Health Care & Life Sciences and Health Care & Insurance

Lilly needs more R&D successes to counter declining ROI on new drugs

January 13, 2014

Eli Lilly and Co.’s success at moving an experimental migraine medicine forward by using outside companies and capital is good news since the fundamental business of Big Pharma drug development is in bad shape.

From 2010 through 2013, the total cost of bringing one new drug to market rose 18 percent to $1.3 billion, according to a recent Deloitte report on the return on investment from research and development at the 12 largest pharmaceutical companies, including Lilly.

But during the same period, the average peak sales predicted for experimental drugs fell a whopping 43 percent, to just $466 million per year. Drugs are generating less in revenue as health insurance plans and state-run health programs push generic drugs, take longer to grant reimbursement for new drugs and demand clear patient benefit before paying premium prices.

Since drugs stay on the market for multiple years, that still means pharma R&D is predicted to generate returns of 4.8 percent. But that’s a far cry from the 10.5 percent predicted in 2010, and the returns the industry enjoyed in prior decades.

Even though the big pharma companies brought 105 new drugs to market in the past four years, Julian Remnant, head of Deloitte’s European R&D practice, said “they are failing to match this level of performance in other drivers of R&D economics, for example reducing the cost of success and boosting the rate of innovation.”

But Lilly’s migraine medicine, called LY2951742, is an example of how Lilly is trying to do both.

In February 2011, Lilly created what it called its “Mirror Portfolio,” which sought to push 45 to 60 additional drugs into human testing—as much as doubling the size of Lilly’s in-house portfolio. Lilly renamed the effort its Capital Funds Portfolio, which currently includes nine drugs, including the migraine medicine.

Lilly aimed to accomplish the strategy by licensing the drugs out to other pharmaceutical companies—many of them virtual companies that contract with third-party firms to conduct testing—and to fund the work with investments from outside venture capital firms. Lilly committed to invest up to 20 percent of the capital in the participating venture capital funds.

The “proof of concept” testing aims to determine whether a drug appears to do what it was designed to do. The migraine medicine is designed to bind to the calcitonin gene-related peptide, a protein in the brain that has been shown to cause inflammation, dilation of blood vessels and pain signaling in human brains—all factors that can cause migraine headaches.

Lilly licensed the migraine drug to Massachusetts-based Arteaus Therapeutics, which was created by an $18 million investment from venture capital firms OrbiMed and Atlas Venture.

So the Capital Funds Portfolio allows Lilly to use other people and other people’s money to test a higher number of drugs.

If a drug’s basic mechanism works, as is apparently the case with the migraine medicine, Lilly can buy the drug back and focus its resources on bringing it to market.

If not, Lilly has avoided the really expensive tests—Phase 3 trials involving hundreds or even thousands of patients.

Late-stage failures—which have beset Lilly repeatedly in recent years—cost the 12 largest pharma companies $243 billion over the past four years, according to the Deloitte report.

“Through this strategy, independent investment firms and portfolio companies provide a unique way to access [new drugs], share risks, and expand funding to develop molecules, such as the CGRP antibody, to help speed the delivery of timely valued medicines to patients who are waiting,” Jan M. Lundberg, president of Lilly Research Laboratories, the R&D arm of Lilly, said in a statement.

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