Bristol-Meyers Squibb is apparently the best health care company at research and development

The cost of creating a new drug for a pharma company is somewhere around $5 billion right now, and often takes 10 years or more. If someone approached your company and told you, “We want to take 5 billion dollars of your money over the next decade and there’s absolutely no guarantee your drug will be cleared for use or even remotely successful once it hits shelves,” would you get all in on that? Consider this graph:

Then consider this: the amount of new drugs per billion dollars spent has been halved every nine years going back multiple decades. In very short order: there’s a lot of random chance involved here.

The Forbes link above goes into detail about a new 128-page report on the state of Big Pharma as involves R&D in the drug space. Bristol-Meyers Squibb comes in first, and Vertex comes in third despite having -125.4 percent real economic returns to research and development spending. Yes, that’s negative 125 percent.

There are some potential flaws with the research, yes:

“It’s a really good, solid, and thought-provoking piece of work,” writes Jack Scannell, a noted researcher on pharma R&D productivity, in an email. “I wish I had written it or something like it.” But Scannell notes that, except for the financial metrics, the new data have not been back-tested. “If such an analysis showed that measures did not present subsequent economic returns (or stock returns), then the measures would appear to be demonstrably useless and there would have been no point in writing a big report about them.”

But overall, it’s nonetheless an interesting picture of a massive industry that almost bleeds out cash and innovation in the name of getting drugs to you within a decade-or-so pipeline of time. The presence of investors in the space only further complicates things.

If you’re looking for a successful model within this space, consider this contrast:

Twenty years ago, Merck was viewed as the best drug research firm on the planet, a lot like Genentech. Novartis has recently achieved a similar reputation. But Evans says both are actually inefficient, because they follow a model of paying a lot of internal researchers, many of them in fields in which the company is not a leader, to work on a huge number of products. Over the course of its history, Evans says, Merck’s success has not been because it has had better ideas, but because it spends even more money when it finds one, like the cholesterol-lowering statin drugs.

“The reason they are so innovative is because they’ve taken a four-cylinder engine and put nitro in it,” he says. A more efficient model is the one adopted by Bristol under Sigal, which focused on bringing in products from the outside (Bristol’s breakthrough cancer drugs came from the purchase of Medarex) and using capital efficiently.