Big Pharma R&D - is it worth it?Deloitte, the accountancy and consultancy firm, recently published a new study, which concludes that big pharma is getting worse at R&D. Deloitte estimates that returns on investment in drug development by the largest pharmaceutical companies, as measured by the average internal rate of return (IRR), have dropped sharply over the past year, falling from 11.8% in 2010 to 8.4% this year, while the cost of developing a new drug rose from $830m to $1.1bn. A summary of the study can be found on the Financial Times web site at http://www.ft.com/cms/s/0/09c29098-137e-11e1-81dd-00144feabdc0.html#axzz1gFDTVi00.
Deloitte commented: “R&D is still performing, but it’s getting harder. For most companies, the challenges go beyond simply organisational fixes. The next wave to boost productivity is more collaboration. We see an unprecedented appetite by chief executives to work with each other in non-competitive areas.”
This theme is echoed in the Future Pharma report recently published by KPMG, another accountancy and consultancy firm (http://www.kpmg.com/ch/en/library/articles-publications/pages/future-pharma.aspx). The KPMG report notes that R&D productivity has been decreasing steadily over the last 20 years and advocates the use of IRR to prioritise and rationalise R&D portfolios. KPMG suggests that such an approach could transform investment decisions but cautions that it will require companies to think carefully about the metrics they use to determine the rate of return.
At one level, this sort of analysis could be good news for the biotech sector if the end result is more collaboration between big pharma and biotech companies. On the other hand, a strategy driven by a short-term IRR analysis may lead big pharma to conclude that investment in R&D just isn’t worth the bother.
For me, these concerns are reinforced by the recent announcement from Amgen that it plans buy back up to $5bn of its shares from current shareholders. The deal is being financed by selling $6bn of debt through a bond issue at an average interest rate of 3.79%. Amgen’s shares were up 5.9% immediately following the announcement. The longer term impact on Amgen’s share price remains to be seen but it could be the case that big pharma will decide that share buybacks are a more effective way of boosting share price than investing in R&D. If Amgen, a rare example of a biotech start up that matured into a world class independent pharma company, has come to this conclusion what hope is there for a vibrant biotech sector?