Pharmaceutical r&d: the road to positive returns

You have full access to this article via your institution. Download PDF Leif JØrgensen, Other One. From www.scp.co.uk The pharmaceutical industry is grappling with diminishing R&D

productivity. Our estimates suggest that the internal rate of return (IRR) on small-molecule R&D is now ∼7.5% (Fig. 1; see Supplementary information S1 (box), which is less than the

industry's cost of capital. The trend has been to view diminishing returns on R&D investment purely as a 'science problem', spurring much discussion of 'new

paradigms' that would radically change pharmaceutical R&D. Although scientific innovation is certainly part of the solution, in this article, we present analyses indicating that

stronger management attention to well-known value-creation levers — cost, speed and decision making — could increase the IRR of an average small molecule to 13% or more. SIZING THE CHALLENGE

We modelled the estimated average return on R&D investment for a typical small-molecule compound and for a typical biologic (Fig. 2a; see Supplementary information S1 (box) for detailed

methods and data sources). This model suggests that present-day returns for an average small molecule fall below the cost of capital (net present value (NPV) ≈ –US$65 million; IRR ≈ 7.5%),

whereas between 1997 and 2001, this return approached 12%. Key factors driving the downward trend are well known. For example, our industry interviews and analysis of the Pharmaprojects

database indicate that, over the past decade, the overall probability of success (POS) for small molecules has decreased by 5 percentage points and the time required for R&D has

increased by 12–18 months. Furthermore, R&D costs have been rising ∼8% annually for the past several years, and prices are under substantial pressure globally. It could be argued that

companies should shift much of their R&D investment to biologics, as the average biologic currently offers a greater return (NPV ≈ $1.26 billion; IRR ≈ 13%) owing to higher average peak

sales and slower decay of sales following loss of exclusivity (Fig. 2a). However, increased investment in biologics alone is not the solution, given the limited number of such molecules and

the expected erosion of returns as biosimilars competition mounts. LEVERS FOR CHANGE _COST._ Although most companies have made progress in reducing costs, efforts too often focus on the

obvious organizational and procurement issues. In our experience, successful firms have generally employed broader strategies. One approach is for companies to change what they are doing,

not just the efficiency of execution. For example, companies that consistently over-power clinical trials could reduce the number of patients per trial. Our experience also suggests that

R&D costs can be reduced by 5–10% through more aggressive outsourcing of selected non-core activities to low-cost geographies. A second approach is to decrease the costs that are

associated with drug failures. Companies generally design R&D programmes for success, even though the majority of programmes will fail. For example, costly 2-year-long carcinogenicity

studies are often initiated before a compound reaches 'proof of concept' at the end of Phase IIa, and this cost is wasted if the compound fails (as is the most likely scenario).

Lilly's Chorus group represents one effort to reduce the cost of failures by focusing on the activities that truly reduce the risk of failure of a compound on the way to proof of

concept. Reducing the cost of failure can also be achieved by sharing risk with another party, such as another pharmaceutical company, a contract research organization or investors. In our

client experience, these cost-saving strategies can together reduce the overall cost of R&D by 15% or more, increasing the NPV of average small-molecule projects by ∼$250 million, and

raising R&D IRR by ∼2 percentage points (Fig. 1). _SPEED._ For successfully marketed medicines, our modelling indicates that each 6-month delay to launch can mean a loss of almost $100

million in NPV, or a reduction of 0.5 percentage points in IRR. This number is obviously much higher for top-performing drugs. Our view is that opportunity exists to address inefficient

operations such as poor planning of clinical development, slow patient recruitment, and suboptimal site and investigator management. We modelled the effect of accelerating a development

programme by 18 months. This conservative assumption increased the NPV of an average compound by ∼$190 million, raising the IRR by 1.5 percentage points (Fig. 1). Some companies have done

much better: for example, Merck accelerated the launch of the diabetes drug sitagliptin (Januvia) by ∼3–4 years by appropriately employing novel parallel development techniques. Of course,

gains in speed cannot come from short cuts: the key to capturing value from programme acceleration is choosing the right programmes to accelerate. _DECISION MAKING._ R&D leaders grapple

with decisions about programme termination, acceleration, resourcing and prioritization. Project termination decisions are especially difficult, and can cost a company hundreds of millions

of dollars if made too late. The current high attrition rate in Phase III trials suggests that companies have overlooked or ignored key signals and in some cases have made poor decisions

about aspects over which they have substantial control. Indeed, our analysis indicates that of 106 reported Phase III failures from 1990 to 2007, 45% were due to insufficient efficacy versus

placebo, and 24% to insufficient differentiation versus standard of care. It is easy to scrutinize decision making with the benefit of hindsight, but R&D leaders can increase returns by

identifying and removing poor performers from the portfolio earlier in development. In our experience, many organizations still advance compounds for the wrong reasons: because of momentum,

