Poor R&D results exacerbate dangers for Pharma


By guest blogger Daniel Hoffman:

This spring the independent equity analysts at Sanford Bernstein & Co. held a conference to assess how well the pharmaceutical industry is doing at creating new opportunities and cushioning the impact of the impending “patent cliff.”

The patent cliff is the shorthand phrase for pharma’s fast approaching revenue catastrophe, as 18 of the industry’s 20 top-selling drugs lose patent protection over the next five years. This wave of patent expirations poses a revenue crisis because the industry’s research pipeline has been woefully unproductive at developing new compounds to offset those losses.

The Bernstein analysts and their guest speakers examined four key areas where the pharmaceutical industry needs to correct its current course. These involve R&D productivity, diversification to lessen dependence on prescription pharmaceuticals, mergers and acquisitions, and controlling costs. They concluded that the industry is doing a dismal job on all fronts.

And while all four areas are critical the problems with R&D led the analysts to the understated conclusion that “the data was quite sobering.”

More specifically, they found that research productivity over the last 10 to 15 years declined far below the historic pattern. The drop has been so steep that the rate of return on capital invested in R&D has fallen below its cost. And such poor R&D productivity has even led the major pharmaceutical companies to cut their research spending.

“This is unfortunate,” according to the Bernstein analysts, “because R&D is the lifeblood of the pharmaceutical industry. ...[L]ong-term drug company survival would seem to hinge on successfully generating replacement products.”

As far as diversifying out of prescription pharmaceuticals, they conclude, “diversification is easy to talk about, but actually achieving diversification effectively is another matter.” And mergers and acquisitions represent another path with as many problems as solutions.

So what remains? The Bernstein analysts conclude that while cost cutting won’t fix  the problem of declining revenues it can help “offset the bottom line impact.”

They claim that substantial opportunities remain for trimming costs in the industry, so trends for layoffs (particularly of sales reps), further research cuts and outsourcing are likely to continue over the next five years.

In other words, employment opportunities in pharma are likely to get worse before they get better.

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On July 8, Merck & Co. announced huge cuts and Thursday and Johnson and Johnson said it would layoff 300 workers at it's Fort Washington, Pa. plant.