Michael Martorelli07.15.09
In my previous column, I asked whether the current slow pace of clinical research, as reflected in the financial results of the large publicly owned CROs, represented a temporary setback or a longer-term problem. In this column, I look at some of the statements and indications of intent from the drug development industry. After all, outsourcing firms are really in a "derivative" industry; their revenue and profit flows depend entirely on decisions made by those customers. A CRO can broaden its list of offerings, open new offices, and adjust its pricing. A CMO can purchase new equipment, acquire or develop a new process, and expand a facility. But neither type of company can create demand for its services. So anyone trying to evaluate the financial prospects of the outsourcing industry must pay close attention to changes in R&D being discussed and implemented by the biopharmaceutical industry.
AstraZeneca is pruning the product categories in which it conducts research, exiting areas such as hypertension, IBD, Parkinson's and MS. Its restructuring efforts have already achieved as much as $300 million in savings in the R&D function. Management anticipates further streamlining of the organization and further expense reductions.
Bristol-Myers Squibb acknowledges that the traditional vertically integrated model of drug development is risky, costly, and unsustainable. It is seeking productivity initiatives yielding $2.5 billion in cost savings during the next few years; the growth rate of R&D spending is likely to lag the growth rate in sales during that period.
GlaxoSmithKline has reduced its R&D infrastructure, closed three sites, and exited some therapeutic categories. During the next three years, it is seeking another 350 million in R&D savings from its ongoing restructuring efforts.
Eli Lilly, Pfizer, and Sanofi-Aventis have each exited several disease areas as part of comprehensive reviews of their R&D efforts.
Following its acquisition of Genentech, Roche expects to generate annual cost savings of about $800 million, at least $230 million of which should be derived from eliminating duplicative functions in R&D.
Merck's acquisition of Schering-Plough is expected to close in the fourth quarter. In 2008, the companies spent a combined $8.5 billion in R&D and another $16.4 billion in materials and production. Management has estimated the combination will yield $3.5 billion in annual cost savings, approximately 40% of which will come from manufacturing and R&D.
Pfizer has announced the structure of the R&D operation that will incorporate its pending acquisition of Wyeth, but not the extent of any savings it expects to realize by combining the two companies. In 2010 and beyond, we doubt that they will spend a total of more than $11 billion in research, as the two companies did in 2008.
Given the restructurings and consolidations noted above, and the financial difficulties of many single product biotechnology companies that will not be able to afford meaningful increases in R&D spending over the next several quarters, we would not be surprised to see the annual amount of R&D spending by the global biopharmaceutical industry actually decline in the 2009-10 period. In the short term, it's hard to see the outsourcing industry enjoying a quick rebound in its financial fortunes.
The longer-term picture appears much brighter. Looming patent expirations should spur all biopharmaceutical firms to complete their portfolio optimization exercises and increase the number of compounds in advanced stages of development as quickly as possible. Moreover, most managements have indicated the necessity and even the desirability of making more intelligent use of outsourcing. In the long run, using such providers - dare we call them partners? - should be a viable method of increasing the efficiency and productivity of whatever amount of dollars are allocated to R&D spending.
The Obama Administration is engaged in efforts to permit the reimportation of prescription drugs, authorize biosimilars, allow Medicare payers to negotiate prices with the drug industry, and reshape the nature of health insurance in America. Watching Congress craft legislation authoring these actions can be painful. But I have to believe that such endeavors will be structured in ways that will not kill the American pharmaceutical goose that continues to lay golden eggs responsible for the alleviation of much pain and suffering throughout the world.
AstraZeneca is pruning the product categories in which it conducts research, exiting areas such as hypertension, IBD, Parkinson's and MS. Its restructuring efforts have already achieved as much as $300 million in savings in the R&D function. Management anticipates further streamlining of the organization and further expense reductions.
Bristol-Myers Squibb acknowledges that the traditional vertically integrated model of drug development is risky, costly, and unsustainable. It is seeking productivity initiatives yielding $2.5 billion in cost savings during the next few years; the growth rate of R&D spending is likely to lag the growth rate in sales during that period.
GlaxoSmithKline has reduced its R&D infrastructure, closed three sites, and exited some therapeutic categories. During the next three years, it is seeking another 350 million in R&D savings from its ongoing restructuring efforts.
Eli Lilly, Pfizer, and Sanofi-Aventis have each exited several disease areas as part of comprehensive reviews of their R&D efforts.
Following its acquisition of Genentech, Roche expects to generate annual cost savings of about $800 million, at least $230 million of which should be derived from eliminating duplicative functions in R&D.
Merck's acquisition of Schering-Plough is expected to close in the fourth quarter. In 2008, the companies spent a combined $8.5 billion in R&D and another $16.4 billion in materials and production. Management has estimated the combination will yield $3.5 billion in annual cost savings, approximately 40% of which will come from manufacturing and R&D.
Pfizer has announced the structure of the R&D operation that will incorporate its pending acquisition of Wyeth, but not the extent of any savings it expects to realize by combining the two companies. In 2010 and beyond, we doubt that they will spend a total of more than $11 billion in research, as the two companies did in 2008.
Given the restructurings and consolidations noted above, and the financial difficulties of many single product biotechnology companies that will not be able to afford meaningful increases in R&D spending over the next several quarters, we would not be surprised to see the annual amount of R&D spending by the global biopharmaceutical industry actually decline in the 2009-10 period. In the short term, it's hard to see the outsourcing industry enjoying a quick rebound in its financial fortunes.
The longer-term picture appears much brighter. Looming patent expirations should spur all biopharmaceutical firms to complete their portfolio optimization exercises and increase the number of compounds in advanced stages of development as quickly as possible. Moreover, most managements have indicated the necessity and even the desirability of making more intelligent use of outsourcing. In the long run, using such providers - dare we call them partners? - should be a viable method of increasing the efficiency and productivity of whatever amount of dollars are allocated to R&D spending.
The Obama Administration is engaged in efforts to permit the reimportation of prescription drugs, authorize biosimilars, allow Medicare payers to negotiate prices with the drug industry, and reshape the nature of health insurance in America. Watching Congress craft legislation authoring these actions can be painful. But I have to believe that such endeavors will be structured in ways that will not kill the American pharmaceutical goose that continues to lay golden eggs responsible for the alleviation of much pain and suffering throughout the world.