Drugmakers’ Returns on Research Fall as Pipeline Projects Fail

The world’s biggest drugmakers saw returns on their investments in new products decline 29 percent from last year as more experimental drugs failed at costly late stages of development.

Pharmaceutical-company returns on research and development fell by 3.4 percentage points to 8.4 percent this year, the report by consulting firm Deloitte LLP found. The study looked at the 12 drugmakers that spend the most on R&D, including New York-based Pfizer Inc. (PFE), Paris-based Sanofi and Japan’s Takeda Pharmaceutical Co.

There were fewer drugs in the final phase of testing or undergoing review by regulators, down from an average of 23 per company in 2010 to 18 this year, the study found. At the same time, the cost of bringing a new medicine to market rose from $830 million to $1.05 billion. More drugs are failing in development and at later stages than a year ago, said Julian Remnant, a partner with Deloitte and the report’s author.

“We continue to see a level of late stage drug failures,” Remnant said in a telephone interview. “That’s something that should not be happening to the extent it still is.”

The report assessed the future potential returns of R&D projects. Returns from investment can fall because a product fails in a study or because of a lack of new drug candidates with future potential returns, Remnant said.

Other companies analyzed in the report are Roche Holding AG (ROG), AstraZeneca Plc (AZN), Merck & Co., Novartis AG (NOVN), GlaxoSmithKline Plc (GSK), Amgen Inc. (AMGN), Eli Lilly & Co. (LLY), Johnson & Johnson (JNJ), Bristol- Myers Squibb Co.

Drug Development Setbacks

Merck, based in Whitehouse Station, New Jersey, this year halted one study and narrowed another on anti-clotting pill vorapaxar after bleeding risks were found. Sanofi discontinued development of a potential successor to its Multaq heart-rhythm drug after it failed to prevent sudden deaths in patients. Glaxo’s experimental diabetes drug albiglutide failed to control blood-sugar levels better than Novo Nordisk A/S’s Victoza treatment. Sangamo BioSciences Inc., based in Richmond, California, decided to stop developing its diabetic neuropathy drug after it failed to show it was any better than a placebo.

“The ROI story over the last few years has been gloomy news,” said Erik Gordon, a business professor at the University of Michigan who follows the industry. Companies are tackling more complex diseases he said, and generating lower returns for their efforts.

“It’s more expensive to get to the failure, and there are more failures,” he said in a phone interview.

Late-Stage Drugs

Along with more failures, there are also fewer drugs in the late stages of development -- 220 this year compared with 270 last year -- Remnant said.

“That could be a signal that the industry is investing in quality,” he said, with companies paring down their research portfolios to focus on the most promising drugs.

Remnant said it will be a challenge for companies to keep their pipelines generating new products as they come under pressure to cut costs as drugs already on the market lose patent protection and with it, revenue.

From now through 2015, $171 billion in global pharmaceutical sales will lose patent protection and face generic competition, according to Gary Gatyas, a spokesman for IMS Health in Parsippany, New Jersey, which tracks the pharmaceutical industry. Pfizer’s cholesterol pill Lipitor, the world’s best-selling medicine that generated $10.7 billion last year, goes off patent at the end of this month.

“R&D is a very common target for short-term cost cutting,” Remnant said. Research “is in a battle for capital,” he said.

Pfizer, facing losses in Lipitor sales, plans to divest its animal health and nutritional units so it can focus on producing new medicines. Abbott Laboratories (ABT), in October, announced that it is splitting into two companies, one focused only on prescription drugs.

“I think it’s a new era,” Gordon said. “People who invest in pharma companies have to expect, not as a permanent condition, but as a long term trend, a lower rate of return than they had during the golden blockbuster years.”

To contact the reporter on this story: Drew Armstrong in Washington at darmstrong17@bloomberg.net;

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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