How to Manage Rising Drug Development Costs

In a video interview with Pharma Commerce, Kevin Dondarski, Deloitte’s life sciences R&D strategy leader, describes how his company’s 15th annual Deloitte report on the return on investment (ROI) in pharmaceutical R&D reveals a continued upward trend, with a projected ROI of 5.9% for 2024. This marks a notable reversal from the consistent decline seen throughout much of the 2010s. During that period, ROI dropped largely due to a more challenging commercial environment, which reduced the projected value of drug pipelines. This was influenced by both business dynamics and a shift toward developing treatments for more specific, nuanced patient populations, often with smaller market sizes.

However, the past two years have shown a positive turnaround, with year-over-year increases in projected ROI. Two key drivers are behind this recent momentum. First, the overall projected value of late-stage drug pipelines has grown, especially when adjusted for risk, signaling stronger confidence in the commercial viability and clinical success of these therapies.

Second, a small number of exceptionally high-value drug programs have had an outsized impact. Among these, treatments in the GLP-1/obesity space stand out, significantly boosting the total value of the late-stage pipeline. These high-potential programs are reshaping expectations and driving much of the improvement in projected R&D returns.

The renewed optimism in pharma R&D ROI is largely attributed to an increase in risk-adjusted value across the pipeline and the emergence of breakthrough therapies in lucrative areas such as obesity treatment, highlighting a shift toward more valuable and promising innovation.

Dondarski also comments on the strategies companies can adopt to manage or mitigate escalating drug development costs; current best practices for balancing long-term pipeline sustainability with short-term financial returns; how GLP-1’s success influence future investment strategies in high unmet-need areas; how AI and automation realistically reduce clinical development timelines; and much more.

A transcript of his conversation with PC can be found below.

PC: Despite the rising ROI, the cost of developing a drug has climbed to $2.23 billion. What strategies can companies adopt to manage or mitigate these escalating costs?

Dondarski: I think about it in two parts. The first is, what's actually driving the cost and the cost increase over time? I would say, generally speaking, that there's probably three factors that are really responsible for that. First and foremost is always attrition. Failure is always an issue. The later stage the failure, the more of an impact that it has specifically, because the figure you mentioned is more or less a normalized amount for what companies are spending to get an approval.

The second is R&D inflation. Certainly, if you follow the news, inflation has been a factor over the last couple of years. I think that within the world of R&D and R&D services, costs have risen even more so. Third, and finally, I think it oftentimes is the competitive dynamics, specifically in the clinical world. With so much of the industry focusing on similar areas, you don't normally use the word “competition” for patients, but the reality is, there're so many studies that end up taking longer to recruit, and that drives costs off. If I think about that, every company has probably a different area that they focus on if they're trying to address the cost part of the equation.

There’s so much of an effort at all the different companies where we serve to try and think about how in two areas. One is, how can you just really double down on operational efficiency? Much of that is through data and AI, which is perhaps the least surprising thing ever. Then the second is continuing to ensure that what companies are focusing on within their pipeline, A) they feel like they have a differentiated way to kind of pursue either that molecule or that indication, given their knowledge of the disease area, and then B) ensuring that there's the appropriate degree of rigor and discipline when it comes time to making either go, no-go, or investment decisions to ensure that you’re really maximizing the utility of how you deploy your R&D capital.