2016 was a bummer! After years of rising FDA approvals that swelled to an all-time high of 51 new drugs in 2015, they plummeted to 22 last year—a 57% drop—down to a level not seen since 2010 (Fig 1 and 2). What happened? Reversal to the mean? A harbinger of worse things to come? The answer matters because we spend $328 billion a year to buy our medicines in the U.S. ($697 billion worldwide), and the less productive the industry R&D, the more remote the prospect of enjoying affordable great drugs again.
The Food and Drug Administration says it has not slowed down, but it simply cannot approve drugs that have not been submitted for review. It also points out that it accelerated five approvals that were expected in 2016, and moved them to 2015—something it often does for drugs that show compelling benefits. Yet, even after adjusting for that shift, the industry still registered a 41% drop in output last year.
Many of the metrics used to assess drug R&D did not change significantly. Research spending, now at $154 billion, has kept growing, if modestly. The 13 historic big pharma companies received 36% of the approvals vs. 41% in 2015. In both years, the same percentage of drugs (41%) were prized first-in-class therapies targeting novel modes of action. Cancer, infectious diseases, hematology and central nervous systems remained the leading therapeutic areas, garnering 73% of the approvals vs. 71% in 2015. Biological drugs gathered a majority of the approvals for the first time (55% vs. 39% in 2015), extending the trend of recent years. On the regulatory side, a higher percentage of drugs benefited from FDA’s programs to speed their journey to market (Fig 3) as compared to 2015. In short, the class profile of 2016 does not stand out from its predecessor on any metric that might explain the lower approvals.
What did change, however, were the companies getting the approvals. The outperformers of recent years, GlaxoSmithKline (GSK), Johnson & Johnson and Novartis did not get an approval in 2016 (Fig 4); Neither did Amgen, AstraZeneca, Bayer and Bristol-Myers Squibb (BMS). In all, seven of the 13 historic big pharma companies, which received 14 approvals in 2015, came up empty-handed in 2016. The remaining six companies saw their take grow from 6 to 8.
What these figures illustrate is the difficulty to hyper-innovate on a consistent basis. This is a serious concern because the traditional big pharma research model carries enormous structural costs, and needs hyper-innovation to pay for them. Without it, the model destroys value. (At the moment, hyper-innovation means about two New Molecular Entities (NME) per year, consistently.) Deloitte’s recent study on the return from pharmaceutical innovation estimates the 2016 return on drug R&D at 3.7%. This is well below the cost of capital for pharmaceutical (7.7%) and biotech (9.2%) companies. So, most of them are already destroying value at a hefty clip, and have done so for at least six years (Fig 5). They have tried to mitigate this, to some extent, with robust price increases, but, if President-elect Donald Trump is to be believed, this may be harder to do in the future.
Ironically, we find ourselves in a situation where basic research—the kind funded by the National Institutes of Health and mostly performed at universities—is turning out dazzling discoveries. Yet translating them into commercial products can no longer be done economically by most companies. There has hardly been a better time to pierce the scientific secrets that have held back innovation, and a worse time to bring that innovation to market. And worryingly, it is getting worse: R&D spending per NME—already into multibillion-dollar territory—keeps ascending; the success rates for drug candidates in oncology, cardiovascular and neuroscience have been steadily declining and are now down to mid-single-digit percentages; and patients and payers have had just about all the price increases they can take.
Investors don’t typically fund industries that have poor prospects for creating value. Pharma companies still trade on the reputation they enjoyed when they were cherished growth companies. But industries that thrive are those that create value for their customers, not those that appropriate value from them. Pharma is one of the greatest industries of all times. It has a fantastic product—potentially—and no shortage of very clever people. It must leverage these assets more effectively. The goal here is nothing less than changing the economics of drug R&D.
It’s the economics
Fortunately, there is a path to that, but companies must first let go of their steadfast focus on process improvement, reorganization and regimentation. They have practiced this with great application for over two decades and the results are in: underperformance, innovation crisis, plummeting success rates and runaway R&D spending per NME. It is not that these methods are useless, but they are ill-suited at managing the creative enterprise. They have a place in pharma, but not where boldness and creativity are needed.
To be fair, some companies have already gone a long way towards changing the economics of their R&D operations. Some, like J&J, GSK and Novartis, have headed toward hyper-innovation with undeniable success, even though they were not rewarded last year. Others, like BMS, Boehringer-Ingelheim, Biogen, Novo Nordisk and Gilead have espoused a more focused, specialty biopharma model that allows them to function with lower structural costs, and a lesser flow of NMEs.
But the greatest opportunity to change the economics of drug R&D lies in changing the economics of data collection, its biggest and most expensive bottleneck. New data capture technologies are rapidly emerging. Their potential is impressive, both to supplement the clinical trial data being collected and to gather rich natural history and other real-world evidence. Much remains to be done to integrate these tools to biomedical research, but the drug industry would be wise to get behind this and work with patients, regulators and other stakeholders to speed adoption.
Business as usual has become a real threat to the pharmaceutical industry. Lack of success in changing the economics of drug R&D will inevitably lead to damaging populist policies despite the consequences. Change would be a much smaller price to pay.
