Epoch 36: Alternative Pharma Productivity Measures

Top 16 Most Productive Pharma R&D Units

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Hello Avatar! Welcome back for another week of biotech analysis. This week we are going to revisit a familiar topic - R&D productivity.  We recently came across an interesting publication on this topic which we felt was important to share. Classical R&D productivity analysis has centered around quantitating and optimizing for clinical trial cycle times as well as attrition/survival rates across various stages of development. The authors of the manuscript we will run through today approach productivity from a practical perspective, one which simply looks at output in terms of sales and looks to correlate that to input in the form of R&D spend. The results are quite interesting, particularly when viewed at the company level.  Yes, that means we will be looking at (and ranking) R&D productivity for each of the 16 largest pharmaceutical companies. Who does R&D best? Who does it worst? Keep reading to find out. 

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REVISITING R&D PRODUCTIVITY

Today’s discussion will be derived from a recent publication from Europe titled: Analysis of pharma R&D productivity – a new perspective needed.

Frequent Bowtiedbiotech readers will be familiar with the topic of R&D Productivity as it is something we often discuss here.  We encourage you to have a look at our previous writings:

2023

Epoch 11: Clinical Productivity Trends 

Epoch 8: Biopharma Productivity Crashes 

2022

Epoch 40 - Which Pharma R&D Unit is Most Productive?

Epoch 44 - Pharma vs Biotech - Which Does R&D Better? 

With that in mind we are excited to take you through today’s analysis which again comes from a slightly different perspective. It is important to remember there is technically no correct way to calculate R&D productivity.  Past efforts have looked at how much capital it takes to bring a drug to market, including the cost of failure. And of course the classic measures that management consultants have made a killing “helping” pharma with over the past 2 decades are clinical cycle times and survival.  

Gassmann and colleagues conducted a comprehensive analysis of 16 prominent research-based pharmaceutical companies spanning two decades from 2001 to 2020. Their analysis reveals a few interesting observations.

PHARMA R&D INVESTMENT TRENDS

There are a few factors to keep in mind as we explore historic pharma investment trends.  

First, is that pharma has substantially increased their R&D investments, achieving a noteworthy compound annual growth rate of 6% in R&D spend over the studied period, resulting in an average R&D budget of $6.7B per company by the year 2020.  Big pharma is big pharma for a reason - they invest A LOT in R&D.  

Second, the companies within the published analysis successfully introduced 251 novel drugs to the market, accounting for a substantial 46% share of all FDA approvals under the CDER category during the past two decades.  Again, big pharma is big pharma for a reason, about half of drug approvals come from the top 16 companies!

Third, when evaluating R&D efficiency, the authors noted a striking observation that nearly half of the leading companies resorted to compensating for their suboptimal R&D productivity by engaging in mergers and acquisitions.  No surprises here, with scale comes inefficiency, and that inefficiency is offset by M&A. 

PHARMA R&D PRODUCTIVITY TRENDS

With drug discovery, like any business, eventually it comes down to cash flows.  Everything that comes before cash flow (most of biotech) are investors speculating on future cash flows and paying a risk adjusted premium for access to those potential cash flows.  With that in mind, the best logical measure of R&D productivity is to look at how much cash is actually generated.

The authors propose something completely logical regarding quantification of ROI (i.e. productivity)

“R&D productivity should be defined as the ratio of commercial value of new drugs to the related investments in drug discovery and development”

Lets quickly revisit recent trends in R&D Productivity (hint: it is not good)

• Costs are UP: R&D costs per new drug skyrocketed to an average of $2.6B, or even higher to $2.9B when Phase IV trials are factored in.

• Survival and Cycle Times DOWN: High attrition rates during R&D and protracted development timelines have plagued the industry.

• Market Caps DOWN: From 2000 to 2010, the market cap of the top 20 pharma plummeted by a substantial 30%.

• Average Peak Year Sales are SHRINKING: From 2000 to 2019, as evidenced by expected average peak sales per new drug, notably dwindled, particularly in the domain of new oncology products due to smaller market segments per approval.

• R&D Spend UP: The decline in R&D productivity is primarily attributed to the industry's increasing R&D expenditure, with a significant portion of expenses directed toward unsuccessful R&D projects.

SIGNS OF A TURNAROUND IN R&D PRODUCTIVITY..MAYBE?