Reshaping R&D replaces cost cutting as top priority

13-Nov-2008 - Last updated on 13-Nov-2008 at 11:47 GMT

Cost cutting has sustained pharma profits in the faltering global economy, however top executives are starting to realise that reducing R&D capacity may not have been the smartest move in an era of weak pipelines and impending patent expiry, according to a new report by Ernst & Young.

While drugmakers have continued to invest in R&D in the last few years, recent PhRMA figures indicate for example that US spending grew 20 per cent between 2004 and 2007, the focus has been on acquisitions and on making greater use of contractors to develop new products.

In contrast, internal R&D departments at big pharma firms have been subject to the same cost cutting initiatives and restructuring measures being employed in manufacturing and sales operations as the industry prepares for greater generic competition.

Although this strategy has proved effective in the short term, the growing concern among CEOs and observers alike is that the race to improve margins has weakened big pharma’s ability to innovate, which used to be the sector’s great strength.

For its latest study, E&Y quizzed executives at 15 of the world’s top pharmaceutical firms including Pfizer, GlaxoSmithKline and Johnson & Johnson and discovered that 72 per cent ranked the “thinness” of drug pipelines as their major concern.

This indicates a marked change in thinking compared with E&Y’s 2007 report which revealed that 92 per cent of the same group viewed cost reduction as their primary focus.

Perhaps understandably, 66 per cent of those questioned this year consider that reinvigorating R&D, through both internal efforts and acquisitions, is key to future prosperity in the shifting global market. In addition, growth in emerging pharmaceutical markets and the adoption of a more customer-centric focus were raised as being important to any new business strategy.

Study author Mark Hassenplug, global pharmaceutical markets leader at E&Y, told CNNMoney that: “We saw little focus by executives on developing complimentary alternative business models…[but] this is going to need to change.”

E&Y’s finding is in keeping with recent moves by firms like Wyeth, Pfizer, Eli Lilly and Bristol-Myers Squibb (B-MS) to maintain R&D spending but narrow their focus to therapeutic areas where demand is likely to grow, particularly in lifestyle-related illnesses expected to become prevalent in emerging markets.