Drug Development Costs Soar as GLP-1s Drive Financial Returns in Pharma Industry

The pharmaceutical industry is experiencing a significant shift in its research and development (R&D) landscape, with rising costs offset by increased returns, particularly driven by the success of GLP-1 therapies. A recent report by Deloitte sheds light on these trends, highlighting both challenges and opportunities for Big Pharma companies.

R&D Costs Continue to Climb

According to Deloitte's annual report, "Measuring the return from pharmaceutical innovation," the average cost for a Big Pharma company to develop a drug in 2024 reached $2.23 billion, up from $2.12 billion in the previous year. This increase was observed in 12 out of the 20 companies analyzed, which represent those with the highest R&D budgets as of 2020.

The rising costs are attributed to several factors:

1. Increased trial times
2. More complex research areas
3. Macroeconomic pressures
4. Technological advancements
5. High attrition rates

Despite the overall increase, the industry has managed to slow the growth rate of R&D spending. The compound annual growth rate (CAGR) for R&D spend has decreased to 6.44%, compared to 7.69% from 2013 to 2020, reflecting efforts to boost efficiency in research expenditure.

GLP-1 Therapies Boost Returns

While R&D costs have increased, the projected return on investment (ROI) for pharma R&D has also seen a significant uptick. In 2024, the expected ROI reached 5.9%, a substantial increase from 4.1% in 2023. However, this growth is largely attributed to the success of GLP-1 therapies.

The impact of GLP-1s on industry financials is stark:

• Without GLP-1s, the average ROI drops to 3.8%
• The average forecast peak sales per asset across the 20 pharmas was $510 million, but falls to $370 million when GLP-1s are excluded
• The internal rate of return for late-stage pipeline assets increased from 4.3% in 2023 to 5.9% in 2024, but drops to 3.8% when GLP-1s are removed

Potential Blockbusters on the Rise

Another factor contributing to the elevated internal return rate is the resurgence of potential blockbuster drugs in late-stage pipelines. In 2024, 29 potential blockbuster assets entered late-stage development, accounting for 14% of all new products. This represents a 53% increase from the 19 new blockbuster assets in 2023.

The increase in potential blockbusters, coupled with improved commercial forecasts following positive trial outcomes, has bolstered the industry's financial outlook.

Strategic Recommendations for Pharma Companies

To maintain a competitive edge and accelerate innovation, Deloitte advises pharmaceutical companies to diversify their portfolios and build expertise in less saturated therapy areas. While targeting areas of unmet need involves greater complexity and risk, the potential rewards can be substantial, both financially and in terms of improving global health outcomes.

As the pharmaceutical landscape continues to evolve, companies that can balance rising R&D costs with strategic investments in promising therapies and underserved markets are likely to see the greatest success in the coming years.