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Insight & Intelligence : Apr 4, 2011
Restructuring and Cuts Threaten to Lower Industry R&D Spending Next Year
Last year’s numbers were up, but companies will likely have to trim expenses.
On March 16, Novartis said that it will decrease R&D in the U.K. with reports putting the number of jobs to be cut between 400 and 550. This places the pharma giant in the company of GlaxoSmithKline, Merck & Co., Pfizer, and Roche. Over the past two years all have reported R&D layoffs and laboratory closings tied to restructurings following blockbuster mergers and acquisitions (M&As). Another pharma giant, sanofi-aventis, said it can’t rule out cutbacks if its planned multibillion-dollar acquisition of Genzyme goes through.
Yet these same companies were among pharma, biopharma, and biotech firms that in aggregate spent more money than ever last year for R&D on new medicines and vaccines. The industry group Pharmaceutical Research and Manufacturers of America (PhRMA) trumpeted this feat in a study released a day before Novartis announced its cutbacks. PhRMA and study partner Burrill & Co. found that biopharma spending on R&D last year rose by $1.5 billion, or 2.3%, to a record-high $67.4 billion.
The numbers may not be so upbeat next year, though. The majority of R&D spending comes from the biggest of big pharma companies, which will have some juggling to do. On the one hand there is a need to cut costs after all their M&A activities. On the other hand they face the need to replenish research pipelines as patent protection ends for some of their best-selling drugs.
R&D Budgets in 2010
For 2010, big biotech R&D spending held below double digits. Among big-name biotechs, the biggest spender was Amgen at $2.894 billion, up 7% from $2.694 in ’09. Next was Biogen Idec with $1.248 billion, down slightly from $1.283 billion a year earlier. Genzyme, which is soon to merge with sanofi-aventis, followed with $847.3 million, up slightly from 2009’s $833.85 million.
Within big pharma, Roche’s pharma unit spent $9 billion of the $10 billion set aside for corporate R&D in 2010. That’s down 5% from just over $9.8 billion the previous year, when Roche first began scrambling to cut costs following its $46.8 billion merger with biotech giant Genentech. The company axed RNAi and four research and early development sites, saying resources would go to external research partnerships and Phase II programs.
Roche ended its membership with PhRMA in 2009, soon after the Genentech deal was announced. Among members of PhRMA, R&D spending increased 6.5%, or about $3 billion, to $49.4 billion in 2010. That is 73% of the overall $67.4 billion attributed to all of biopharma.
Unlike Roche, four of the five PhRMA members with the largest R&D budgets increased their spending during 2010. Merck posted the biggest R&D spending gain within big pharma, nearly doubling its budget to $10.991 billion last year from $5.845 billion in 2009.
Pfizer’s spending climbed 21% in 2010 to about $9.4 billion from over $7.7 billion in 2009. Novartis’ expenditures for its Sandoz, vaccines, and diagnostics units rose 7.3% to $7.277 billion in 2010 compared with $6.783 billion the previous year. For GSK, R&D spending for vaccine and pharmaceutical development inched up to £3.634 billion (about $5.915 billion) from £3.624 billion (approximately $5.897 billion) in ’09. Sanofi-aventis rounds up the top-five list but saw a drop in R&D expenses last year.
These five firms together contribute about 56.57% of the total $67.4 billion in R&D spending. And while the likes of Merck, Pfizer, Novartis, and GSK may have reported bigger budgets last year, it remains to be seen whether this upward trajectory in R&D spending will continue.
Merck Still Restructuring from Schering Merger
Merck’s leading $10.991 billion budget isn’t as big as it seems. It includes a $1.7 billion in-process (IP) R&D impairment charge reflecting setbacks last year in a pair of Phase III studies for vorapaxar. Merck inherited this compound with its $41 billion acquisition of Schering-Plough in 2009. The compound was pulled from a 13,000-patient study for acute coronary syndrome and discontinued from use among previous stroke patients in a 26,500-patient study. It was, however, continued among people with previous heart attacks or arterial disease, about three-quarters of the patients in that study.
Merck took another $763 million of IPR&D impairment charges. A chunk of that is attributable to compounds abandoned and determined to have either no alternative use or returned to the respective licensor, the company said. Other charges stem from expected delays in launch timing or changes in the cash flow assumptions for certain compounds.
In addition, Merck’s R&D spending included $418 million in expenses associated with restructuring activities and a $50 million up-front payment related to the restructuring of an agreement between Merck and Ariad Pharmaceuticals for ridaforolimus, a potential cancer treatment.
A jump in R&D spending this year is unlikely for Merck. The company is still trying to eliminate about 7,200 positions—6,800 active employees and 400 vacancies—worldwide by the end of 2011, with about 40% of these reductions in the U.S.
