R&D spending soars above value of new drugs

To understand the depths of the pharmaceutical industry’s recent struggles, consider this: The industry has been spending $57 billion more per year on research and development than the value of the products it has been launching. That’s a problem.

The analysis comes from a June report by EvaluatePharma, a London-based research firm. It compared the value (calculated as future sales in today’s dollars) of products launched from 2008 to 2010—which came out to be $70 billion per year. The value of R&D spending during the same period: $127 billion per year.

“The Industry as a whole is not yet generating a return on R&D investment,” wrote Anthony Raeside, EvaluatePharma’s head of research. “Even if all R&D was successful, it is unlikely governments would be capable of reimbursing all new products. It is telling that when Pfizer announced the removal of $1.5 [billion] from its 2012 R&D spend, its stock price rose 5 percent. In an age of austerity, who will be next to wield the ax to their R&D budget?”

One quick answer: not Indianapolis-based Eli Lilly and Co. When the Reuters news agency asked Lilly CEO John Lechleieter about competitors cutting R&D spending, he said, "It's crazy; first of all, by definition this is a research-and-development-based industry.”

EvaluatePharma predicts overall prescription drug sales will rise 4 percent per year between now and 2016—an improvement from its year-ago forecast of 2.9 percent.

But the prediction still pegs the drug industry’s growth below the growth of the global economy in coming years.

Lilly, of course, has far worse problems than that, as it is losing patent protection on five of its best-selling drugs through 2014. EvaluatePharma predicts Lilly’s sales will shrink 4 percent per year between now and 2016.

In spite of that, Lilly plans to earmark as much as 25 percent of annual sales—or more than $5 billion a year—for research and development. Last year, Lilly spent $4.9 billion on R&D, which represented 21 percent of sales.

"Lilly is showing it is very committed to the innovative R&D model," JP Morgan analyst Chris Schott told Reuters.

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