Biopharmaceutical R&D Productivity 2016

Schedule of Exhibits

Lacking a common definition of R&D productivity, managements have no efficient means of communicating on the topic; and, no means of measuring — and thus managing — performance

Presumably we can all agree on what R&D productivity ‘is’ – the rate at which firms convert resources (inputs) into innovation (outputs). If so, all that’s left is to define the inputs and outputs, calculate the rate at which one (inputs) becomes the other (outputs), and we can begin thinking of R&D productivity in measurable and thus manageable terms

WHY R&D PRODUCTIVITY IS FALLING, AND WHAT CAN BE DONE

We are all agreed that your theory is crazy. The question that divides us is whether it is crazy enough to have a chance of being correct – Neils Bohr

Input costs are rising, and too many inputs are used per approval

Falling economic returns on R&D spending (Exhibit 1) show, quite simply, that the cost of producing a given amount of innovation has risen more rapidly than the profit generated by that same amount of innovation

Addressable causes of high failure rates

If you don’t have a competitive advantage, don’t compete — Jack Welch

Rising failures rates obviously increase the amount of input required to achieve an approval. We believe failure rates are unnecessarily high for at least two addressable reasons: companies spend too much effort on projects that have relatively little chance of success; and, companies are too eager to put their own discoveries into development, even when these are not the best development candidates

The importance of failing early …

Sometimes when you innovate, you make mistakes. It is best to admit them quickly, and get on with improving your other innovations — Steve Jobs

The longer a project stays in the portfolio before it fails, the more resources it consumes. This is quite obvious; less obvious however is just how sensitive economic returns can be to how long failures stay in active development

Basic operating efficiency

Larger R&D operations tend to produce lower economic returns per R&D dollar spent (Exhibit 12), and we believe this occurs for several reasons. At the very least we suspect that the number of non-technical (e.g. human resources, finance, law, administration) resources applied to a given project is directly related to firm size – that is to say we believe larger firms invest more non-technical inputs into an average project than smaller firms. Far more importantly, in smaller firms information, resources, and decision making authority tend to be distributed according to merit; in larger firms information, resources and power tend to be distributed bureaucratically. Merit as a basis for information, resource, and power flows implies that stronger ideas capture the organization’s resources, and that weaker ideas do not. Bureaucracy as a basis for distributing information, resources, and authority implies that the preferences of those with rank determines which projects the organization emphasizes, and which it ignores

The contribution of US pricing to R&D returns, and why risks to US pricing compel an urgent approach to R&D productivity

Roughly half of trailing economic returns to R&D spending are the direct result of real price inflation on approved products sold in the US. What’s crucial to realize is that if US real pricing gains stall, R&D productivity will begin eroding at a correspondingly more rapid rate

Addressable causes of volatility

Coincidence is God’s way of remaining anonymous – Albert Einstein

For decades, US net pricing gains have been a major driver not only of global revenue and earnings growth, but also of revenue and earnings predictability. During this period the rate at which managements grew US net prices was at least partly discretionary – this meant more aggressive pricing actions could be taken when prescription demand weakened or when patent losses outpaced new product flow, mitigating the effects of weak demand or eroding product mix on revenue and earnings. Thus as US net pricing power erodes, revenue and earnings not only decelerate, they become more volatile