ECONOMIST INTELLIGENCE UNIT / World pharma: Leaner labs?
arthur garbayo
February 13th 2012 |
FROM THE ECONOMIST INTELLIGENCE UNIT 2011 results provide a snapshot of how pharma companies view R&D. But it isn't quite as simple as cutting versus spending, as Merck's experience shows. How much should drug companies spend on research and development (R&D)? This is a question that many have been asking in recent years as the major industry players have struggled to come up with new blockbuster drugs to replace those going off patent, despite ploughing vast sums of money into research. Some companies, notably industry leader Pfizer (US), appear to have come to the view that bigger isn’t necessarily better when it comes to R&D spending, and are making deep cuts in their budgets. Still the world's biggest spender on pharma R&D, Pfizer spent US$9.1bn on R&D in 2011, slightly down on 2010 (see chart). But it now plans to cut this figure by more than a fifth to US$6.5.bn-7bn in 2012. And Pfizer is already spending a fairly modest 13.5% of sales on R&D, in an industry where a ratio of 15-20% is historically more typical. Anglo-Swedish AstraZeneca, meanwhile, announced in February 2012 that it intends to shed 2,200 research jobs as part of a new round of cost cutting, on top of 3,500 job losses in this area associated with an R&D restructuring begun in 2010. The company did, however, increase spending on R&D in 2011 by a respectable 4%, nearly double the rise at its larger compatriot GlaxoSmithKline. In general, the financial markets have tended to welcome cuts in research spending, which can help to boost profits in the short-term. But not everyone is convinced that they make good business sense in the longer run. Some warn that these R&D cuts will come back to haunt the companies that make them, given that new products are essential to the drug industry’s future. And they have their champions within the pharma business itself, in companies such as Eli Lilly (US). It increased R&D spending by 3% in 2011, to just over US$5bn, or a very generous 21% of sales. The company has been cutting costs in the face of major patent expiries, but not in this area of its operations, believing that investment in its pipeline will safeguard future sales and profits.
Profits up So where does Merck, the world’s third largest drug company, stand on this issue? Unveiling its 2011 results on February 2nd, the New Jersey-based firm reported a 4% increase in sales in 2011, to just over US$48bn, and an almost eight-fold increase in net income, to US$6.7bn. In part, this sharp increase in profits came about because the previous year’s figures were depressed by write-downs. But it was also helped by a reduction in R&D spending, which fell 24% year on year, to US$8.5bn (see chart). On the face of it, this would appear to put Merck in the camp of the R&D budget slashers. However, the company still spent a relatively high proportion of sales on research last year, at almost 18%, and puts recent reductions in spending down to efficiency savings. Among other things, Merck is still restructuring its operations following the 2009 merger with fellow US pharma giant Schering-Plough. The company, which is less diversified than many of its peers, expects to spend around the same amount on R&D in 2012 as it did in the previous 12 months. In December 2011, Merck’s CEO, Kenneth Frazier, defended the amount of money that the company devoted to research saying that “the most sustainable strategy is really around innovation”. Mr Frazier, who comes from a legal rather than a scientific background and has led Merck since the start of 2011, is keenly aware of the need to bring new products to market to replace mature drugs facing generic competition. 2012 will be a particularly challenging year for the company in this respect as the US patent on Singulair, an asthma treatment that is currently Merck’s top selling drug, expires in August. Singulair brought in revenues of US$5.5bn in 2011, up 10% year on year and representing 11% of the company’s total sales. Expect that to have slumped sharply next year. Another blockbuster, Remicade, an anti-inflammatory that was part of the Schering-Plough’s portfolio, is also generating lower revenues than it used to, following settlement of a dispute with Johnson & Johnson, which manufacturers and licenses the drug. This has resulted in Merck selling Remicade and a newer, related treatment Simponi, in fewer territories from July 2011 onwards. Merck’s revenues from Remicade totalled US$2.7bn in 2011, down 2% on 2010, as changes to the distribution agreement started to kick in. More promising is Merck’s diabetes franchise. Sales of Januvia, a type 2 diabetes treatment, grew by 39% in 2011 to US$3.3bn. And sales of Janumet, which combines Januvia with an older diabetes drug, rose 43% to US$1.4bn. In early February 2012 the US Food and Drug Administration approved an extended-release version of Janumet, to be taken once rather than twice a day, which should further boost sales in 2012. Other blockbusters that performed well last year included Isentress, an HIV drug, and Gardasil, a human papillomavirus vaccine. Overall, Merck expects revenues to be little changed in 2012 compared with 2011 on a constant currency basis. But in the longer term much depends on how well it manages to replenish its pipeline. The Schering-Plough tie-up has certainly helped here. The combined company currently has almost 20 candidates in Phase III clinical trials, and plans to file five major product approvals during 2012 and 2013. If all goes to plan, then that R&D spending will have paid off handsomely – which might give Merck's rival pause for thought.
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