Post by stcks on May 3, 2018 4:25:45 GMT
Found this on Endpts. The guy brings up some interesting points. It’s a danger thats always been front of BioPharma. And a danger of looking at it industry as a whole. Also one that has been put in the crosshairs of government and Increased regulation.
I think there’s another problem here with his answer. I try to answer that after the two parts that I have posted.
He uses a lot of graphs so you might want to go to the website to read each one. Rather than what I posted here.
Part 1
endpts.com/pharmas-broken-business-model-an-industry-on-the-brink-of-terminal-decline/
Part 2
endpts.com/pharmas-broken-business-model-part-2-scraping-the-barrel-in-drug-discovery/
Pharma’s broken business model: An industry on the brink of terminal decline
Part 1 of 2
November 28, 2017 08:44 AM EDT
Biotech Voices is a contributed article from select Endpoints News readers. Commentator Kelvin Stott regularly blogs about the ROI in pharma. You can read more from him here.
Like many industries, pharma’s business model fundamentally depends on productive innovation to create value by delivering greater customer benefits. Further, sustainable growth and value creation depend on steady R&D productivity with a positive ROI in order to drive future revenues that can be reinvested back into R&D. In recent years, however, it has become clear that pharma has a serious problem with declining R&D productivity.
Various analysts (notably Deloitte and BCG) have tried to measure Big Pharma’s R&D productivity in terms of the internal rate of return (IRR) on investment, but in each case the analysis is highly complex and convoluted (and thus subject to doubt), as it depends on many detailed assumptions and forward-looking forecasts at the individual product level. Here for the first time, I introduce a far simpler, much more robust methodology to calculate pharma’s return on investment in R&D, which is based only on reliable and widely available high-level data on the industry’s actual historic P&L performance. This new analysis confirms the steady decline reported by others, but here I also explore the underlying drivers and make concrete projections, which suggest that the entire industry is on the brink of terminal decline.
A simple new method to measure R&D productivity / IRR
Pharma’s business model essentially involves making a series of investments into R&D and then collecting the return on these investments as profits some years later, once the resulting products have reached the market. However, the situation is complicated by the fact that both investments and returns are phased over many years for each product, and not all products make it to market; in fact, most products fail to reach market at all and they fail at different times and costs during their development.
Now we can greatly simplify this picture by considering only the average return on investment across the industry as a whole, which is what interests us in any case. We simply assume that all profits in any given year come from investments made within a single previous year, where the gap between these two years represents the average investment period, from the midpoint of R&D investment to the midpoint of returns at peak sales. As it happens, this average investment period is relatively stable and well-defined, as it is largely driven by a fixed standard patent term of 20 years, as well as a historically stable R&D phase lasting roughly 14 years from start to finish. Thus, the average investment period is about 13 years, from the midpoint of the R&D phase after 7 years, plus another 6 years to reach peak sales before loss of exclusivity.
There is one potential argument against this method, which is that the later phases of R&D tend to cost many times more than the earlier phases. However, we must also remember that we need to invest in many more projects at the earlier phases than we invest in at the later phases, due to natural attrition within the R&D pipeline. Thus, the total R&D investment is actually distributed quite evenly throughout the development timeline. And, as I show below, the calculated return is not very sensitive to this single assumption in any case.
Before we use this simple method to calculate the return on investment, there is one more small but important detail to remember: The net return on R&D investment includes not only the resulting profits (EBIT), but also the future R&D costs. This is because future R&D spending is an optional use of profits that result from previous investments.
So now we can calculate the average return on investment (IRR) as the compound annual growth in the value of past R&D investments to the value of resulting profits (EBIT) plus future R&D costs, as illustrated here with industry P&L data from EvaluatePharma:
Rest of the blog here: endpts.com/pharmas-broken-business-model-an-industry-on-the-brink-of-terminal-decline/
I think there’s another problem here with his answer. I try to answer that after the two parts that I have posted.
He uses a lot of graphs so you might want to go to the website to read each one. Rather than what I posted here.
Part 1
endpts.com/pharmas-broken-business-model-an-industry-on-the-brink-of-terminal-decline/
Part 2
endpts.com/pharmas-broken-business-model-part-2-scraping-the-barrel-in-drug-discovery/
Pharma’s broken business model: An industry on the brink of terminal decline
Part 1 of 2
November 28, 2017 08:44 AM EDT
Biotech Voices is a contributed article from select Endpoints News readers. Commentator Kelvin Stott regularly blogs about the ROI in pharma. You can read more from him here.
Like many industries, pharma’s business model fundamentally depends on productive innovation to create value by delivering greater customer benefits. Further, sustainable growth and value creation depend on steady R&D productivity with a positive ROI in order to drive future revenues that can be reinvested back into R&D. In recent years, however, it has become clear that pharma has a serious problem with declining R&D productivity.
Various analysts (notably Deloitte and BCG) have tried to measure Big Pharma’s R&D productivity in terms of the internal rate of return (IRR) on investment, but in each case the analysis is highly complex and convoluted (and thus subject to doubt), as it depends on many detailed assumptions and forward-looking forecasts at the individual product level. Here for the first time, I introduce a far simpler, much more robust methodology to calculate pharma’s return on investment in R&D, which is based only on reliable and widely available high-level data on the industry’s actual historic P&L performance. This new analysis confirms the steady decline reported by others, but here I also explore the underlying drivers and make concrete projections, which suggest that the entire industry is on the brink of terminal decline.
A simple new method to measure R&D productivity / IRR
Pharma’s business model essentially involves making a series of investments into R&D and then collecting the return on these investments as profits some years later, once the resulting products have reached the market. However, the situation is complicated by the fact that both investments and returns are phased over many years for each product, and not all products make it to market; in fact, most products fail to reach market at all and they fail at different times and costs during their development.
Now we can greatly simplify this picture by considering only the average return on investment across the industry as a whole, which is what interests us in any case. We simply assume that all profits in any given year come from investments made within a single previous year, where the gap between these two years represents the average investment period, from the midpoint of R&D investment to the midpoint of returns at peak sales. As it happens, this average investment period is relatively stable and well-defined, as it is largely driven by a fixed standard patent term of 20 years, as well as a historically stable R&D phase lasting roughly 14 years from start to finish. Thus, the average investment period is about 13 years, from the midpoint of the R&D phase after 7 years, plus another 6 years to reach peak sales before loss of exclusivity.
There is one potential argument against this method, which is that the later phases of R&D tend to cost many times more than the earlier phases. However, we must also remember that we need to invest in many more projects at the earlier phases than we invest in at the later phases, due to natural attrition within the R&D pipeline. Thus, the total R&D investment is actually distributed quite evenly throughout the development timeline. And, as I show below, the calculated return is not very sensitive to this single assumption in any case.
Before we use this simple method to calculate the return on investment, there is one more small but important detail to remember: The net return on R&D investment includes not only the resulting profits (EBIT), but also the future R&D costs. This is because future R&D spending is an optional use of profits that result from previous investments.
So now we can calculate the average return on investment (IRR) as the compound annual growth in the value of past R&D investments to the value of resulting profits (EBIT) plus future R&D costs, as illustrated here with industry P&L data from EvaluatePharma:
Rest of the blog here: endpts.com/pharmas-broken-business-model-an-industry-on-the-brink-of-terminal-decline/
