Pharma R&D returns improve amid rising costs, competition

Rising R&D costs

As noted in Deloitte's report, the cost of bringing a new drug to market has climbed to $2.23 billion per asset. The industry is investing more heavily in advanced therapies such as gene editing, antibody–drug conjugates and trispecific antibodies, which require more extensive research and longer clinical development timelines. Precision medicine has further added to the expense, with highly specialized treatments demanding rigorous trial designs and personalized patient recruitment strategies.

Clinical trial challenges remain another key factor. As more companies target the same high-value indications, competition for eligible patients has intensified, lengthening recruitment timelines and driving up costs. Regulatory requirements are also becoming more demanding, as stricter safety and efficacy standards contribute to longer development cycles. In 2024 alone, companies spent $7.7 billion on clinical trials for assets that ultimately failed to reach approval, exposing the high-risk nature of pharmaceutical R&D.

While emerging technologies like AI-driven drug discovery and automation offer long-term cost-saving potential, their implementation requires significant upfront investment. Meanwhile, inflation, rising labor costs and material shortages continue to add financial strain to the drug discovery and development process.

Blockbuster and GLP-1 drugs

Much of the improvement in the internal rate of return (IRR) has been driven by a surge in high-value drugs entering late-stage pipelines. The report found that 29 new blockbuster assets -- drugs expected to generate over $1 billion in peak sales -- entered late-stage development in 2024, a 53% increase over the previous year.

GLP-1 receptor agonists, particularly those for obesity and metabolic disorders, continue to be the industry’s biggest revenue drivers. Without these drugs, Deloitte's analysis shows that the industry’s IRR would fall to 3.8%.

Despite the influx of potential blockbusters, not every high-value asset makes it to market. Two major drug candidates, a blood cancer therapy and a COVID-19 treatment, were terminated in late-stage trials due to clinical setbacks. Ten other drugs saw their peak sales forecasts cut by more than $1 billion, largely due to unexpected safety concerns, weaker-than-anticipated efficacy, or the emergence of competing treatments.

Overcrowding in oncology

Investment in oncology remains strong, with 37% of all late-stage pipeline assets focused on cancer treatments. While this has led to groundbreaking therapies, it has also resulted in overcrowding, increased competition for clinical trial sites and rising development costs. Additionally, companies are struggling to recruit enough eligible patients for trials, and with so many treatments targeting similar mechanisms of action, differentiation is becoming more difficult.

In contrast, other therapeutic areas remain underserved. The report notes that the neurology, cardiovascular disease and infectious diseases sectors lag in investment despite significant unmet medical needs. Companies willing to shift focus away from saturated markets like oncology and toward less crowded fields could gain a competitive advantage, Deloitte suggests.

M&A strategies face growing scrutiny

With $200 billion in revenue at risk due to upcoming patent expirations, many pharmaceutical companies are turning to mergers and acquisitions (M&A) as well as in-licensing to sustain growth. According to the report, 61% of late-stage pipeline assets in 2024 were externally sourced, an increase from 59% in 2023.

However, externally developed drugs come with greater risks. The report found that externally sourced drugs are more likely to be terminated in late-stage development compared to in-house assets. Meanwhile, 77% of surveyed pharma executives expect an increase in M&A activity in 2025, as companies look for ways to offset revenue losses from expiring patents.

Although acquiring late-stage assets can provide an immediate financial boost, Deloitte suggests that focusing on early-stage acquisitions and strategic partnerships may offer a more sustainable long-term approach. For instance, investing in innovative biotech firms and securing promising assets early in development might help companies build a more resilient pipeline while avoiding the high costs associated with late-stage deals.

Improving R&D strategies

Deloitte’s findings indicate that pharma companies must reconsider their R&D methodology to sustain growth and optimize returns. Organizations that focus on major unmet needs, enhance clinical trial design, and diversify their pipelines beyond traditional blockbuster models will be better positioned for long-term success.

One key strategy is expanding investment in novel mechanisms of action (MoAs) rather than relying on incremental improvements to existing drugs. The report suggests that being first to market with a new MoA can provide a competitive advantage, particularly in less saturated therapeutic areas. Investing in AI automation and real-world data analytics can also help companies optimize trial efficiency while reducing costs and improving decision-making.

With 56% of R&D executives planning to revise their portfolio strategies in 2025, the pharmaceutical industry is witnessing a pivotal moment. Companies that prioritize transformative innovation while embracing emerging technologies and making bold strategic moves will be best positioned to navigate the challenges ahead.

The return on pharmaceutical innovation is improving, but maintaining this progress will require continued adaptation and strategic reinvention. Rising costs, along with intensifying competition and shifting regulations, present significant obstacles. However, companies that boldly approach pipeline development by investing in underexplored therapeutic areas and leveraging emerging technologies have a greater chance of securing long-term growth.

Alivia Kaylor is a scientist and the senior site editor of Pharma Life Sciences.