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MIT research shows sharp decline in economic returns of new drugs

CAMBRIDGE, Mass., Feb. 3, 2015 – Investment in the pharmaceutical and biotech industry seems to be booming these days, especially in the Boston area. However, the financial returns realized by new prescription drugs are a common topic of debate. To shed light on this issue, MIT Sloan School of Management Prof. Ernst Berndt conducted a study on new drugs launched in the U.S. from 1991-2009. He found that while lifetime net economic returns were positive in the earlier years, returns have fallen “sharply” for drugs launched in the 2005-2009 period.

“Our findings raise the question of whether the current rate of investment in new medicines can be sustained,” says Berndt, who conducted the study with researchers at the IMS Institute for Healthcare Informatics. Their article on the study, “Decline in economic returns from new drugs raises questions about sustaining innovations,” was published in the February 2015 issue of Health Affairs.

Although prior research has highlighted the riskiness of investments in new drugs, Berndt says that little attention has been paid to what happens once drugs are developed. In this study, the researchers compared average lifetime pharmaceutical revenues to average R&D and lifetime operating costs to determine the net economic returns for four cohorts of new drugs launched in the U.S. The cohorts included biologic and small-molecule drugs launched between 1991-1994,1995-1999, 2000-2004, and 2005-2009.

He notes that the first set of results was “surprising,” as it showed how much more volatile revenues are than R&D costs after a drug is on the market. This coefficient of variation was 1.5 or 2 times larger for net revenues than for R&D costs.

They also found that economic profits were positive in the 1991-1994 cohort, and even more substantial during the “golden years” of 1995-1999 and 2000-2004. However, since 2004, profits have declined sharply. In the 2005-2009 period, economic profits were negative, which Berndt attributes to revenues declining as R&D costs and the cost of goods sold remained steady or declined less.

“We hear a lot about blockbuster drugs, but the vast majority of these newly activated substances achieve small lifetime sales. In fact, more than 75% of these drugs launched over this 20-year period had lifetime sales of less than $4.5 billion and 50% had lifetime sales of less than $1.5 billion,” says Berndt.

He adds, “The message for drug companies and investors is that returns on investments in R&D for new medicines is highly volatile and risky. However, the future may not be entirely bleak. It’s possible that the dynamics have changed for drugs launched more recently. The FDA approved a large number of new drugs in 2014, but we’ll have to wait and see if we’ve turned a corner yet.”

Ernst Berndt is a professor at MIT Sloan School of Management and co-director of the Biomedical Enterprise Program, a joint program of MIT Sloan and the Harvard-MIT Division of Health Sciences and Technology. He is coauthor of “Decline in economic returns from new drugs raises questions about sustaining innovations,” which was published in the February issue of Health Affairs.

For more information on Prof. Berndt, please visit: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=41392

The MIT Sloan School of Management is where smart, independent leaders come together to solve problems, create new organizations, and improve the world. Learn more at mitsloan.mit.edu.