Pharma industry cutting its R&D cloth to more sustainable levels

Source EP Vantage
Company NovartisRocheMerck & CoPfizerGlaxoSmithKlineJohnson & JohnsonSanofiEli LillyAstraZenecaTakeda 
Tags Analysis, Free Content, Company Strategy
Date July 07, 2010

Much has been made of declining R&D productivity levels in recent years, in terms of both the quantity and quality of new products, leading many to suggest that the days of throwing huge and unsustainable amounts of money at the problem are over.

A recent report by EvaluatePharma (World Preview 2016) highlights some stark and intriguing facts about R&D spend in the industry, not least that 2009 witnessed an unprecedented event, a 1% decline in overall R&D expenditure to $124.5bn. It remains to be seen whether the staggering $800bn spent on research in the last eight years alone, when average budgets across the industry increased more than 10% per year, will represent value for money. Meanwhile the outlook for the next seven years sees a major reining in of R&D spend for the industry at just 2% annual growth, suggesting 2009 was a watershed year in scaling back research efforts to more sustainable levels (see tables below).

More sustainable but continued growth

While a decline in output is clearly a factor in changing attitudes to unsustainable levels of R&D spend, another is undoubtedly a dramatic slowing of prescription drug sales over the next few years, impacted by global pricing pressures and loss of patent protection for many of the biggest-selling drugs.

The table below demonstrates how an expected deceleration in sales growth is mimicked by a slowing in R&D spend.

Global R&D Spend Analysis 
  2002  2004  2006  2008  2009  2010  2012  2014  2016 
 Pharma R&D Spend ($bn)   68.4   86.2   104.9   125.6   124.5   127.4   132.3   139.1   145.5 
Growth per year     11%   11%   8%   -1%   2%   2%   3%   2% 
 WW Prescription (Rx) Sales ($bn)   350   448   530   628   644   662   699   746   785 
Growth per year     11%   9%   8%   3%   3%   2%   3%   2% 
 R&D as % of WW Rx sales   19.6%   19.3%   19.8%   20.0%   19.3%   19.2%   18.9%   18.6%   18.5% 
 Cumulative R&D spend (02-09)   $798bn                 
 Annual R&D spend growth (02-08)   10.6%                 
 Annual R&D spend growth (09-16)   2.3%                 

The data also shows a tangible reduction in R&D spend as a proportion of total prescription sales, from 20% in 2008 to 18.5% by 2016, indicating that R&D budgets are being reined in at a greater rate than the slowing sales growth.

Nevertheless, after the blip in 2009 R&D spend is expected to grow again this year to $127.4bn and then around 2% annually to reach $145.5bn by 2016. Indeed the industry is forecast to spend $952bn - that is, approaching a trillion dollars - on R&D in the next seven years.

So although R&D budgets are being constrained, unless there is a sudden surge in the quantity and quality of new products reaching the market it would appear the industry’s return on this massive investment is unlikely to improve significantly.

Swiss to the fore

In terms of the biggest companies investing the most in R&D, the table below reveals a mixed bag of strategies. Swiss healthcare giants Novartis  and  Roche  are expected to continue to invest heavily in R&D;  Novartis ’ budget in 2016 will exceed $10bn, driven in part by the impending acquisition of Alcon , analysts' forecasts suggest.

Pharma R&D Spend - top 10 companies 
  Pharma R&D ($bn)      R&D spend as % of Rx sales   
  2009  2016  CAGR (09-16)    2009  2016  Change (09-16) 
 Novartis    7.3   10.0   +4.6%     19.6%   21.7%   +2.1% 
 Roche    8.2   9.4   +2.0%     22.8%   21.5%   -1.4% 
 Merck & Co  (Schering-Plough)*   8.6   8.8   +0.4%     20.6%   19.0%   -1.6% 
 Pfizer  (Wyeth )*   9.9   8.4   -2.3%     17.8%   17.8%   +0.0% 
 GlaxoSmithKline    5.9   7.4   +3.3%     16.3%   19.2%   +2.9% 
 Johnson & Johnson    4.6   6.0   +4.0%     21.6%   24.3%   +2.7% 
 Sanofi -Aventis   6.4   5.9   -1.0%     16.7%   15.2%   -1.4% 
 Eli Lilly    4.2   5.4   +3.7%     21.3%   31.8%   +10.4% 
 AstraZeneca    4.3   4.6   +0.7%     13.7%   20.6%   +6.9% 
 Takeda    3.3   3.7   +1.5%     26.4%   30.2%   +3.8% 
* Proforma data for 2009 

Meanwhile, Pfizer , which spent the most last year on R&D following its acquisition of Wyeth , is clearly planning a significant rationalisation to keep spending in line with declining prescription sales, mainly following the loss of market exclusivity next year for Lipitor .

One company that stands out from these forecasts is Eli Lilly , which despite facing a particularly precipitous patent cliff is expected to ramp up its research effort, in real dollar value terms and also relative to sales; by 2016 the group will spend nearly a third of its pharmaceutical sales on R&D, the highest ratio amongst its peers.

Earlier this week Lilly’s chief executive, John Lechleiter, reiterated his commitment to investing heavily in R&D as a way out of its patent cliff woes, despite a disappointing development track record in recent years.

Once again, however, the data shows that with the odd notable exception big pharma will continue to invest heavily in R&D over the next seven years, albeit at a slower rate than in previous years. For all big pharma’s restructuring of R&D operations in recent times, including a much greater use of outsourcing, the fundamentals of spending big on research remain unchanged.

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