Novartis set to remain top spender as R&D investment dips

Novartis is not only forecast to be the biggest seller of drugs by 2018, it is also expected to be spending the most on developing them, EvaluatePharma’s World Preview 2018 reveals. The Swiss pharma giant is seen investing $10.1bn on pharmaceutical R&D by 2018, quite lot more than its peers, with its spend growing as a proportion of drug sales at a time when most other majors are cutting back.

Novartis does seem to be bucking the trend – over the coming years the pharma industry is expected to reduce R&D investment substantially, the report also reveals. The industry spent $135bn on research in 2011, equivalent to 18.8% of worldwide prescription drug sales; by 2018 that proportion is seen dipping to 16.9% - a forecast that no doubt reflects the intense pressure on management teams to ratchet up the productivity of their drug pipelines (See tables below and link to full report).

Fair shape?

The table below, based on consensus forecasts from equity analysts, seemingly reflects an industry in fair shape – although the rate of annual growth is slowing prescription sales are still seen climbing, and companies are trimming R&D spending accordingly.

The problem – for senior management teams at least – is that investors remain unconvinced that this picture will translate into growing profits and improved shareholder returns. Or indeed whether those forecast sales will materialise. Years of big pipeline failures and the industry’s collective inability to replace aging blockbusters has translated into diminished stock market valuations and investor wariness about the drug sector; austerity measures and increasing pricing pressure in developed countries are also not helping.

A jump in the number of new drug approvals last year raised hopes that the industry was indeed finding answers to the productivity problem. The World Preview also highlights that total US sales five years after launch – a measure to compare of the quality of each year’s cohort of new drugs – has improved over the past two years.

However, with investors in the main refusing to ascribe a value to pipeline products, the industry clearly has some work to do to convince the financial world that its prospects are improving.

Worldwide R&D Spend by Pharma & Biotech Companies (2008-2018)
WW Prescription Sales ($bn) per year
2008 2010 2012 2014 2016 2018
Pharma R&D Spend  130.9 128.3 134.2 138.4 143.8 149.4
Growth per Year  9.1% 0.8% (0.3%) 1.7% 2.0% 1.9%
WW Prescription (Rx) Sales  643 676 709 760 827 885
Growth per Year 8.2% 2.8% (0.9%) 3.7% 4.3% 3.2%
R&D as % of WW Rx Sales 20.3% 19.0% 18.9% 18.2% 17.4% 16.9%

Meanwhile the table below shows the industry’s biggest R&D spenders, with Novartis set to continue leading the pack.

As a proportion of sales its investment is seen staying almost flat over the coming years. While most of the top 10 are clearly seen keeping a lid on spending, Eli Lilly and AstraZeneca look set to keep the taps open proportionately, although their actual spend will drop.

The proportion of sales they are investing is being inflated by several huge patent expiries hitting the top lines at both companies in the coming years.

This can been seen most clearly at Lilly, one of the most trenchant defenders of the R&D faith but also one of the worst stock market performers, largely owing to its low-regarded pipeline and massive patent exposure. Unless Lilly's management can urgently deliver new products it seems unlikely that such a huge proportional investment, compared to its peers, can be justified. It seems likely that AstraZeneca's chief executive recently lost a similar argument with investors (AstraZeneca needs new strategy after boardroom shake up, April 26, 2012).

These tables were extracted from EvaluatePharma's World Preview 2018. The full report is available here for download.

Pharmaceutical R&D Spend (2011/18): Top 20 Companies & Total Market
Pharma R&D ($bn) R&D As a % of Rx Sales
Rank Company 2011 2018 CAGR 11-18 2011 2018 Chg. (+/-)
1 Novartis 9.0 10.1 2% 19.2% 19.8% 0.5%
2 Roche 8.1 8.7 1% 21.9% 19.9% (2.0%)
3 Merck & Co 7.7 7.6 (0%) 18.5% 18.6% 0.1%
4 GlaxoSmithKline 5.7 7.2 3% 16.2% 16.0% (0.2%)
5 Pfizer 8.1 6.7 (3%) 15.2% 13.9% (1.3%)
6 Sanofi 6.5 6.7 0% 16.5% 13.8% (2.7%)
7 Johnson & Johnson 5.1 5.9 2% 23.0% 21.9% (1.1%)
8 Eli Lilly 4.9 4.7 (1%) 23.8% 34.1% 10.3%
9 Bristol-Myers Squibb 3.6 4.2 2% 21.3% 19.9% (1.4%)
10 AstraZeneca 5.0 4.1 (3%) 15.6% 18.6% 3.1%

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