Phar­ma's bro­ken busi­ness mod­el — Part 2: Scrap­ing the bar­rel in drug dis­cov­ery

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Biotech Voic­es is a con­tributed col­umn from se­lect End­points News read­ers. Com­men­ta­tor Kelvin Stott reg­u­lar­ly blogs about the ROI in phar­ma. You can read more from him here.

In Part 1 of this blog, I in­tro­duced a sim­ple ro­bust method to cal­cu­late Phar­ma’s In­ter­nal Rate of Re­turn (IRR) in R&D, based on­ly on the in­dus­try’s ac­tu­al his­toric P&L per­for­mance.  Fur­ther, I showed that Phar­ma’s IRR has fol­lowed a rapid and steady lin­ear de­cline over 20 years, which is con­sis­tent with re­cent es­ti­mates from BCG and De­loitte, and can be ful­ly ex­plained by the Law of Di­min­ish­ing Re­turns as a nat­ur­al and un­avoid­able con­se­quence of pri­or­i­tiz­ing a lim­it­ed set of in­vest­ment op­por­tu­ni­ties while each new drug rais­es the bar for the next.  Fi­nal­ly, I showed that a sim­ple ex­trap­o­la­tion of this ro­bust lin­ear trend means that Phar­ma’s IRR will hit 0% by 2020, which im­plies that the in­dus­try is now on the brink of ter­mi­nal de­cline as it en­ters a vi­cious cy­cle of neg­a­tive growth with di­min­ish­ing sales and in­vest­ment in­to R&D.

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