LATEST THINKING


The future of pharmaceutical innovation: Tackling the R&D productivity gap

Performance indicators reveal the most significant challenge for pharmaceutical R&D is the productivity decline.

Overview

The industry is developing fewer new molecular entities, and the cost for each is increasing. Blockbuster drugs, once the industry’s historical success recipe, are more difficult to identify and face significant reimbursement challenges. Leading companies are more reliant on external molecules from smaller biotechs as sources of new products. The industry is exploring targeted therapies and patient sub-segmentation to support predictive efficacy, better attrition rates and potentially attractive pricing.

Key Findings
Based on our research and experience working with R&D productivity issues across the pharmaceutical industry, we see that the future of pharmaceutical innovation will be built on a smaller, less integrated and less complex R&D organization.

Leading companies should consider taking the following actions:

  • Establish a new vision. Explore an R&D model that focuses on the core parts of the value chain for a strategic advantage over the competition with know-how that allows for differentiation in select disease areas.

  • Leverage externalization. Externalization not only applies to CRO R&D activities, it is a strong option for an increasing share of the novel IP that can be in-licensed or acquired from early stage biotechs or potentially traded between major pharmaceutical companies.

  • Spin out assets. To create value for groups of assets in the portfolio—specific disease areas that are deemed nonstrategic for the future, but still have attractive commercial potential—consider spinning these assets out and creating biotech companies.

  • Be objective. Avoid the pitfalls of favoring in-house activities by keeping internal rate of return (IRR) for R&D superficially low.

  • Reward innovation. Institutionalize a culture of innovation and entrepreneurship by rewarding leaders for informed risk taking and creative de-risking approaches through external funding and other mechanisms.

  • Keep it simple. Simplify overly complex matrix organizations by creating smaller, independent business units with decision and budget authority.

  • Start small then scale. Start the change process with controlled experiments in which specific and emerging therapeutic franchises pave the way for the broader organization.

Analysis

Pharmaceutical R&D productivity has been on the decline for far too long. The need for change is too great—and the stakes are too high—to continue with the status quo. To close the productivity gap, the industry must act boldly to change the current R&D model across every dimension.

This will require a significant evolution and a holistic perspective that accounts for strategy, process, people, organization and funding. It is time to begin the future of pharmaceutical innovation—a future much different than the past, but full of opportunity.

The future of pharmaceutical innovation requires more focused strategies, less emphasis on overly competitive areas, and flexible business models that drive outcomes in new ways. Leading companies should consider taking the following actions:

  • Focus the portfolio. Develop more focused portfolio strategies that target only those disease areas with the likelihood of successfully developing first-in-class or best-in-class assets or addressing unmet needs with meaningful health economic impact for payers.

  • Lead with strengths. Conduct a realistic assessment of the core strengths of the organization. Assess clinical and scientific development, commercial call points, patient advocacy and brand reputation.

  • Bury the blockbusters. Realize that blockbusters are becoming increasingly rare and costly to commercialize.

  • Pursue targeted therapies. Targeted therapies and ensuing patient sub-segmentation leads to potentially lower approachable patient numbers.

Recommendations

In this climate of scarce resources and sensitivity to late stage clinical failures, the industry should more aggressively pursue partnerships, external funding and de-risking approaches. Leading companies should consider taking the following actions:

  • Explore collaboration. For accessing and developing early stage assets, a collaborative model between pharmaceutical companies, biotechs, venture capitalists and other risk tolerant sources of early funding has strong potential.

  • Approach risk differently. For de-risking and co-funding of risky late stage and commercial investments, the model pioneered by Lilly in collaboration with Quintiles, and funded by TPG, is viable.

  • Choose the right partners. Identify partnerships with funding sources backed by content and execution expertise. This way, individual projects can be rapidly and expertly assessed and implemented.