After facing a decade-long decline in R&D returns, global pharmaceutical companies have reported a recovery, with a projected return on innovation increasing to 4.1% in 2023 from a record low of 1.2% in 2022.
Pharmaceutical companies have experienced a notable rebound in their return on R&D investment after hitting a record low. This upturn comes as companies adapt to complex regulatory environments, rising costs, and advances in technology, particularly AI. Although AI’s transformative potential in drug development is recognized, its full impact remains unrealized due to fragmented strategies. Despite ongoing challenges, this resurgence highlights the industry’s resilience and capacity for innovation.
Previous Decline & Recent Resurgence of R&D Returns
Between 2010 and 2021, the industry saw a significant decline in R&D returns, dropping from 10.1% in 2010 to a mere 1.2% in 2021. This decline was driven by rising development costs, increased regulatory complexities, and the shifting therapeutic focus toward more complex and less profitable areas like rare diseases and oncology. The cost per asset for drug development also surged, with the average investment rising to approximately $2.3 billion.
However, the industry has recently seen a resurgence, with the average return on R&D investment climbing back to 4.8% in 2023. Several factors have contributed to this turnaround. First, the strategic prioritization of high-value areas such as metabolic diseases, including the burgeoning GLP-1 receptor market, has driven profitability. Companies like Merck, Roche, and Novartis have led the way in reinvigorating their pipelines by focusing on innovative treatments and capitalizing on emerging therapeutic areas.
Additionally, the adoption of advanced technologies, particularly generative AI, has enhanced the efficiency of R&D processes. AI tools are now being used to accelerate drug discovery, optimize clinical trials, and reduce time-to-market, giving companies that leverage these technologies a competitive edge.
This recovery, while promising, also comes with new challenges. The competitive intensity in certain therapeutic areas, coupled with ongoing regulatory uncertainties, continues to pressure R&D returns. Companies are now focusing on balancing innovation with cost management and strategic investments across their portfolios to sustain and further improve these returns in the coming years.
For more details, visit Deloitte’s report.
In conclusion, while the pharmaceutical industry’s return on R&D investment has improved from its nadir, maintaining this upward trajectory will require continued innovation, strategic focus, and effective management of the complex challenges facing the industry.