A small post about a big problem
The annual Pharmaceutical Innovation Index measures pretty much the only thing that matters in pharma: did you take assets to market (and to patients) in the past 5 years, and did you do so successfully? Any measures of productivity that miss those two parameters are surrogates, and incredibly misleading.
However, take a look at these numbers, which compare performance of the top 11 in the 2018 Index with the lowest 10. Perhaps no surprise that the biggest spenders had a much greater chance of an approval in any year over the 5 years, and therefore derived much more of their revenue in 2017 from products launched in that period. But, we’re still only talking about 1 approval per year for the top 11 companies, on average.
Source: 2018 Pharmaceutical Innovation Index, ? IDEA Pharma
The straight facts are that the $6 billion spent on R&D while they gained each of those approvals is some way north of the number we’ve all been sold on. Of course there are more elegant assessments, and the R&D dollars in the past 5 years were not all spent on drugs launched in the last 5 years - hopefully they’re going to be more productive in the next 5. But, let’s take that number forward: each approval has cost our large companies $6 billion.
The question is: are they getting that $6 billion back? Are the drugs they’re launching paying for the ones they’re not?
No.
Between beginning 2013 and end 2017, 217 drugs had their 1st approval (we only included drugs that had sales figures greater than $0).
Of those drugs, only 6 reached cumulative global sales of over $6bn. That is 2.8%.
They still have time, of course to go higher. But then, this only counts sales, not profits (so ignores cost of manufacturing, distribution, sales and marketing, etc.)… Those drugs: Harvoni (Gilead, 2014 launch), Sovaldi (Gilead, 2013 launch), Tecfidera (Biogen, 2013 launch), Opdivo (BMS, 2014 launch), Imbruvica (AbbVie/ J&J, 2013 launch), Triumeq (GSK, 2014 launch).
(Rough rule of thumb: to generate profits of $6B to cover just to cover the R&D costs would require $43 billion lifetime sales (based on an average pharma profit figure of 14% p.a.). That, of course, is way beyond the almost all launched drugs in history…)
The ‘blockbuster’ definition always bothered me. But, let’s use that as a gentler hurdle. Has that $6 billion at least produced a bunch of $1 billion ‘blockbusters’?
No.
Of the 217 drugs, only 48 even reached cumulative sales of over $1bn in this period (22.1%). 24 drugs (11%) had ‘blockbuster’ sales of over $1bn in 2017.
So, we have a problem. Not only do most of the drugs we put into pipelines not make it to market, those that do are not even paying for their own R&D programmes, never mind the R&D for the failures around them.
Companies can talk about ‘innovation’ all they want, but this is an unsustainable state. Launching medicines that stand a chance of repaying their own investment has to be the measure of success, of productivity. The commercial environment is a whole lot easier to predict than the biology of the human. (Or, should be.)
My opinion? This is the part of pharma that’s broken. The McTemplates, the TPPs, the tsunami of ‘market research’ that looks but never understands, the forecasts that are pushed ever higher, the walking dead products that are pushed ever forward in pipelines. For those ready to see it, there’s still good news, in throwing out those shackles. As those companies doing it well show, the future is already here, but very unevenly distributed…
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6 年Many (majority?) of the drugs listed have in fact origins which are not in the top 10, and have a long tail of acquisitions and mergers behind them...
Principal, Silver Hill Partners
6 年Mike, The fundamental questions about arithmetic were pointed out back in the mid 90s by Jürgen Drews and Stefan Ryser. We took the calculation then further at McKinsey and suggested with Christensen that the future model of pharma had to be highly outsourced and smaller, matching the size to the market. We now have the end of the blockbuster bit pharma still needs large drugs. It is like being dependent in a lottery win to make ends meet.
Retired
6 年Mike Thanks for sharing the research. When I think about R&D spend in biopharma, I ponder the decision of the U.S. deciding to go to the moon. How much would we have saved by not going? Then I ask, "What would have been the opportunity cost? What products would we not have today had we not gone? How might a decision to not pursue a space program have impacted the standing of the United States in the world today?" With hindsight it is easy to see what a tremendous impact the decision to go had on all of the above questions. That being said, I imagine for many at the time, it was hard to envision how much could/would result from the decision to go to the moon. Remember how many costly failures we had along the way? From my perspective, biopharma R&D spend is very similar. For example, I recall speaking with Clay Siegall, Ph.D., cofounder and CEO of Seattle Genetics (founded in 1998). He shared how five of the company’s products failed to become commercial successes before ADCETRIS got its first FDA approval in 2011 for treatment the treatment of patients with relapsed Hodgkin lymphoma or systemic anaplastic large cell lymphoma (sALCL), a type of non-Hodgkin lymphoma. I remember Siegall explaining the importance of earlier failures putting the company on the proper path, and had they not had (and learned from) those failures, he’s not sure the company would have ever gotten to ADCETRIS. So, while I understand your point regarding R&D productivity at the present, being the consummate optimist, I have to believe the returns and treatments will eventually come. For visionaries understand the importance of playing the long game, which biopharma R&D most certainly is.
Mike,? great observations!? ?I've done the analysis many times in my career, but when I did it last (many years back) in order for a drug to have a positive NPV, by the end of year 3 post launch,? it had to reach $1B in sales for a primary care drug and about $400MM in sales for a specialty drug.? ?Though the analysis used a 15% discount rate it was also had much smaller discovery and development costs.? Connected to that measure, many of the companies in your top 10 have returns on total capital below any reasonable estimates of their costs of capital.? ?But many of these companies also have portfolios of older products in harvest mode that contribute nicely to operating profit and probably masking all the issues you're raising.? ?The questions is, "when do the trend lines cross?"? ?If predictable, it would be a great short.
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6 年So I suppose as R&D costs go up, the margins for failure (or just modest wins) disappear. We need more breathing room rather than force every drug to be a $6B blockbuster. What clinically impactful drugs are we dropping because return wasn’t large enough to justify despite need and market?