Can Current Investment in New Drugs Be Sustained?

Feb. 17, 2015

When blockbuster drugs hit the market, they make big news and big profits. But for every blockbuster drug launched, there are an awful lot of disappointments.

A good example is Vertex’s launch of the Hepatitis C drug Incivek. It was extremely successful in its first year on the market and heralded in a new era of Hepatitis C therapies. However, that meant competition. It wasn’t too long before newer and better treatments like Gilead’s Sovaldi and AbbVie’s Viekira Pak essentially replaced it in the market. Last spring, Vertex announced that not only is it no longer investing in research or developing new Hepatitis C drugs, it was withdrawing Incivek from the market.

Even when we see tremendous therapeutic progress with a drug potentially worth billions, there is the risk that it will be overtaken by the next generation of drugs. There is no sure thing.

Prior research has focused on a portion of this riskiness, showing the average costs of bringing a new drug to market. However, little attention has been paid to what happens once drugs are developed. How many actually pay off over time? How many are failures? The two main studies cited on this topic use data that is now 25 to 30 years old. Since then, we’ve seen an increase in the availability of biologic drugs and targeted medicines as well as heightened scrutiny by payers for coverage decisions and increased regulation.

To conduct a new study, I worked with researchers at the IMS Institute of Healthcare Informatics to compare the average lifetime pharmaceutical revenues to average R&D and lifetime operating costs. We determined the net economic returns for four cohorts of new drugs launched in the U.S. The cohorts included biologic and small-molecule drugs launched between 1991-1994, 1995-1999, 2000-2004, and 2005-2009. (Full disclosure: The IMS Institute of Healthcare Informatics researchers were sponsored by pharmaceutical companies. My research was not sponsored.)

Our first finding was surprising, as it showed how much more volatile revenues are than R&D costs after a drug is on the market. This coefficient of variation was 1.5 to 2 times larger for net revenues than for R&D costs.

We also found that economic profits were positive in the 1991-1994 cohort, and even more substantial during the “golden years” of 1995-1999 and 2000-2004. However, since 2004 profits have fallen very sharply. In the 2005-2009 period, economic profits were actually negative. That was likely due to revenues declining while R&D costs and the cost of goods sold remained steady or declined less.

It’s common to hear about blockbuster drugs and assume that most drugs are financially successful, but more than 75% of the drugs we studied over the 20-year period had lifetime sales of less than $4.5 billion. Indeed, 50% had lifetime sales of less than $1.5 billion. The message for drug companies and investors is that returns on investments in R&D for new medicines are highly volatile and risky. We’re correct to question whether the current level of investment in new drugs can be sustained.

However, the future may not be entirely bleak. It’s possible that the dynamics have changed for drugs launched more recently. The FDA approved a large number of new drugs in 2014, but it’s too soon to tell if we’ve turned a corner yet.

Ernst Berndt is a professor at MIT Sloan School of Management He is coauthor of “Decline in economic returns from new drugs raises questions about sustaining innovations,” which was published in the February issue of Health Affairs.

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About the Author

Ernst Berndt | Professor