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A New Era in Pharmaceutical Innovation Means Major Challenges for the Industry

New study shows productivity of pharma R&D down by 70 percent

NEW YORK--(BUSINESS WIRE)--Dec 1, 2011 - The value generated by a dollar invested in pharmaceutical research and development has fallen by more than 70 percent in recent years, according to a new study from the consulting firm Oliver Wyman.

The study, “Beyond the Shadow of a Drought: The Need for a New Mindset in Pharma R&D,” looked at the 450 new drugs (“new molecular entities,” or NMEs) approved by the U.S. Food and Drug Administration between 1996 and 2010. The analysis determined that this period fell into an Era of Abundance from 1996 to 2004 and an Era of Scarcity from 2005 to 2010. There were striking differences between the two eras:


  • Fewer new drugs: In the Era of Abundance, an average of 36 NMEs were approved per year. In the Era of Scarcity, the average was 22—a drop of 40 percent. “The decline in the number of NMEs approved is well established,” says Jeff Hewitt, a partner in Oliver Wyman's Health and Life Sciences practice and one of the study's authors. “But it is usually thought of as a continual decline. We thought the data showed two distinct periods, roughly demarcated by the Vioxx withdrawal in September 2004.”
  • Lower sales per new drug: To get a sense of the economic value created by each drug, the study used a common industry metric: sales in the drug's fifth year on the market, in constant dollars. (Forecasts were used for drugs that have not yet hit the five-year mark.) This figure dropped from an average of $515 million for a single drug in the Era of Abundance to $430 million in the Era of Scarcity—a decrease of more than 15 percent. “The R&D productivity problem isn't limited to the decline in the number of new drugs,” Hewitt explains. “We are also challenged because the value of new drugs produced is less. Not only do we have fewer blockbusters, but the smaller products are not making up the difference.”
  • Lower total new-drug revenue: Taken together, the impact of fewer drugs per year and lower sales per drug meant that the average fifth-year sales produced by the industry as a whole went from $18.3 billion a year to $9.4 billion—a drop of almost 50 percent.
  • Higher R&D costs, lower return: Even with recent reductions, R&D expenditures almost doubled over the study period—from an average of $65 billion per year in the Era of Abundance to $125 billion per year in the Era of Scarcity. But those dollars produced significantly less. In the Era of Abundance, drug companies produced an average of $275 million in fifth-year sales for every $1 billion they spent on R&D. In the Era of Scarcity, the figure was $75 million.

“Drug companies are clearly doing a lot of things right,” says Jerry Cacciotti, a partner at Oliver Wyman and another of the study's authors. “Most have maintained strong net income levels, and the industry as a whole has grown at 6 percent a year for the last five years. But our study shows that in the activity that counts the most—bringing valuable new drugs to market—the industry is in worse shape than has been publicly acknowledged.”

The solution for pharma? “Now that the industry has clearly entered a different era, R&D needs a new mindset for drug development,” says Cacciotti. “Drugs will remain rare. Strategy will be set differently. The bar on innovation is higher; drugs must be used to reduce overall cost in the healthcare system; and companies will further increase their focus in disease areas.”

The full report is available at

About Oliver Wyman

Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 25 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development. The firm's 3,000 professionals help clients optimize their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. For more information, visit Oliver Wyman is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC], a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 52,000 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in risk and insurance services and solutions; Guy Carpenter, a global leader in risk and reinsurance intermediary services; and Mercer, a global leader in human resource consulting and related services. For more information, visit

Contact: Oliver Wyman
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Posted: December 2011