disease states,” says Hewitt. “Companies in the industry have operated as silos for too long.”
 

 

2011 Was A Really Good Year
Through partnerships and other business strategies, many drug companies have indeed maintained strong net income levels, and, as a whole, the industry has grown 6% per year for the last five years. Thus, 2011 was actually a great year for drug development. “NME numbers were better than they had been in the last six years,” says Hewitt. And, 6 of the 25 new drugs approved by the FDA in 2011 have the potential to be blockbusters.

But don’t get too excited. 2011 still falls into the Era of Scarcity, and Hewitt predicts another development drop-off is possible through 2014. Of the 180 NMEs projected to launch between 2012 and 2014, the authors found that when the expected output of these three years is combined with 2011 levels, the projected fifth-year sales is around $9 billion. And, the fact remains that only about half of all drugs entering Phase 3 trials will actually reach the market.

Hewitt and his colleagues remain optimistic, however, about the future of pharmaceutical R&D. The industry is merely going through a cycle, and the authors fully expect successful companies to emerge with a new mindset of developing new drugs that offer additional benefit, go beyond the current standard of care, and are attractive to payers. At the same time, the new compounds have to reduce costs out of the healthcare system. Hewitt says: “Despite the challenges, pharma can be successful in this new drug development era.”