A recent study by the Office of Health Economics (OHE) in the UK has, unsurprisingly, concluded that research and development costs for a new medicine are increasing, thanks in part to factors such as a 500% increase in out-of-pocket costs. What’s interesting is that the study offers important insights into how and why drug development costs are increasing and what companies can do about it. Check out the presentation below for a summary of the study’s findings:
This study is not a casual overview of R&D costs and its drivers. Instead, the study extensively surveys existing research, ultimately finding several factors to blame. Out-of-pocket development costs, success rates, development duration and cost of capital all play an important role in rising R&D costs.
Why R&D costs are high – and how partnering can help
In sum, the OHE study explains that R&D costs have undeniably risen, but why? According to the study, costs have risen as a result of several different factors:
Increasing failure rates
Failure rates have increased over the last several decades for a variety of reasons. Most notably:
- Regulators are increasingly risk averse
- Pharmaceuticals are now targeting chronic and degenerative diseases, which are more complex
- It’s increasingly difficult to discover new drugs that provide a significant benefit over existing drugs
However, the study also finds that in-licensed drugs have higher clinical approval success rates than self-originated, as shown in the chart below:
These results suggest that leveraging business development and licensing activities may help life science companies improve their drug success rates. Increasing success rates will push the cost per successful drug down.
Out-of-pocket development costs
The OHE study finds that out-of-pocket development costs have risen nearly 500% between 1991 and 2010, largely due to the cost of increasingly complex clinical trials. To offset the costs, pharma companies have moved some trials overseas. However, most trials are still conducted in North America and Europe, due to regulatory conditions, relevant expertise and infrastructure.
One way to reduce the costs of these trials, according to OHE, is to partner with Contract Research Organizations (CROs). The best CROs are able to run highly efficient clinical trials, leading to significant savings. However, because negotiating many individual deals negates the savings made by outsourcing, pharma companies should form close partnerships with only a few CROs. Both Sanofi-Aventis and Elli Lilly have taken this approach, signing 10 year deals with Covance. To make the most of long-term agreements, companies must pay careful attention to their alliance management processes and capabilities.
Since 2000, development times have been relatively stable, though long. Thanks to risk adverse regulators and complex therapeutic targets, reducing time to market is a formidable challenge. For example partnering with a CRO can make discovery work both faster and cheaper. In the Sanofi/Covance partnership, Covance provides Sanofi with discovery support, toxicology, chemistry, Phase I to IV, central lab and market access services. Further, by partnering with other life science companies, pharmas don’t waste time developing everything on their own.
Cost of capital
According to the OHE study, the cost of capital has a major impact on R&D costs, accounting for approximately 50% of the total cost per new molecular entity. Reducing the development times likewise decreases capital costs. However, companies should also focus their investments on strategic priorities to optimize expenditures. By partnering for technology and expertise, rather than developing everything in-house, capital investments can be limited to only what’s necessary. Conversely, companies can reduce excess production capacity by divesting or leasing facilities, further reducing costs.
For companies fighting against high R&D costs, partnering offers critical relief. It can even drive profits by opening access to new markets. However, when it comes to partnering, doing it right pays off. To reap the benefits, companies must first implement the processes, capabilities and best practices it takes to be a partner of choice.