Pharma R&D investment returns sink to 13-year low

[Image courtesy of Adobe Stock]

A recent Deloitte report revealed that the declining trend in pharma R&D returns, evident before the pandemic, continued in 2022.

The return on investment in R&D has generally declined since 2010. The latest Deloitte report on pharma innovation showed a steady fall in the internal rate of return (IRR) on R&D from 2014 to 2017, with a sharper drop from 2018 to 2019. During the pandemic, however, the IRR surged. “Some of that was due to the rapid development of COVID-19 therapies and vaccines,” said Kevin Dondarski, a partner in Deloitte’s life sciences R&D strategy practice. “The industry was able to bring these products to market quickly, but the challenge for R&D organizations is to replace the value exiting the pipeline through the commercialization of these products.”

The decline in IRR in 2022 is a product of a reduction in the number of assets progressing from the early stages of pharma R&D to the later stages.

[Image excerpted from Deloitte report, “Seize the digital momentum: Measuring the return from pharmaceutical innovation 2022“]

Deloitte also reported that the number of terminated assets in 2022 was twice that of the previous year, reaching 30. Dondarski, who co-authored the report, acknowledged that attrition was typical of the industry but is usually seen earlier in the value chain. He also noted that although the number of terminated assets doubled in 2022 compared to the previous year, the impact on the sector’s IRR would be insignificant as those assets were unlikely to be future blockbusters.

The declining trend in pharma R&D, which was evident before the pandemic, resumed in 2022, according to the recent Deloitte report, “Measuring the return from pharmaceutical innovation.”

Rising pharma R&D costs

The report also found that the average cost of developing a drug rose by almost $300 million to $2.3 billion in 2022.

To calculate that figure, Deloitte worked to get an estimate of the end-to-end cost attributable to bringing an asset to the market. That spans from the start of pharma R&D in early research to clinical trials and then through regulatory to approval.

Deloitte’s calculus of the average cost of developing a drug relies on publicly disclosed information. “We make a series of modifications to translate that to a cash flow figure, which is required to calculate the IRR,” Dondarski said. “Then, we use a set of assumptions to understand the proportion of that cost that’s attributable to the various phases of R&D and then the associated cycle times for those various phases of R&D.”

Internally-sourced assets up in 2022

After a period of decline, the percentage of projected revenue from internally-sourced assets experienced a sizable increase in 2022. “I think there are two ways to interpret that,” Dondarski said. First, Deloitte looks at pipeline composition volumetrically — gauging how many of the assets in a late-stage pipeline are internal versus external. “The other way we look at it is by projected value. What is the projected value of those internal assets versus those external assets?”

Deloitte tends to see far more volatility in the value-driven dimension. Year over year, if there is one substantially high-value asset, that can skew that conclusion one way,” Dondarski said. “And that’s what I think we saw this past year.” The proportion of value from self-originated assets jumped up quite a bit in 20221. “That was surprising, but that’s heavily driven by a handful of very high-value self-originated assets,” he added.

The volume perspective is a better reflection of the choices that pharma R&D leaders have to make, Dondarski said. “It’s been relatively consistent for the last three or four years where roughly around 30% of assets in the late-stage pipeline are self-originated.” By extension, almost 70% are coming in some way, shape or form from external sources. “If we think about where the innovation comes from, it remains largely external. It’s just that year-over-year, it can shift quite a bit when we put an annual value on it,” Dondarski concluded.