In recent decades, the biotech and pharmaceutical sectors have experienced unprecedented progress, reshaping patient care through the introduction of cutting-edge therapies. A stream of novel drugs has emerged at an increasingly rapid pace, for conditions lacking approved treatments or as improved treatments where existing drugs fell short in terms of efficacy, safety, or convenience. But is the health innovation industry falling victim to its own burgeoning success?
Over the past five years, an average of 50 new drugs per year have secured FDA approval – a significant surge from the previous average of 30 drugs per year, two decades ago. The driving forces behind this ongoing success are scientific breakthroughs in unravelling molecular intricacies of disease pathways, in obtaining a detailed understanding at the atomic level of disease targets, as well as in the continual expansion of new drug modalities targeting freshly mapped disease pathways.
Yet the pharmaceutical industry stands on the precipice of its own triumphs. In a landscape where an increasing number of drugs vie for a slice of the national healthcare budget, projected peak sales are simultaneously declining. A recent Deloitte study highlights a concerning reality for companies: between 2014-2022, the average anticipated peak sales of new drugs dropped from USD 550 million to USD 389 million.
Moreover, the window for commercial sales is being compressed. There are plenty of recent examples underscoring this trend, for instance: Spinraza – the ground-breaking antisense oligonucleotide FDA approved for Spinal Muscular Atrophy in 2016 – is already witnessing a decline in sales just five years post-launch. It now contends with competitors like Zolgensma (a gene therapy, which itself reached its peak four years after launch) and the recently introduced small-molecule drug, Evrysdi, which is now dominating the market. Similarly, sales of antibody drugs targeting the calcitonin gene-related peptide (CGRP) pathway have started waning merely five to six years after their 2018 debut, facing stiff competition from newer entrants like Nurtec, Ubrelvy, and Qulipta (all small-molecule CGRP inhibitors).
The window for profit narrows further
Beyond the challenges posed by the increasingly rapid emergence of next-generation pharmaceuticals, the commercial trajectory of recently-introduced drugs is under additional pressure from evolving regulatory measures. The 2022 US Inflation Reduction Act (IRA) has introduced a mechanism enabling Medicare (and, by extension, other payers) to lower the prices of specific drugs that have been on the market for either seven years (for small molecules) or eleven years (for biologics). This legislative shift adds another layer of complexity, resulting in an even more condensed timeframe during which a drug can command its full market price, irrespective of its patent protection period.
With the lifetime revenues of new drugs being curtailed by increased competition and regulatory constraints, it is imperative for biotechs, pharmaceutical companies, and venture capital funds to evolve their investment strategies. Only by doing so will they be able to maintain a viable return on their investments.
Cost reductions are imperative – but how?
The R&D costs of new drugs can be broadly categorized in two main phases: first, from drug discovery to preclinical studies; and second, from clinical studies to market launch. The prospects are relatively limited for significant reduction in clinical development costs. Despite advancements in digitalization and the integration of wearable sensors in clinical trials (which ease the burden for patients and staff, and enable more robust data collection), the average clinical cycle for new drugs isn’t decreasing. Instead, between 2014 to 2022, the time from trial initiation to clinical approval increased from an average of 6.1 years to 7.1 years.
The preclinical phase of drug development offers a more promising arena for cost and time reduction. This is enabled by groundbreaking progress on multiple fronts, such as the expansion of the chemical/biological drug space through AI-driven de novo compound creation, high-throughput digital simulation of drug-target interactions leveraging dynamic structural information, AI-based forecasting of drug efficacy and safety, and the diversification of drug modalities targeting specific disease markers. When used thoughtfully, these tools have the potential to significantly reduce costs and expedite the pace of preclinical drug development.
Furthermore, their judicious use can indirectly yield cost savings in the clinical phase as well: a more stringent selection of clinical drug candidates translates to a lower rate of clinical failure, hence reducing overall costs per approved drug. The accelerated pace of drug development also allows companies to increase their throughput, bringing more potential therapies to market in a given period. This can diversify a company’s portfolio and enhance its revenue potential.
Safeguarding future innovation
The commercial cycle of drug development is a complex interplay of opportunities and challenges. The societal benefits are evident, with an increased number of better drugs positively impacting the lives of countless patients, all at a lower cost to the payers. However, pharma and biotech companies, along with their investors, must carefully navigate the risks posed by the diminished lifetime revenues of their newly-launched drugs. It is imperative for the long-term future of health innovation that we comprehensively embrace the myriad tools available for shortening the drug development cycle – thereby reducing costs and increasing profit margins.
As drug development continues to evolve, investors will play a crucial role in shaping the landscape and driving the industry toward a future of faster, more efficient, socially responsible, and accessible innovation.