Pfizer Will Focus on Fewer Diseases
Also restructuring at present is Pfizer, which attributed its higher R&D numbers this year mainly to the inclusion of Wyeth operations for the first full year in 2010. Pfizer completed its $68 billion acquisition of Wyeth in October 2009.
Pfizer has stated that it will slash R&D spending this year and next to between $8 billion and $8.5 billion in 2011. It anticipates further decreases to between $6.5 billion and $7 billion in 2012. The R&D spending range for 2012 was originally the same as this year’s.
“Driving this decline is the planned reduction in the number of disease areas the company will focus on based upon where the greatest medical and commercial impact can be achieved as well as a realigned R&D footprint,” the company said.
Pfizer reported that it had already begun restructuring its R&D operations. Labs in Sandwich, U.K., have been shut down and some operations from Groton, CT, have been shifted to Cambridge, MA. Pfizer plans to grow its Cambridge R&D center so it can complement the company’s other research hubs in La Jolla and San Francisco in California, New York, as well as Cambridge, U.K.
Novartis Balances Cuts with New Facility
Novartis credits steady spending on R&D, which is 20.1% of pharma sales, for its ability to pump out new products that generate revenue to fund additional research. The company says that last year products launched since 2007 generated $6.6 billion, 21% of net sales, compared to 16% in 2009.
Novartis expects to sustain this level of investments in core R&D, which eliminates the impact of acquisition-related factors and other significant exceptional items. The firm is also pursuing approvals for a $600 million expansion of its global research HQ, which it expects would add 300 jobs over five years to a local workforce of about 2,000.
Yet, even Novartis is not immune to R&D cutbacks. On March 16, the pharma giant announced it would shrink its operations in the U.K., specifically its campus in Horsham, West Sussex, from 950 to 550 jobs over the next two years.
GSK Maintains Budget
GSK, the fifth-biggest R&D spender among PhRMA members, expects its budget to stay at 14% of 2011 sales. The firm believes sales will maintain momentum except for Avandia (facing patent loss), Valtrex (facing competition from generic drugs), and pandemic products. Total sales were down 1% in 2010 over the previous year when those products were included in the results, but sales were up 4.5% when they weren’t.
Also in 2010, gains in R&D on vaccine and drugs already on the market made up, if barely, for a £55 million (almost $88.04 million) slide in pharma R&D spending. GSK said in its annual report that it exited five R&D centers—two of which were transferred to other operators—after refocusing away from some areas of neurology, such as pain and depression. The firm is realigning resources toward neurodegenerative and neuroinflammatory diseases because it feels the prospects for successful registration and launch of differentiated medicines were great.
Sanofi-Aventis Yet to Close Genzyme Takeover
Sandwiched between Novartis and GSK in R&D spending is sanofi-aventis. Even though it holds fourth place, the firm saw a 4% decrease in expenditure to €4.401 billion (roughly $6.25 billion) from €4.583 billion (about $6.51 billion).
Like GSK, sanofi-aventis stepped up R&D spending on vaccines, which rose from $491 million in ’09 to $517 million last year. But the company’s pharma R&D expenditure fell by 5%, to $3.884 billion.
The French pharma giant last month announced plans to acquire Genzyme for $20.1 billion. If it goes through, there may be more cutbacks and restructuring. Sanofi-aventis is already planning to shut down its R&D facility in Great Valley, PA, eliminating 400 positions this summer. The majority of workers were reportedly offered jobs at other facilities, and the clinical trial supply staffers were spared.
Sanofi-aventis did not offer specific 2011 or 2012 R&D budget guidance but did say it plans to cut its fixed R&D costs in the next few years from 60% to 50% and make up the difference in activity through more open innovation. The company expects its 2011 earnings to be off as much 5% to 10% from this year’s $9.68 a share, citing pressure to contain prices, especially in Europe, and competition from generics.
Next year, the company loses patent protection for the blood thinner Plavix, which is commercialized in partnership with Bristol-Myers Squibb (BMS). Plavix accounted for €2.083 billion (about $2.963 billion) in net sales for sanofi-aventis and $6.666 billion in BMS’ net sales in 2010. Thus Plavix represents roughly 6.9% of total sanofi-aventis net sales and about 34% of BMS’ net sales last year.
As M&A and restructurings threaten R&D spending—not to mention all those R&D jobs—this year and beyond, it begs the question: Who will make up the difference? Future articles will discuss two possible sources for additional research funding: NIH and academia.
Alex Philippidis is senior news editor at Mary Ann Liebert, Inc., and Genetic Engineering & Biotechnology News.
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