Financial Returns on R&D: Looking Back at History, Looking Forward to Adaptive Licensing

Abstract

Investment in R&D for drugs launched in the late 1970s to early 1990s generated good returns for investors. R&D was inexpensive. Clinical trial success rates were high. Consumption was increasing. Drug prices were outstripping inflation, which raised profit margins. Tax rates were falling. However, returns on R&D have been falling since the early 1990s given rising clinical trial costs, rising trial failure rates, and lower consumption growth in developed markets. Many investors believe that average financial returns on today's R&D will be below the cost of capital, particularly if US drug price inflation moderates. Thus R&D investment by major drug companies is flat or perhaps falling in real terms. Various regulatory initiatives have tried to streamline clinical development and approval. The latest is Adaptive Licensing (AL). The near-term effect of AL on industry-level financial returns will be modest. AL will, however, be salient for decisions to invest in specific trials and may make it easier for smaller companies to fund development. AL could become more important in the long run if it helps shift industry, regulators, and payers from what has been an increasingly linear model of innovation; predicated on the ideas that basic science predicts, trials test predictions, and trial results form a complete description of a drug's attributes. History shows that many drugs become important because doctors and patients discover utility that was not initially apparent to regulators, payers, or investors. One hope for AL, therefore, is that it will bring more acceptably safe chemical diversity into real world use at lower R&D cost.