The world’s top 10 pharmaceutical companies spend around $50bn a year on research & development…but have very little to show for it.
The cost of bringing a new drug from the laboratory to market has risen to around $1bn and, in an influential study released last year, McKinsey estimated that the industry’s return on R&D over the past decade has averaged just 7 per cent, below its cost of capital. It is startling that companies boasting operating margins of 30 per cent or more are actually destroying value in their core activity. No wonder the sector has been de-rated so substantially over the past 10 years.
It was meant to be very different. The introduction of “industrial” technologies, including genomics and high-frequency screening of chemical compounds in the 1990s was supposed to lead to an explosion in productivity. Pharma companies built huge research compounds and started to think of their scientists as engineers, perhaps even factory workers that would reliably churn out new medicines. That turned out to be a blind alley: drug discovery remains an almost personal process, based on intuition and serendipity as much as technology.
Now the industry, led by GlaxoSmithKline, is reversing course. Over the past few years, GSK has progressively started to break up its research clusters again, from thousands of people, to 300-400 and most recently units as small as 60-80 people, with more responsibility. At the same time, it is saving money by trimming the gold-plated physical infrastructure with which its boffins like to surround themselves. And it is becoming better at killing off drugs early that have a poor chance of making it to market. Each research project now has to pass a “Dragons Den”-type committee before it gets substantial funding.
The early results look encouraging. GSK had no new products approved in the US between 1998 and 2007 but 15 since then with another six in its late-stage pipeline. And at yesterday’s results presentation, chief executive Andrew Witty said that the group’s return on investment in R&D had risen from the 7 per cent industry average to 11 per cent in 2009 and that he “aspired” to 14 per cent. The fact that GSK – first among its peers – has revealed a proper measure of research productivity is as encouraging as the numbers. It may even tempt investors back into the sector.
