Deloitte urged pharma executives to “be bold” in a new report tracking the top 20 pharmaceutical companies’ R&D performance.
For the second year in a row, the internal rate of return for pharmaceutical R&D at the top 20 companies in the sector has increased, led by high-value products moving into Phase III in areas of considerable unmet need like diabetes and obesity, according to a new report from Deloitte. That means Big Pharmas are making more money from the drugs they develop than in recent years, but Deloitte warns that the progress is “fragile.”
Deloitte’s latest Be Bold, Be Brave report chronicles the biopharma industry’s performance and success in generating returns, focusing on the top 20 pharma companies by R&D spend.
The analysis found that the forecast internal rate of return (IRR) increased to 5.9% in 2024, thanks to market-shattering products like GLP-1s for weight loss and obesity. Late-stage assets that have shown significant improvements in the clinic over incumbent therapies also helped boost the ROI.
“To sustain and improve this growth there is a need for a bolder, advanced strategic approach to pipeline development,” wrote authors Colin Terry, U.K. life sciences transformation and technology, and Kevin Dondarski, U.S. life sciences strategy. The authors encouraged pharmas to go after areas of unmet need with novel mechanisms of action, while “embracing cutting-edge technologies” like AI and gene therapy.
The IRR had been in decline in the decade leading up to the pandemic when there was significant volatility across the industry. IRR peaked in 2014 at 7.2% but fell to 1.5% in 2019. The pandemic spurred a spike, with IRR reaching 6.8% in 2021, before tumbling to a 12-year low of 1.2% in 2022. With those volatile years behind the industry, the trend has been in reverse the past two years.
Deloitte noted that the cost of developing a drug remains very high, with each asset costing about $2.23 billion. The cost hit a peak in 2020 at $2.36 billion and was at its lowest point in 2013 at $1.3 billion when Deloitte began tracking the data.
This sky-high cost stems from myriad issues. The complexity of research is one factor, particularly in tricky diseases like Alzheimer’s, coronary artery disease, cancers and rheumatoid arthritis. Addressing these conditions requires equally complex mechanisms, like gene therapies, antibody-drug-conjugates, radioligand therapies and trispecifics. Clinical trials are also more rigorous than ever, particularly as multiple companies zero in on the same indications and therapy areas and thus must compete for study participants.
Other factors that bear on the cost of developing a drug include a high failure rate—Deloitte estimates that the group of companies analyzed has spent $7.7 billion on clinical trials for assets that were ultimately terminated in 2024. Companies are also having to spend significant money to bring on advanced technology like robotic process automation and AI, which promise long-term cost reduction but are expensive upfront. Finally, Deloitte noted macro headwinds to research expenses, such as inflation, tax and tariff increases and the rising cost of labor.
Drugs are also taking longer to go through the clinical cycle. It now takes 100 months from Phase I to regulatoty filing, compared to about 93 months in 2020.
Meanwhile, pharmas are expecting higher sales from the assets they do get approved. The average peak forecast sales per asset has increased to $510 million, compared to $353 million last year. Two companies —which Deloitte did not name—have average peak sales forecasted to exceed $2 billion. If GLP-1s are excluded, the peak is just $370 million, while IRR falls to 3.8% for 2024.
To keep up the momentum, Deloitte urged pharmas to adopt a “proactive and bold pipeline replenishment strategy” defined by differentiation from other companies. The highest forecast revenue areas are oncology, which has long been at the top, followed by the obesity, endocrine and metabolism spaces.
This of course means M&A. Deloitte recommended that companies prioritize smaller, early-stage M&A instead of big megadeals. “While large-scale, late-stage acquisitions can provide a quick revenue boost, a more sustainable approach would prioritize smaller-scale, early-stage M&A that targets promising innovation,” according to the report.
“The evidence from our analysis is clear: maintaining the status quo in pipeline strategy can limit biopharma returns on investment in R&D,” the authors concluded.
