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Has Lack Of Revenue Growth Stunted Pharma R&D Investments?

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Recently, FiercePharma published a list of “The top 15 pharma companies by 2014 revenue”. What was striking about the article was the relatively stagnant growth in revenues experienced by these leaders in 2014.  Overall, these companies amassed sales of $526.9 billion last year, a mere 2.4% over 2013 revenues. In fact, if you set aside Gilead whose annual revenues more than doubled thanks to the launch of its hepatitis C cure, Sovaldi, the other 14 companies cumulatively lost 0.2% on a year-to-year comparison.

Did this lack of revenue growth impact the R&D spending for these companies? Generally, R&D investments are tied to revenues. Given the general malaise in sales growth, coupled with the downsizing that many Big Pharma companies have been undergoing, particularly in R&D, one could imagine that R&D investments are significantly shrinking.

In fact, looking at data taken from corporate annual reports, R&D has not experienced disproportionate cuts. These 15 companies, with 2014 sales totaling $526.9 billion, spent over $80 billion on R&D, which represents 15% of top line revenues. This level of investment is the norm for the biopharmaceutical industry and is higher than any other business sector. What is also interesting is that the percent investment changes made in each company’s R&D efforts paralleled the changes in revenues. Thus, companies that had sales increases of 2 – 5%, such as J&J, Roche , Bayer , and  Sanofi , also increased R&D spend by the same percentages. Companies whose sales revenues significantly declined such as GSK (revenues down 9%) and Lilly (revenues down 15%) similarly lowered R&D expenses (GSK, 12%; Lilly, 14%). Essentially, sales and R&D investment seem to be inextricably linked.

There are some interesting outliers, however, that may say something about the internal strategies for these companies. For example, despite experiencing an almost $2 billion decline in revenues between 2013 and 2014, Pfizer ’s R&D budget increased by 9%. While AstraZeneca’s 2014 sales grew by 1.5%, its R&D spend increased by 15%. The opportunities presented by the experimental drugs in each companies pipeline no doubt justified these investment decisions. However, one cannot help but speculate that, after the failed Pfizer merger attempt with Astra Zeneca, Pfizer is trying to demonstrate tangibly that it does believe in investing in R&D. AstraZeneca, for its part, could be trying to accelerate the drugs in its pipeline to show that it can meet the high financial goals its CEO set in the wake of spurning the Pfizer offer.

AbbVie which grew revenues by 6%, bolstered its R&D spend by 15%, perhaps trying to bolster its pipeline in the face of looming biosimilar threats to its Humira franchise. And, despite having 2014 revenues drop by 3% in 2014, Bristol-Myers Squibb increased its R&D spend by 21% perhaps to maximize its opportunities in one of the hottest areas of research in the industry today, immune-oncology.

Then there is Gilead. Its sales grew from $10.8 billion in 2013 to almost $24.5 billion, thanks to the aforementioned Sovaldi. Its R&D spend increased a healthy 35% in 2014 – something that most R&D heads can only fantasize about. Of course, others can have the Gilead experience. All you have to do is come up with an novel drug that changes the treatment paradigm for an important disease. And, contrary to the beliefs of industry critics, these data show that big companies do plow revenue growth back into new drug discovery. But these data also show that, if the R&D organization doesn’t deliver, revenues decline and the R&D investment declines in parallel.