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A U G U S T 2 012

p h a r m a c e u t i c a l s & medica l p r o d u c t s p r a c t i c e

Restoring value to
biopharmaceutical R&D

After years of seeing value destroyed by R&D excesses,

biopharmaceutical companies can gain healthier returns—
but only if they recognize several new imperatives.
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Over the past 25 years, the pharmaceutical industry has created more than $1 trillion
in shareholder value. Yet during the “decade of doubt,” from 2000 to 2010, significant
value eroded. That difficult period also coincided with a 60 percent increase in the rate of
spending on research and development, to around 16 percent of sales, from around 10,
on average.

Indeed, the inability of the pharma and biotech industries to meet shareholder
expectations over the past decade makes R&D look like a gambler’s game. Although a few
companies have bucked the trend, it’s not clear if they are really improving their models in
the long run. Returns for many companies will deteriorate further (exhibit).

Still, we have good reasons to think that big pharma can once again make R&D a strong
contributor to value creation. Unmet patient needs, scientific advances, and increasing
Web 2012 should create continuing opportunities to innovate. Many industry players are
affluence
I&P Damocles
piloting new ideas successfully, and regulators are beginning to understand that they
Exhibit 1 of 1
need a new type of dialogue with the industry in an era of personalized health care and
The pharma industry’s return on investment over the past decade
bioinformatics.
makes R&D look like a gambler’s game.

Exhibit Economic return on R&D investment for top 10 biopharma players,1 %

Decade of high Decade of doubt The way forward?

returns
Performance
trajectory
14 – 15
13 – 14
10 –12
Forecast
8–9 returns 6 –8

4 –5

1991– 1996 – 2001– 2006– Current Step change

1995 2000 2005 2010 trajectory (30% further
improvement in
productivity)

9–10 12 16 17 15 – 16 ?

Average % of sales reinvested in R&D

Includes impact of working capital, property, plant and equipment, and goodwill.
1
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To make pharma R&D a strong value creator, companies must heed several imperatives:

• Take only quality shots. The industry doesn’t have enough validated targets in
discovery or enough quality pipeline assets to maintain R&D investment at the formulaic
15 to 20 percent (or any other percentage) of sales. Darwinian discipline in decision
making is needed so that only the strongest programs survive.

• Make R&D investment variable. Companies must therefore become more flexible—
prepared to invest, for example, 5 to 25 percent of their revenues on R&D, depending on
fluctuations in the portfolio’s quality, the evolution of the pipeline, and the strength of
the team.

• Consider “new paradigm” solutions. New approaches include next-generation

licensing, effective precompetitive collaboration with other companies, or co-inventing
drugs with them. If pharmaceutical companies could collaborate as effectively as high-
tech and movie companies do, they could create significant value.

For more, download the full version of this article, “Escaping the sword of Damocles:
Toward a new future for pharmaceutical R&D,” on mckinseyquarterly.com.

Copyright © 2012 McKinsey & Company. All rights reserved.