Forty-six new drugs cleared the desks of regulators at the Food and Drug Administration last year — the most New Molecular Entities approved since 1996 and more than double the number OK'd in 2016.

And that figure doesn't include the approval of several groundbreaking medicines, including two cell therapies for cancer and the U.S.'s first-ever gene therapy for an inherited disorder, which were given a green light by another office within the FDA.

All told, the stepped-up pace of approvals is good news for biotech and pharma companies, signaling a generally welcoming regulator. 2017's uptick in approvals also suggests the low mark seen in 2016 likely represents an outlier rather than a warning of withering drug pipelines.

Looking forward, the FDA under Commissioner Scott Gottlieb appears primed to accelerate its evaluation of new drugs. Since his appointment, Gottlieb has focused heavily on increasing competition in drug markets, which should augur higher approval numbers to come.

All that positive momentum, however, masks concerns over R&D productivity and the cost of drug development. A recent report from the consultancy Deloitte, for example, estimated the financial return on drug R&D fell to just 3.2% across 12 large cap biotechs and pharmas in 2017.

Sobering analyses such as Deloitte's beg the question: even as the FDA waves more drugs through, can the industry continue to deliver still higher numbers of innovative medicines?

A wave of new drugs for cancer, rare disease

Increasingly, innovation appears to be concentrated in lucrative therapeutic areas like oncology, immunology and rare diseases. Notably, more and more drugs winning FDA approval are targeted biologics rather than small molecules.

"There has been an explosion of activity in biologics, in genetic diseases," said Judith Ng-Cashin, chief scientific officer at Syneos Health, in an interview. "All of those things that had been preclinical over the past few years are now en masse starting to hit and go through the development cycle."

Both biotech and pharma have channeled investment toward these specialty markets in recent years — and away from the mass market categories that supported the blockbuster drugs of the 90s and early 2000s (most of which are small molecules).

In oncology, that investment has led to a boom in cancer research and, correspondingly, new drugs reaching patients.

Twelve new cancer medicines were approved by the FDA's Center for Drug Evaluation and Research (CDER) last year, along with another for a cancer-related side effect to complete a baker's dozen.

The first two CAR-T cell therapies for leukemia and lymphoma also secured landmark green lights from another FDA office, milestones that many see as heralding a new chapter in cancer therapeutics.

Surging R&D activity, however, has also meant an influx of "me-too" molecules in existing drug classes. In 2017, for example, the FDA approved the fourth and fifth PD-1/L1 inhibitors, the second and third CDK 4/6 inhibitors, as well as the third PARP inhibitor.

Most of the cancer drugs approved in 2017 were designated an Orphan Drug by the FDA, indicating the targeted condition affects less than 200,000 individuals in the U.S. More often than not, drugmakers first take aim at specific cancer subtypes before expanding into broader indications.

Pfizer Inc. and Merck KGaA, for example, secured an OK for their checkpoint inhibitor Bavencio (avelumab) in Merkel cell carcinoma, a rare skin cancer. The companies plan to broaden the drug's market with future supplemental approvals.

Outside of oncology, the industry's interest in developing drugs for orphan diseases is readily apparent from 2017's roster of approvals.

Eight non-cancer orphan medicines were OK'd by CDER, including the first treatments for a type of Batten disease and Sly syndrome, an inherited metabolic condition also known mucopolysaccharidosis type VII.

Including new indications for already approved drugs, the FDA endorsed a record number of orphan indications in 2017 — a figure that has increased rapidly since 2010.

That trend doesn't look to be going away either. Last year, the regulator received 568 requests for orphan drug designations, more than double the number submitted by the industry in 2012.

The FDA also marked another landmark with an affirmation for the first gene therapy for an inherited disorder, approving Spark Therapeutic Inc.'s Luxturna (voretigene neparvovec) for a form of hereditary blindness.

Gene therapy as a field appears to have made real strides, and several other DNA-based treatments look set to reach regulators in the coming years. That coming wave has spurred the FDA to plan a revamp of its regulatory approach to gene therapy.

"Next year we'll begin issuing a suite of disease-specific guidance documents on the development of specific gene therapy products," FDA Chief Gottlieb said in remarks delivered Dec. 19. "These guidance documents will be part of a modern, comprehensive framework for how we'll help advance the field of gene therapy."

Several notable drugs were also approved in 2017 for inflammatory conditions like psoriasis, atopic dermatitis and asthma.

Currently, the ranks of the industry's best-selling drugs are already full of anti-inflammatory biologics — led by AbbVie Inc.'s market-leading Humira (adalimumab). But, as 2017's approvals show, drugmakers still see the potential for growth and new markets.

