Poor R&D Productivity as a Self-Inflicted Injury: Who’s Missing the Most Toes, and Why

Richard

R&D productivity can be measured, and thus managed, far better than is reflected in current practice

Using metrics produced with a combination of US patent data and company disclosures, we calculate / identify:

economic returns to R&D spending (the relationship btw Yr1 R&D and Yr10 adjusted earnings)

the number of quality-adjusted ideas produced per $M of R&D spend

the average quality of ideas produced

the pre-phase 3 research areas that account for at least 80 percent of each company’s  innovation; and

each company’s rank v. peers in these key research areas

The related analyses identify 5 addressable causes of poor R&D productivity:

1.       Companies tend to move their own discoveries into development, without fully considering whether externally available compounds would be a better use of development dollars. LLY, AMGN, and AZN are worst in class on this metric; BMY, PFE, and Roche are best-in-class
2.       A large percentage of companies’ research activity takes place in research areas where the company is too low ranking for its efforts to be worthwhile. Across the research areas that account for 80 percent of pre-phase 3 innovation, the typical company has an average rank of 8th. LLY is worst-in-class among the large caps on this metric with an average rank of 12th; BMY and Roche are best-in-class with average ranks of 2nd
3.       Lack of cost discipline:  JNJ, GSK, NVS, LLY and SNY all consistently spend much more than peers to produce a given quality-adjusted amount of innovation; BMY consistently spends less than peers
4.       Poor average quality of innovation: Bayer, GSK, LLY, MRK, and SNY consistently produce innovation that is of less than average quality (‘per unit’ of innovation) than peers; BMY, CELG and VRTX all consistently produce innovation of above average quality
5.       Negative scale economies both across (larger firms are less R&D productive than smaller firms) and within (as firms grow, they become less R&D productive) firms. Only VRTX has been able to substantially grow its real R&D spending without meaningful declines in R&D productivity

These and other R&D productivity metrics covering the 22 largest publicly-traded companies (by R&D spending) are available in a comprehensive benchmarking report at hiddenpipeline.com

 

For our full research notes, please visit our published research site

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