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Biotechnology, Health and Business in Canada, the United States and Worldwide

Pharma / Biotech R&D Budgets – A Proposal For Measuring Performance

During the BioFinance 2011 conference held in Toronto last week, one presenter showed a slide that outlined the number of new chemical entities (NCEs) approved by the FDA over a number of years. Since this slide was used in the context of the increase in global industry R&D budgets, it was meant to show that the huge increase in R&D budgets had not produced an appropriate increase in NCEs approved at the FDA. Is this the correct way in which R&D performance should be measured?

What is the purpose of R&D at pharma companies? I would argue that the purpose of the R&D budgets is to increase the sales and profitability of the companies. R&D budgets are not limited to the development of NCEs but include substantial investments in clinical trials for new indications of currently approved drugs and follow-on versions of those same drugs. Therefore the appropriate measure of R&D performance is the sales of new drug products, whether they are NCEs or follow-on versions, and the sales for new indications of currently approved drugs.

How should this analysis be performed? It would be difficult to do this for 2010 because you would be estimating sales for drugs which have been approved but for which the full marketing campaign may not have been launched. It also may not be meaningful to do single year analyses as the year to year variability may not properly show any trends.

I am proposing an analysis which would be a suitable project for an MBA group. Most of the information would be available from public company financial filings and from the FDA databases on drug approvals. It would be even better if the group had access to the IMS or a similar drug sales database.

  • Look at three five-year periods – 1995 to 1999, 2000 to 2004, 2005 to 2009
  • Pick the 10 largest pharma and biotech companies for this analysis (or do it for a single company if it is a one person project)
  • Tabulate the R&D expenditures for each company by year and then period
  • Create 3 lists for each of these companies for each of the three periods – NCEs approved, other new drug products approved, new indications approved
  • For every new drug product or indication, generate historical sales information and estimate future sales for the remaining lifetime of those drug products
  • Assess the new sales generated in the context of the R&D expenditures (an NPV analysis might be needed)

This is not a perfect analysis because there will be a number of assumptions instead of only real data. However, I think it would be a better assessment of R&D performance than just looking at the number of NCEs approved by the FDA each year.

Any takers?

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3 responses to “Pharma / Biotech R&D Budgets – A Proposal For Measuring Performance

  1. Christopher Neuman June 8, 2011 at 8:14 am

    Great idea.Probably more difficult to do that we realize as we would need to have access to the distribution of sales between old and new indicastions etc.
    I would also like to add to the discussion the R&D efforts and results achieved by some of the major generic companies like Teva, for example.

    I am interested in seeing the ROI per reseasrch dollar.

    The other question that needs to be enveloped into your proposed analysis would be where to allocate any failed R&D efforts ie products that never ended up being commercialized.

    Great thought process and question.

    Best regards,

    Chris Neuman

  2. mofar June 9, 2011 at 1:17 am

    Interesting topic and suggestion for project.

    I would have been interested if it was 6 months ago, and I was still an MBA student.

    Offering any incentive to complete it, I may be interested.

  3. V Patel June 17, 2011 at 1:16 pm

    Interesting question. Measuring performance of R & D in terms of number of new drugs approved per unit time (5 or 10 yrs) and increase in sales of the approved drug assumes that the approved drug always creates value in terms of survival benefits and improvement in quality of life. Unfortunately, this is not the case for most of the approved drugs. For example, a 4 weeks of PFS for a cancer therapy observed in the Phase III trials (the basis of FDA approval) is rarely recapitulated in the general patient population. Therefore, performance metrics for R & D should take into account of the real value created for the patient.

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