Chief among the hopefuls is French drugmaker Sanofi SA, which won approval of its immunology candidates Dupixent (dupilumab) and Kevzara (sarilumab). Both biologics are expected to form the foundation of the pharma's immunology business.

Immunology is another area where the FDA hopes to ramp up its regulatory expertise. In testimony to a Senate committee Dec. 5, Gottlieb indicated the regulator is currently considering setting up more "centers of excellence" around therapeutic areas, noting immunology and neuroscience as two possibilities.

Drug approvals trending upward

While current headlines point to 2017's 21-year high in drug approvals, a year ago just as many were raising questions about 2016's low water mark. After two banner years in 2014 and 2015, only 22 New Molecular Entities were approved in 2016.

NMEs - regulator-speak for drugs with active pharmaceutical ingredients never before approved — can serve as a useful proxy for R&D productivity. Roughly speaking, higher numbers of NME approvals indicate the biopharma industry's labs have been busy churning out novel drugs.

But, calendar-year counts of NME approvals are also a matter of timing.

"A lot of analysts will make comments about the FDA increasing or decreasing its rate of new drug approvals," explained Michael Eckstut, managing principal at MKE BioServices LLC, in an interview. "The way you answer that question is all about what date you pick as the starting point."

In that light, 2016's total looks out of sync with the gradual upward trend in new drug approvals. Over the decade from 2008 to 2017, the FDA approved about 32 new drugs each year - up from 25 in the previous ten year period from 1998 to 2007.

2016 also saw more drugs than usual rejected or delayed, and five NMEs were OK'd ahead of schedule the year before.

Eckstut believes the FDA approvals will likely average somewhere in the high 30s, low 40s moving forward.

"Clearly there is a focus and an emphasis on getting more drugs to market," he said. "That seems to be a number that they can handle comfortably."

Early winners from 2017

Several quarters generally is not enough time for a company to build up significant sales. Still, a number of drugs approved in 2017 found instant commercial success.

Leading the pack is Roche AG's multiple sclerosis medicine Ocrevus (ocrelizumab), which earned over $500 million in its first six months on the market. Approved at the end of March, the closely watched biologic is the first drug to be approved for primary progressive MS, a more severe form of the neurological disease.

Tesaro Inc.'s Zejula (niraparib) also performed strongly, racking up $65 million in sales and stealing share from AstraZeneca plc's PARP incumber Lynparza (olaparib).

And after a shakier than expected start, Sanofi's Dupixent also crested $100 million in sales in its first year. Only Ocrevus and Gilead Sciences Inc's Vosevi (sofosbuvir/velpatasvir/voxilaprevir) recorded higher year one sales.

Novartis AG, Pfizer, Sanofi, Roche all scored two approvals a piece, while AstraZeneca secured an OK for three: the cancer drugs Imfinzi (durvalumab) and Calquence (acalaburtinib) as well as the asthma med Fasenra (benralizumab).

Terminal decline ahead?

Despite a boom year in 2017 and a trend toward more approvals overall, questions still linger about the industry's R&D productivity.

In its latest report, Deloitte analysts note that it cost the 12 large cap biopharmas it tracked about $2 billion, on average, to bring a new drug to market. Ballooning costs have crimped rates of return, which dropped to below 4% in 2017 from over 10% at the start of the decade.

"Our analysis is a stark reminder that investing in biopharma R&D is risky, and financial returns are by no means guaranteed," the researchers wrote in the report. While that has been a truism for the industry for years, the steady erosion of return on biopharma investment in R&D could threaten the industry's business model.

Overall, Deloitte puts a positive spin on the industry's prospects to improve in the future. But other predictions aren't so optimistic. A widely circulated analysis posted on LinkedIn in November by Kelvin Stott, a director of R&D portfolio management at Novartis, argues that the industry is in terminal decline, having already plucked the low hanging fruit of drug development.

While pharma companies may feel a growing burden from increasing costs and falling returns, leaner biotechs have tended to have more efficient successes - at least at first.

Twenty-one of the 46 approvals by CDER in 2017 were granted to developers outside the ranks of big biotech and pharma. Biotechs have also pushed the envelope in areas like gene therapy and CAR-T.

With tax reform in the U.S. now passed and signed into law, more of those biotechs may find themselves getting bought. But growth through consolidation can only go so far. At the same time, pressure around drug pricing has pushed pharmas to restrict price hikes, crimping another major avenue for growth.

Questions about R&D productivity, then, will take center stage. 2017 showed the industry can deliver. But sustaining that level could be a challenge.