Deloitte Report on Pharma R & D Returns

Since drug pricing is likely to be one of the hottest health care topics in 2019 and since drug manufacturers’ favorite justification for high prices in that it costs a lot to develop a product and bring it to market, it seems appropriate to take a look at the Deloitte Centre for Health Solutions ninth annual report on returns to R & D for the industry.   (Deloitte Report)   Looking at 12 large biopharma companies and their compounds expected to launch in the next four years, the report finds an expected internal rate of return on R &D of just 1.9% for 2018, down from 3.75 for 2017 and 10.1% in 2010.  Part of the reason for a reduction in returns is a substantial uptick in costs of getting a product to market.  According to Deloitte in 2018 that was $2.2 billion, compared to $1.2 billion in 2010.  But another reason is a forecast of lesser sales per product, $407 million in 2018 versus $816 in 2010.  The number of assets in development has also decreased from 206 in 2010 to 159 in 2018.   A sub-analysis of 4 smaller companies, as you might expect, finds they are doing better, with a projected return 9.3% on compounds with a development cost averaging $2.8 billion and annual sales of $1.1 billion.  Oncology currently is about 40% of late stage pipelines, compared to 18% in 2010.

I am puzzled by the return analysis.  Many more therapies are getting accelerated review designations by the FDA, which should reduce the costs and time to commercialization.  Prices for new therapies are quite high.  And while some new therapies have relatively small patient populations, that is more than compensated for by the pricing tactics companies are using.  Large companies are inefficient, but not that inefficient.  The methodology used is not laid out in great detail and I wonder if some of the apparent cost increase relates to acquisition activity by larger companies, as they are basically buying pipelines, not developing them.  In any event, I am very skeptical that drug company returns are as low as stated in this report, in fact, I think they are much, much higher.  Looking at publicly available financials would support that perspective.  It is also supported by companies’ willingness to spend very large sums on acquisitions.  They wouldn’t do that if they didn’t see large returns available.