Managing Director & Senior Partner
BCG’s study on R&D outliers was featured in the September edition of Nature Reviews Drug Discovery.
R&D is the lifeblood of the biopharmaceutical industry, the ultimate source of the economic value that the industry creates. Little wonder, then, that the continuing evidence of a major decline in R&D productivity has generated a sense of crisis—not just in R&D circles but in the industry as a whole.
Consider some sobering numbers: from 2000 through 2010, the market value of the top 20 biopharma companies declined by more than 30 percent—a loss of an astounding $720 billion. This loss wasn’t the product of a decline in sales; in fact, the net income of these companies grew by 140 percent. Rather, it was due to the vertiginous drop in industry price-to-earnings multiples—a sign that investors had substantially reduced their expectations for the industry’s future prospects.
The powerful market and institutional forces that are driving the decline in R&D productivity are familiar: more complex science, higher hurdles on unmet need, tougher competition, pricing and access pressures, and tighter regulation. All these forces have increased the obstacles to success in R&D and led to a commensurate decrease in returns.
Industry experts have proposed a variety of solutions—ranging from frequent calls to reengineer the R&D value chain to the radical suggestion that big pharma companies get out of the R&D business altogether.1 Notes: 1 See, for example, Steven M. Paul, Daniel S. Mytelka, Christopher T. Dunwiddie, Charles C. Persinger, Bernard H. Munos, Stacy R. Lindborg, and Aaron L. Schacht, “ How to Improve R&D Productivity: The Pharmaceutical Industry’s Grand Challenge,” Nature Reviews Drug Discovery, Vol. 9, No. 3 (March 2010), pp. 203–14, and “Pharmaceuticals: Exit Research and Create Value,” Morgan Stanley Research Europe, January 20, 2010. We believe that neither of these solutions represents a realistic fix for the industry. Although decades of process improvement and the introduction of new, productivity-enhancing technologies such as high-throughput screening, genomics, and proteomics have greatly improved the productivity of discrete steps in R&D, outputs have consistently declined. According to one estimate, the inflation-adjusted R&D expenditure per molecule brought to market has risen one-hundredfold over the last 60 years.2 Notes: 2 See Jack Scannell, Tim Anderson, Jeremy Redenius, and Lisa Bedell Clive, The Long View: Global Pharma—Pharma R&D Productivity Follows Moore’s Law Backwards. Does Anyone Know Why? AB Bernstein Research, February 14, 2011. And while many biopharma companies have increased the in-licensing of new compounds, exiting R&D altogether would mean dismantling the very in-house expertise necessary to determine the most promising candidates, what they are worth, and how best to develop them—a key capability on which effective in-licensing depends.
In order to understand better the nature of the industry’s R&D problem, it pays to look more closely. Although, on average, the ability of biopharma R&D to create value has declined, there is in fact a remarkable variation in R&D performance across the industry. During the past year, The Boston Consulting Group has been studying these wide differences in performance. Our goal has been to identify the characteristics that differentiate those companies in which the R&D organization is making a positive contribution to value creation from those in which R&D is actually destroying value. We call the successful organizations outliers and believe that they offer fresh insights about the true nature of the problem facing biopharma R&D, as well as the outlines of a potential solution.