'numbers-focused' incentive systems or through waiting too long to have tough conversations about the required level of product differentiation. Many companies have started to

restructure to address these issues. Lilly's Chorus unit, GlaxoSmithKline's Discovery Performance Units and Pfizer's smaller, more focused therapeutic areas are just a few

examples. If these efforts allow R&D leaders to make better decisions and shift compound attrition to earlier stages, the impact will be substantial. For example, increasing Phase III

survival by 10 percentage points — comparable to rates in 1997–2001— could be achieved by 'taking' that attrition earlier during Phase II, and would increase IRR by up to 1

percentage point (Fig. 1). Another key aspect of R&D decision making is the choice of compounds in which to invest. For example, we used data for successfully launched drugs between 2000

and 2006 to divide products into quartiles based on their returns. The top two quartiles of launched molecules account for most of the value creation (Fig. 2b). A top-quartile small

molecule has an IRR of 28% compared with 7.5% for an average small molecule, and a top-quartile biologic has an IRR of 33% compared with 13% for an average biologic. Second-quartile

molecules have an IRR of 12% for a small molecule and 15% for a biologic. Perhaps no one can consistently identify top-quartile drugs. Indeed, our analysis shows that, in any given

small-molecule portfolio, only ∼2% of drugs will be top-quartile sellers, whereas ∼54% will be fourth-quartile sellers (Fig. 2b). However, if a company can shift even 4% of compounds from

the fourth quartile to the top quartile, the average IRR would increase by 1 percentage point (Fig. 1). IMPLICATIONS FOR R&D LEADERS Consistent, aggressive and simultaneous focus on the

three levers described above can raise the IRR on an average small molecule from 7.5% to ∼13% (Fig. 1). For a typical portfolio of a leading pharmaceutical company, assuming a composition of

75% small molecules and 25% biologics distributed across various phases of development, this translates to a shift in portfolio return from 9–10% to 14–15%. Experience suggests that these

goals are attainable: from 1997 to 2001, the return on the portfolio described above was 14–15%, driven by a higher POS and shorter development times. Although the current environment is

tougher than in 1997–2001, it is our view that the three levers are not yet fully exploited and that the moderate changes described here can substantially increase returns. A 14–15% IRR on

R&D might not sound like 'hitting the jackpot', but over a large portfolio it would create considerable value. AUTHOR INFORMATION AUTHORS AND AFFILIATIONS * Eric David, M.D.,

Tony Tramontin, Ph.D., and Rodney Zemmel, Ph.D., are at McKinsey & Company, 55 East 52nd Street, New York, New York 10055, USA. [email protected]; [email protected], Eric

David, Tony Tramontin & Rodney Zemmel * [email protected], Eric David, Tony Tramontin & Rodney Zemmel Authors * Eric David View author publications You can also search for

this author inPubMed Google Scholar * Tony Tramontin View author publications You can also search for this author inPubMed Google Scholar * Rodney Zemmel View author publications You can

also search for this author inPubMed Google Scholar SUPPLEMENTARY INFORMATION SUPPLEMENTARY INFORMATION S1 (BOX) Methodology to estimate the internal rate of return on R&D investments

(PDF 296 kb) RIGHTS AND PERMISSIONS Reprints and permissions ABOUT THIS ARTICLE CITE THIS ARTICLE David, E., Tramontin, T. & Zemmel, R. Pharmaceutical R&D: the road to positive

returns. _Nat Rev Drug Discov_ 8, 609–610 (2009). https://doi.org/10.1038/nrd2948 Download citation * Issue Date: August 2009 * DOI: https://doi.org/10.1038/nrd2948 SHARE THIS ARTICLE Anyone

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