R&D productivity and the innovation deficit

Pharma’s traditional strategy of placing big bets on a few molecules, promoting them heavily and turning them into blockbusters worked well for shareholders for many years. However, its productivity in the lab is now plummeting, as it switches its attention from diseases that are relatively common and easy to treat to those that are much more complex or unusual. In 2007, the US Food and Drug Administration approved only 19 new molecular entities and biologics – a smaller number than at any time since 1983.

Moreover, the patents on many of the medicines the industry launched in the glory days of the 1990s will expire over the next few years, leaving Big Pharma very exposed. US research firm Sanford C. Bernstein estimates that generic erosion will knock between 2% and 40% off the revenues of the top 10 companies between now and 2015. Worse still, the report calculates that only four of the 10 have pipelines containing products sufficiently valuable to offset these losses.

This “innovation deficit” has enormous strategic implications for the industry as a whole. Many pharmaceutical companies need to decide what they want to concentrate on doing, and identify the core competencies the activity will require, a process which may involve exiting from some parts of research and development (R&D). Those that regard R&D as a core element of their business will have to make fundamental alterations in the way they work.

We believe that, if the industry is to become more innovative and cut its R&D costs, four features will be vital:

  • A comprehensive understanding of how the human body works at the molecular level
  • A much better grasp of the pathophysiology of disease
  • Greater use of new technologies to “virtualise” the research process and accelerate clinical development
  • Greater collaboration between the industry, academia, the regulators, governments and healthcare providers.
For further details read Pharma 2020: Virtual R&D.

As companies consider streamlining their R&D costs, they may see an adverse impact on their effective tax rate and increased cash taxes. As many jurisdictions offer tax incentives for investing in R&D (eg R&D credits) a significant reduction in spending can reduce such benefits. However, as the calculation of the R&D credit amongst jurisdictions vary, enhancing the overall process and reviewing the qualifying expenditures can be vital to preserving as much of the company's tax benefit as possible.

How PwC can help you

With many of our consultants drawn directly from Pharma R&D, we have deep expertise in reducing both the time and cost in R&D supporting key business decisions and sustained performance improvement through integrated resources, portfolio, and project, financial, and R&D Key Performance Indicator (KPI) management and reporting.

We have extensive experience of improving the performance of global cross-functional R&D teams achieve key milestones and in optimising stage-gate, project governance, and core R&D processes. We know how to manage and sustain change in the R&D environment. In addition to optimising the actual R&D processes, our global tax R&D specialists are well equipped to review such costs to optimise tax savings.