Those are some of the surprising conclusions reached in a new ranking of the top 22 firms by R&D productivity created by Sector & Sovereign Health and its lead analyst, Richard Evans, a former Roche executive and longtime Wall Street analyst. The ranking is included below.
| Drug Companies Ranked By R&D Performance | | |
| | | | | | | | |
| Rank | | Company | Economic Returns to R&D Spending* | Patents / $1M R&D spend* | Average Relative Quality of Innovation* | Average Rank (by share of innovation) in Target Research Areas | Internal Bias Index |
| 1 | | Bristol-Myers Squibb | 1.5% | 0.22 | 1.2 | 1.9 | 23 |
| 2 | | Celgene | 32.3% | 0.23 | 1.5 | 8.4 | 98 |
| 3 | | Vertex | -125.4% | 0.81 | 2.4 | 4.2 | 53 |
| 4 | | Gilead | 20.8% | 0.16 | 1.1 | 6.4 | 185 |
| 5 | | Allergan | 8.0% | 0.46 | 1.4 | 8.1 | 96 |
| 5 | | Roche | 7.7% | 0.09 | 0.9 | 2.0 | 24 |
| 7 | | Amgen | 9.4% | 0.09 | 1.1 | 5.3 | 58 |
| 8 | | Johnson & Johnson | 8.2% | 0.07 | 1.0 | 4.8 | 34 |
| 9 | | Novo Nordisk | 17.5% | 0.11 | 1.7 | 10.8 | 439 |
| 9 | | AbbVie | 11.1% | 0.12 | 1.0 | 9.4 | 54 |
| 9 | | Pfizer | -3.2% | 0.11 | 0.9 | 2.5 | 24 |
| 12 | | AstraZeneca | 3.9% | 0.10 | 1.0 | 7.1 | 43 |
| 12 | | Biogen Idec | 9.1% | 0.13 | 1.1 | 13.1 | 155 |
| 12 | | Shire | 18.6% | 0.11 | 1.4 | 15.4 | 338 |
| 15 | | Sanofi | 1.5% | 0.09 | 0.9 | 4.2 | 28 |
| 16 | | Merck | 3.0% | 0.08 | 0.9 | 5.4 | 35 |
| 17 | | GlaxoSmithKline | 1.0% | 0.09 | 1.0 | 6.0 | 36 |
| 18 | | Novartis | 8.4% | 0.05 | 0.7 | 5.3 | 37 |
| 19 | | Regeneron | 8.3% | 0.16 | 0.7 | 13.7 | 638 |
| 20 | | Bayer | -2.1% | 0.07 | 0.9 | 10.3 | 82 |
| 21 | | Eli Lilly | 4.5% | 0.05 | 0.8 | 11.7 | 131 |
| 22 | | Alexion | 12.8% | 0.03 | 0.4 | 21.4 | 8,012 |
| | | Sources: Bloomberg; AcclaimIP; SSR Health Hidden Pipeline Analysis and assumptions. *Rolling 5-year average. | |
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The goal of the report, available for purchase at
HiddenPipeline.com, is to start to provide metrics that companies can use to measure how well they are doing when it comes to inventing new drugs — and to get better. T0o often, Evans says, pharmaceutical executives instead use the industry’s low success rates as an argument that success is right around the corner. “A gambler that has lost everything he owned, just because he now has a strong hand doesn’t make him a good gambler,” Evans says.
“This is a very rigorous report,” says Elliott Sigal, the former head of research and development at Bristol-Myers Squibb, the top-ranked company. “Nobody would argue: the general trend is that by many measures R&D productivity of the group is going down. Those of us trying to compete and do well in this space see a lot of value for being in the upper quartile. You used to do well if you were in the average.”
The business of inventing, testing, and marketing new medicines is in a protracted crisis. The number of new drugs invented per billion dollars of research money spent has been halved every nine years going back decades, like a perverse reversal of the exponential improvement of microchips that keeps Silicon Valley constantly hopped up on its own grandeur.
But when it comes to fixing the R&D difficulties of any particular company, there is a huge problem: the business of inventing and testing drugs is so full of random chance that it is hard to measure how well a company is doing. Merck might launch no drugs one year and six the next because of luck, not because it got infinitely better in that short time. So how do you tell if a particular company is doing better or worse than average? How do you measure R&D productivity so that you can get better?
This is the problem Evans is trying to tackle in his ranking, which he detailed in a 128-page report that he shared with me, and that I have shared with several experts in drug company R&D. Based on discussions with them, I think Evans’ work provides a valuable new lens through which to view drug company research labs, although there’s a lot more work to do before we know how bankable his conclusions are.
