Considering the rapid changes the biopharmaceutical landscape has been experiencing in recent years, it’s more important than ever that pharma companies review and consider what’s in their growth engines so that they can adapt along with market conditions.
A core driver of growth for biopharmaceutical companies is the development of new molecular entities (NMEs) and original Biologics License Applications (BLAs) that they hope will be approved to go to market and eventually deliver financial returns.
To provide insights to those who manage or analyze biopharmaceutical company pipelines, ZS does research to benchmark what to expect from the product pipelines at the largest biopharmaceutical companies in the world. Our annual analysis aims to help pharma professionals answer key questions at their organizations, namely:
- Is our pipeline right-sized for our organization?
- Will our organization get enough out of what it spends on its pipeline?
- What can we do to maximize the value of our pipelines and investments?
This excerpt summarizes some of the key insights from our 2021 benchmarking study.
To conduct this benchmarking research, we reviewed the pipelines in 2021 for the top 15 pharma organizations (by 2020 revenue), according to data available from Evaluate Pharma (expected NPV or eNPV) and Bloomberg (market capitalization, net margin % and R&D spend for the year 2020).
Our analysis considered the expected net present value (eNPV) of NMEs and BLAs in Phase 2, Phase 3 and “filed” development stages. These assets represent a core growth engine that is novel (i.e., not line extensions), not too early stage to be speculative (i.e., Phase 1), and held within the company (i.e., not associated with business development activities).
To compare the eNPV for different sized companies, we used the market capitalization and net margin percentage to control for overall company size and current profitability. We calculated the eNPV to R&D spend ratio to evaluate the future expectations for each company’s pipeline based on its R&D spend.
To determine whether companies are seeing a strong return on investments into their pipelines, we calculated the ratio of expected pipeline NPV (eNPV) to R&D spend. For this metric, we observed an average of 2.94 with a broad range—from 0.41 to 14.88—which indicates a few things:
- There is a high degree of variation in the expected value emerging from the R&D spend at different companies.
- Different companies are taking different strategies related to clinical development versus business development.
- Expectations for the pipelines of these companies vary widely.
We also observed a negative correlation between R&D spend and eNPV, indicating that the more that companies spend on R&D, the lower their marginal return on that spend. This again reflects that it’s harder for larger biopharmaceutical companies to fund their own growth through their own pipeline and that they do not benefit from economies of scale. Instead, the data shows that the largest biopharmaceutical companies are experiencing diminishing returns (figure 1).
Our analysis found that larger companies have a lower ratio of eNPV to market capitalization, which suggests it’s harder for big companies to fund their own growth through their own pipelines. This points to biopharmaceutical company pipelines not benefiting from economies of scale. Given this data, large biopharmaceutical companies will likely need to make additional strategic investments, such as mergers, acquisitions, licensing and line extensions to create sustainable growth.
Our benchmarking research points to a few key conclusions:
Finding 1: The largest biopharma companies may find it harder to generate the required growth from the NMEs and BLAs in their pipelines. Though this may not be causal, the correlation between eNPV to market capitalization and eNPV to R&D spend metrics suggest that, as companies increase in size and spend more on R&D, their ability to generate expected future return diminishes.
Finding 2: There is opportunity for large companies to rethink their development strategies to generate more growth themselves and improve their eNPV metrics. But in the meantime, these companies will need to look elsewhere for growth in the immediate term, such as business development activities and loss of exclusivity (LOE) investments.
ZS will continue to conduct this benchmarking study in future years to help biopharma companies compare the state of their pipelines to their peers.