This week we launched our latest annual report on ' Measuring the return from pharmaceutical innovation' . Since 2010, we have been measuring the projected returns that the leading 12 life science companies are likely to deliver from the drugs they are developing in their late stage pipelines.

Despite an overall decline in R&D returns, from 10.1% in 2010 to 5.5% in 2014, our analysis shows that R&D returns may actually be turning a corner. This year, we estimate late stage pipelines returns for the cohort of companies to be 5.5%, representing an uplift from 5.1% in 2013. The most successful of the 12 companies in our analysis had an estimated R&D return of 11.7 per cent in 2014; the lowest R&D return for an individual company was estimated to be -0.7 per cent.

Over the last five years, the 12 companies have launched, in total, 143 products with projected, total lifetime revenues of $955 billion. Over the same period their R&D divisions have progressed 236 assets into their late stage pipelines, with projected, total lifetime revenues of $1,171 billion. This is no mean feat considering the continuing market hurdles they face including; ongoing austerity measures, increasing complexity of regulatory scrutiny and the scientific uncertainty in being able to address unmet need successfully.

Many of the companies in our cohort are negotiating these hurdles successfully and are continuing to populate their late stage pipelines with promising new compounds and bring new medical innovation to patients. However, our analysis reveals that challenges remain;

  • the cost of bringing an asset to market, including accounting for failures, has risen for the fifth consecutive year to $1,401 million
  • late stage terminations continue to cost the industry dear - across our cohort, for every $5 that has been launched, $2 has been lost to failure.

This year's findings indicate that the quality of assets in late stage development is improving. For the first time since 2010 the average forecast revenues of an individual asset have increased, regaining most of the ground lost since 2012, and the average forecast peak sales per asset have also recovered slightly, by $5 million since 2013.

The dynamics behind the uplift in R&D returns are complex with wide variations at the individual company level. This year, our analysis focussed on identifying characteristics of outperformance; what is it that sets apart those companies that are delivering higher than average returns? We found that size matters, as does therapy area focus and that assets acquired from external sources of innovation (for example via acquisition, co-development/joint-venture or licensing) have higher projected peak sales compared with assets developed internally.

Company size matters - our analysis reveals that the larger the company, by revenue or R&D spend, the greater the cost to develop each asset and the lower the returns. In addition, companies that pursue a large, broad portfolio of assets, without rigorous portfolio management and discipline, add significant cost without delivering adequate returns. Legacy investment burdens on larger R&D organisations may be one explanation. Furthermore, the sheer size, complexity and bureaucracy prevalent within some larger life sciences companies may be overshadowing the benefits of scale.

A focus on four or fewer therapy areas delivers better returns - our results show that those companies focusing on four or fewer therapy areas are forecast to deliver better returns from their late stage portfolios. A strong therapy area focus appears to provide companies with an in-depth knowledge of disease biology and a comprehensive disease management-based view, instead of a product-based view. Deep therapy area expertise also drives more effective commercial conversations with payers when negotiating price, reimbursement and market access.

Externally-sourced assets have higher, projected peak sales - three quarters of the companies in the cohort generate the majority (on average 58 per cent) of their forecast late stage pipeline revenues from intellectual property that is acquired externally. Our analysis also shows that forecast revenues from externally sourced assets, on average, are six per cent higher than assets which are self-originated. For those drugs with orphan or breakthrough status, the difference is significantly higher; 20 per cent higher for drugs with breakthrough status designation and an impressive 54 per cent higher for those with orphan drug status. These results highlight the importance of innovation strategies founded on collaboration, networking and asset acquisitions. The ability to engage in and subsequently manage strategic alliances effectively is a critical success factor in life sciences R&D.

The life sciences R&D ecosystem is undergoing a transformation that has forced the industry's biggest players to reinvent how they access, foster and commercialise innovation. Our findings indicate that some of the top 12 companies are further through their reinvention than others and, as a result, are delivering leading returns. Innovation strategies founded on collaboration, networking and asset acquisitions continue to grow in importance and impact; indeed, the ability to effectively engage in and subsequently manage strategic alliances is a critical success factor in life sciences R&D. What is clear, is that the ability to collaborate across the industry and with all stakeholders remains the imperative if returns are to continue to improve. Companies need to consider if they have invested in capabilities that make them 'collaboration ready', including the talent, processes, infrastructure and data required to collaborate effectively for the long term without eroding the value acquired.

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