Evans ranks firms based on five metrics:
- The economic returns of each company’s R&D spending — essentially, how does income now compare to R&D investment a decade ago?
- The number of patents filed by companies for every $1 million they spend on R&D; only patents before drugs hit the middle stages of trials count, because after that some companies file extra patents with an eye toward defending marketed products later.
- How often a company’s patents are cited by other patents or publications.
- A “leadership” index: is the company is leading or lagging in terms of the number of patents it files in particular diseases or types of chemist. Is it #1 or #11?
- And a ranking of internal bias: basically, how good is a company at avoiding “not-invented here syndrome.
“It’s a really good, solid, and thought-provoking piece of work,” writes Jack Scannell, a noted researcher on pharma R&D productivity, in an email. “I wish I had written it or something like it.” But Scannell notes that, except for the financial metrics, the new data have not been back-tested. “If such an analysis showed that measures did not present subsequent economic returns (or stock returns), then the measures would appear to be demonstrably useless and there would have been no point in writing a big report about them.”
Evans ignores one of the most common measures of research productivity, and one of my favorites: the number of new drugs, called new molecular entities or new biologic entities, approved by the Food and Drug Administration in a given year. Evans says these can be “grossly misleading” because they reflect “the sporadic nature of research.”
Bernard Munos, of the InnoThink Center for Research in Biomedical Innovation, worries that Evans may actually be understating the degree that R&D is a money-losing proposition for drug firms. One reason is that Evans doesn’t separate out R&D in pharma from that in other businesses, like medical devices or over-the-counter products, nor does he try to filter improvements in earnings from introducing new medicines from those that come from cutting costs or increasing drug prices. “The top 12 pharma companies spend $70 billion on R&D, but what comes from their pipelines doesn’t generate $70 billion or more in sales,” Munos writes. However, Evans’ data do indicate that R&D prospects have continued to worsen, even as many executives argue they have turned a corner.
Bristol-Myers Squibb tops Evans’ ranking, as it does the rankings that I’ve published using Munos’ data and R&D figures. Celgene and Gilead are ranked #2 and #4, which is, again not a surprise: they’re the two most successful biotechnology companies of the past couple decades. Worth noting: Evans includes R&D costs from companies that are acquired, so Gilead gets credit for the hepatitis C drug, Sovaldi, which it bought, but which is having the most successful drug launch ever.
Vertex Pharmaceuticals of Cambridge, Mass., does surprisingly well. Evans points to it as a rare example of a company focusing in on a core competency — in this case, the science of understanding how drugs bind to receptors, and compares Vertex to the amazing numbers that were posted by Genentech when it was a standalone company.
One big surprise is the performance of #5-ranked Allergan, which is currently the subject of a hostile bid by Valeant Pharmaceuticals and its billionaire CEO Michael Pearson with some help from Ackman. Valeant’s model has been to buy companies that are wasting money on unproductive R&D and to cut costs to make them more profitable and return money to shareholders. If Allergan’s R&D is actually productive, this effort becomes value-destroying. “It’s absolutely counter to Valeant’s argument, no doubt,” says Evans.
Evans admits that for companies that have only launched one product, like Alexion or Regeneron, the analysis may not be valid. Munos also argues that AbbVie shines only because of its marketing of one new drug, Humira, not because of its ability to introduce new products, and that Lilly is dinged because of its losses in the U.S. insulin market, despite a better record of introducing new drugs.
Twenty years ago, Merck was viewed as the best drug research firm on the planet, a lot like Genentech. Novartis has recently achieved a similar reputation. But Evans says both are actually inefficient, because they follow a model of paying a lot of internal researchers, many of them in fields in which the company is not a leader, to work on a huge number of products. Over the course of its history, Evans says, Merck’s success has not been because it has had better ideas, but because it spends even more money when it finds one, like the cholesterol-lowering statin drugs.
“The reason they are so innovative is because they’ve taken a four-cylinder engine and put nitro in it,” he says. A more efficient model is the one adopted by Bristol under Sigal, which focused on bringing in products from the outside (Bristol’s breakthrough cancer drugs came from the purchase of Medarex) and using capital efficiently.
Evans has more work to do if he wants to make this ranking definitive; there are just too many ways to measure research productivity and they all give slightly different answers. But it’s a valuable contribution as we try to figure out the shape of the problem facing drug research and look for solutions.
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