Tuesday, November 22, 2011

Returns on R&D tumble at world's top drugmakers (Reuters)

LONDON (Reuters) ? Investment returns from researching new drugs have fallen nearly 30 percent in the past year at the world's 12 top pharmaceutical companies, highlighting the productivity dilemma facing the sector, according to a report on Monday.

The average internal rate of return (IRR) from research and development dropped to 8.4 percent from 11.8 percent a year ago in the latest study by Deloitte and Thomson Reuters.

The world's top drugmakers face a range of threats from patent expiries to pricing pressure, but the lack of investor confidence in R&D spending is arguably their biggest challenge.

It means little or no value is being ascribed to drug pipelines by stock markets, with the result that shares in large drugmakers are now trading at a discount to sectors such as fast-moving consumer goods.

Julian Remnant, head of Deloitte's European R&D advisory practice, said the decline in R&D returns reflected the very real productivity challenges confronting CEOs -- but he noted it belied some underlying success stories.

Although 10 out of the 12 companies saw a decline in returns in the past year, two-thirds still succeeded in realizing more value from commercialization of late-stage products than was lost from late-stage product failures.

The industry as a whole, however, is barely keeping its head above water, given an estimated weighted average cost of capital of around 7 percent.

"It's still positive but less positive than last year and part of that is due to the fact that the number of late-stage assets has come down around 20 percent," Remnant said in an interview.

"There's some evidence now that the industry is starting to invest more in the quality of the late-stage pipeline by taking a fine-tooth comb to the portfolio and being much more judicious about what gets progressed into Phase III."

High regulatory hurdles and increasingly stringent internal reviews means pipelines are being pruned across the industry, with the average number of compounds in late-stage Phase III development down to 18 from 23 on average per company.

At just $1.05 billion, it now costs more than 25 percent more to develop a new medicine on average compared with last year, with much of the increased cost reflecting the high rate of failures. Yet the commercial value of these assets is no greater than it was in 2010, according to the study.

The study calculated IRRs by estimating the future value of sales from products in final-stage Phase III clinical trials, or those submitted for regulatory approval, using standard industry benchmarks for success rates.

LET'S GET TOGETHER

Remnant believes the tough times facing the industry are likely to stimulate greater collaboration in R&D, as well as an exploration of ways to share capabilities in pre-competitive areas.

Both trends are, in fact, already evident in a series of actual or planned alliances.

The industry as whole is also reining back the total amount of money it throws at R&D, with aggregate expenditure falling for the first time last year by nearly 3 percent to an estimated $68 billion, according to a recent analysis.

Increasing questions from shareholders about the wisdom of spending billions of dollars on the hunt for new drugs is also causing some companies to reveal more in-house data about rates of return.

GlaxoSmithKline has so far gone the furthest by setting itself a clear target to increase returns on R&D to 14 percent from approximately 11 percent at the start of 2011. Others could come under pressure to follow suit.

The companies analyzed in the study were Pfizer, Roche, Novartis, Sanofi, GlaxoSmithKline, Johnson & Johnson, AstraZeneca, Merck & Co, Eli Lilly, Bristol-Myers Squibb, Takeda and Amgen.

(Reporting by Ben Hirschler; Editing by Elaine Hardcastle)

Source: http://us.rd.yahoo.com/dailynews/rss/health/*http%3A//news.yahoo.com/s/nm/20111121/hl_nm/us_pharmaceuticals_rd

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