Structural decline in pharma R&D is inevitable---that’s diminishing returns.

Kelvin Stott, November 28 2017, “Pharma's broken business model: An industry on the brink of terminal decline,” Endpoints News, https://endpts.com/pharmas-broken-business-model-an-industry-on-the-brink-of-terminal-decline/

Notice how the midsection of the IRR plot of prioritized opportunities follows a perfectly linear downward trend that passes right through 0% IRR, which is exactlywhat we have seen with our analysis of pharma R&D productivity above! The implications of this are rather striking:

Return on investment in Pharma R&D is declining because that is precisely how we prioritize investment opportunities over time.

In essence, drug discovery is rather like drilling for oil, where we progressively prioritize and exploit the biggest, best, cheapest and easiest opportunities with the highest expected returns first, leaving less attractive opportunities with lower returns for later. Eventually, we are left spending more value than we are possibly able to extract:

Implications and projections for the pharma industry

Now given that the steady decline in return on investment in pharma R&D follows the Law of Diminishing Returns as the natural and unavoidable consequence of how we prioritize R&D investment opportunities, where does that leave the industry?

We can simply extrapolate the robust linear downward trend in IRR, and then apply the same formula we used above to calculate IRR based on past performance in reverse, to predict how the industry will evolve in the future. This is what we get:

Wow! What we see is that the entire pharma industry is on the brink of terminal decline, and will already start to contract within the next 2 or 3 years!

This seems incredible, but remember that this is not some arbitrary bleak forecast. It is the direct mathematical result of the Law of Diminishing Returns which we have already seen in our analysis above, and which we have been able to exactly replicate by prioritizing a limited set of random investment opportunities.

So what is going on here? Can this really happen?

Pharma’s broken business model

The situation is illustrated nicely by this schematic here below:

What we have here is an industry that is entering a vicious cycle of negative growth and terminal decline as its fundamental business model has run out of steam by the Law of Diminishing Returns: Diminishing R&D productivity and return on investment leads to diminishing growth in sales. Eventually, growth turns negative and sales start to contract. Reduced sales then reduces the amount of money available to invest back into R&D, which causes sales growth to decline even further. And so on, until the industry is gone altogether.

This principle is further illustrated here, showing how value creation is turning negative:

Industry life cycles and regeneration

So can this happen? Will pharma really shrink out of existence, and is there anything we can do to stop it?

In short, yes, it can and will happen. Pharma as we know it will shrink out of existence, and no, there is nothing we can do to stop it. We know this because the steady decline in IRR is an unavoidable consequence of prioritization, and has continued despite all our efforts to slow, stop and reverse the decline to date.