Analyzing Returns on Investment from Pharmaceutical Innovation

March 20, 2023 - In an annual report focused on the return on investment (ROI) from pharmaceutical innovation, Deloitte analyzed research and development (R&D) in the pharmaceutical industry and the resulting outcomes throughout 2022. Considering the hefty price tag associated with bringing a drug to market, understanding the benefits and ROI of clinical development is critical for pharmaceutical companies to manage their business practices.

While the report does not explicitly denote a good investment versus a lousy investment, pharmaceutical industry leaders may be able to extrapolate data that can be incorporated into future business strategies.

“The report is an annual publication we use — both anecdotally from what we're seeing in the marketplace and the conversations around with our clients but also empirically with the quantitative aspects of things — to draw macro-level conclusions around the state of R&D productivity within the industry,” explained Kevin Dondarski, partner at Deloitte Consulting Life Science Strategy Analytics Practice.

Data Used

Collecting data on and quantifying R&D can be difficult, as the degree of investment can vary dramatically based on the therapeutic area, patient population, and technology used.

“R&D is a complicated endeavor regarding the degree of investment, the degree of risk, and the required degree of time. Deloitte follows a consistent and robust methodology,” noted Dondarski.

He explained that the report focuses on assets in the late stages of the pipeline. That means predominantly phase 3 studies; however, it may include phase 4 research and phase 2 trials with an accelerated or breakthrough designation.

Looking at late-stage clinical trials allows the company to focus on the research that will likely result in an ROI. While 70% of clinical trials in the United States move from phase 1 to phase 2, only 33% of phase 2 trials progress onto phase 3. An even smaller subset, 25–30%, continues past phase 3.

“We work with a third-party data provider who effectively provides us with analyst consensus estimates and forecasts from a revenue perspective for all those programs in the pipeline,” explained Dondarski. “In some cases, they also provide varying indication-specific forecasts so that we're able to look at the projected commercial returns of everything in the pipeline.”

Deloitte then applies a risk adjustment factor to account for the probability of success. Some of these assumptions are company-specific, translating revenue into cash inflow depending on those assets.

“From an investment perspective, we look at historical R&D costs that are publicly disclosed by all the companies profiled in our report,” he noted. “Then, we apply a set of industry assumptions in terms of how much R&D spend is attributable to the various phases of development and historical cycle time estimates to understand how long everything in that basket of assets would've spent in phase 2 development, phase 1 development, research and so forth.”

Macro-Level Trends

One of the critical insights this report provides is a look at the macro-level view — or an industry-level view — of ROI. While it can be easy to assume that a company-specific insight report may provide more valuable data, a broad look at the industry can help contextualize individual profits and losses. Additionally, it may identify industry trends that can guide future research.

“At a macro level, the industry's return on investment declined from 6.8% to 1.2% this past year. That's certainly the lowest value we've seen in quite some time,” revealed Dondarski.

While this data provides some insight into overall trends in ROI, Dondarski notes that the more valuable information is the explanation of why these changes occur — the drivers.

Declining ROI

The report has three major takeaways. First and foremost is the overall decline in ROI in the pharmaceutical industry.

“We went from a mean of $500 million per asset, peak sales revenue, to $389 million. That's one of the biggest drivers in the ROI decline,” noted Dondarski.

He added, “That figure has consistently declined over time. The first year we wrote the report, the average asset in companies’ pipelines had an average peak sale of around $840 million. That decline to $500 million and now to $389 million is substantial.”

PharmaNewsIntelligence prompted Dondarski to explain why the average peak sales declined between 2021 and 2022.

“It's partially driven by the fact that, in the last year or two, we saw the average peak sales per asset trend up quite a bit. That was largely driven by a handful of specific program assets that were approved. That brought the average up; when they were approved, the average came back down,” he responded.

Beyond that, the therapeutic focus areas have evolved drastically in recent years. Dondarski notes that in previous years, there was a significant focus on primary care diseases, impacting a broader subset of patients. However, nowadays, the pharmaceutical industry has shifted to focus on more specialty and rare disease areas.

R&D Costs

Another vital factor highlighted in the report is the costs per asset in the pipeline associated with research and development, which has increased in recent years.

“Year over year, it increased by $300 million. So now, on average, it's roughly $2.3 billion to bring an asset or to discover an asset and progress it through the market,” said Dondarski. “Despite the analytical rigor of our report, if you think about the cost per asset going up, and then the projected revenue per asset going down, that's largely what spells the decline.”

Impactful Product Approvals

“The third piece, albeit tricky, is that we also saw a substantial number of pretty impactful products being approved in the last year,” he continued.

New drug approvals benefit industry members, corporate executives, and patients, expanding access to new and potentially life-changing medications. However, Dondarski explains that the progression from the research and development cycle into the commercial phase means the value is exiting the R&D cycle. Pharmaceutical companies must work to replace research and development assets with new research and the next generation of therapies.

“There was a substantial number of approvals, but companies didn't do a good enough job replacing that value in terms of assets entering their pipelines,” he notes.

Largely successful companies, such as Pfizer and other major pharmaceutical industry powerhouses, do more than work to bring their current products to market. Instead, they are constantly scouring for new research opportunities and chances to acquire new projects, positioning themselves in a way that allows constant progression.

Using the Report

Dondarski notes a few different ways to use the data collected from the report; however, Deloitte focuses on two primary uses.

“One is to take a macro-level view of broader trends and changes. That information has different utility to different companies because some are ahead of the curve, and some are behind the curve,” explained Dondarski.

Beyond a macro-level overview, they can look at it from a company-by-company view, allowing them to discuss how each organization tracks compared to industry trends.

Organization-Specific Uses

“Outside of a numerical perspective — like any other part of the industry or any other industry — no R&D organization doesn't feel the need to improve. People are always striving to get better no matter how successful they are,” said Dondarski.

With that in mind, pharmaceutical companies can extrapolate additional information from the report and apply it to their pharmaceutical practices.

One of the main things that Dondarski harps on is the capital allocation information that can be withdrawn from this report.

He states, “There's always a pressure to emphasize and invest in late-stage development because that typically has the quickest impact commercially.” As mentioned before, replacing products that have left the R&D cycles and entered the market with next-generation products is critical for pharmaceutical company growth. Companies must understand how to invest across the value chain appropriately.

“Takeaway number two is ensuring that companies continue to make non-portfolio investments,” added Dondarski. “COVID facilitated an adoption uptick in some of the more innovative capabilities the industry has talked about for a while, like novel ways of designing trials, virtual trials, and remote trials.”

Finally, he notes that pharmaceutical companies can use data from this report to gather information on future investments.

“From an investment perspective, it's always difficult to make individual decisions on asset investments given its uncertainty. It's a calculated risk on whether this investment will succeed and move to the next stage or the market,” explained Dondarski.

However, historical data and a robust and rigorous research process for each asset investment decision can provide invaluable insight for pharmaceutical companies as they expand their portfolios.