I just came across this interesting position paper published by Deloitte in 2010:R&D value measurement. Is R&D earning its investment?
It proposes to use IRR (internal rate of return) as a means to determine the effectiveness of R&D and, if you like, innovation.
Although the approach is suggested for late-stage pharmaceutical development portfolios (phase III plus), the recommendations made can probably be applied across the entire pharmaceutical and life science innovation chain.
In essence, the paper postulates that significant gains in IRR by pharmaceutical companies can only be achieved if a combination of cost reduction, reduction of cycle times, and annual revenues is considered.
If we look at early R&D, i.e. the CPGR’s main area of activity at the moment, it’s interesting to explore if the same kind of principles are at work and/or drive the creation of value (IRR, if you like).
At the CPGR, we have always argued that:
- Proper utilisation of ‘omics’ resources (equipment, labour, goods) will reduce costs. Therefore, proper management of these resources will have a positive effect on returns generated from the corresponding investments.
- Proper management of projects (and the corresponding risks) will reduce cycle times of projects. Therefore, a positive effect IRR should be achieved.
- Combining 1 and 2 is an antecedent to portfolio mgmt of projects (although we should also take into consideration other aspects such as dedicated disease areas), which in turn lowers risk and therefore has a positive effect on IRR.
According to the Deloitte paper, the biggest positive effects on IRR can be achieved by way of reducing costs with reduction of cycle times coming in at fourth place.
It will be difficult to estimate product sales for early stage research outputs and other factors mentioned in the paper may not apply.
Therefore, reduction of direct costs and cycle time optimisation (project idea-to-patent/publication) are probably the most effective points of intervention for government-led investment into science and R&D.
The former can be achieved by maximising process efficiencies, resource utilisation, managerial capacity and economies of scale linked to ‘omics’ equipment. The latter can be realised by applying effective management principles to planning and execution of projects.