Biotech Dwarfed by Pharma R&D

Posted March 21st, 2011 in Pharma industry

Lots of folks have been talking about the demise of Pharma R&D spending, especially with the recent cuts at Pfizer, GSK, and others.  But the truth is far from that, as they still spend an enormous sum and dwarf the rest of the ecosystem.

The big players probably still spend far too much.  Legacy infrastructures and leviathan bureaucracies place an enormous tax on the utilization of those funds.  Also, Big Pharma R&D is so large that it probably crowds out more capital efficient investments by the smaller players in the ecosystem (e.g., “how can we compete when Pharma will throw hundreds of chemists at this…” or “we can’t recruit patients because Big Pharma XYZ’s studies are running…”).  I’d welcome seeing greater discipline around “doing more with less” and think it would be healthy for the sector.

A few reflections on the comparative statistics of Pharma R&D today:

First, although select companies are cutting, the industry’s overall R&D expenses aren’t shrinking.  It’s a slowdown in the growth of R&D spending from prior 10% year-on-year increases of a few years ago, but it’s not a cut.  According to a piece from JP Morgan analyst Tycho Peterson the Top 20 R&D consensus numbers are likely to be close to 0.2% and 0.3% for 2011 and 2012, roughly in line with where they were in 2009.  To lament the cuts is like hearing folks in Washington saying they’ve cut the budget when they’ve really just cut the growth rate of the budget.

Second, the aggregate R&D number is a huge amount of capitalthe “Big 20” global drug companies spent $96B in R&D in 2010 according to CapIQ.  It may only be roughly 15% or so of drug sales, but its a huge amount of capital relative to other players; here are a few specific points on its relative scale:

  • The Big 20 spent 26x more than the total funding for all private venture-backed biotechs combined in 2010. That’s right, 26 entire private biotech universes.   According to the recent PWC/NVCA MoneyTree™ Report, biotech venture financing was only $3.7B last year in the US across about 460 companies.  Since this is an annual fundraising number that hasn’t grown much, and R&D is the bulk of private biotech costs, it’s fair to generously assume that venture-backed biotech annual R&D is close to that number.
  • Pfizer’s Global R&D budget in 2010 was close to 2.5x that amount, which by extrapolation is about 1000 venture-backed biotech companies worth of funding. Interesting to reflect on that comparison: PFE = 1000 private biotech units.  In fact, the proposed cuts in PGRD over the next couple years amount to close to $3-4B in annual R&D, which is the equivalent of cutting 2010 funds for all the VC-backed biotechs in the US today.
  • Several of the biotech companies I know well have facilities/utilities costs around 3% of the operating expenses.  I’d suggest a large legacy corporation is higher cost to run than that, but even at 3% that implies the Big 20 likely have as much in annual utilities & facilities costs for their R&D organization than all the funding for venture-backed biotech combined. So much for turning the lights on.
  • Taking a longer-term look at those numbers adds further perspective of the scale of Pharma R&D.  During the past 16 years from 1995-2010, biotech venture capital funding in the US alone amounted to just less than $50B over 5600 rounds of financing (PWC/NVCA).  That means in a single year the Big 20 spend close to 2x more than all of private venture-backed biotech funding since President Clinton’s first term.

I recognize the Big 20 are doing some mega-trials in Phase 3 that VC-backed companies wouldn’t come close to doing, but the scale difference remains enormous in research alone.  If research (discovery and early development) is 33% of the overall budget, they still spend 8x+.

Given the scale difference, either venture-backed biotech is completely irrelevant in the overall drug R&D ecosystem, or it’s punching well above its weight class.

Does the entire venture-backed biotech universe contribute more than 4% of the value in the global R&D pipeline today? I certainly think so.  That’s good value for money, but a seriously small David relative to the Pharma Goliath.

Lastly, taking an even wider lens than just venture-backed biotech, the entire publicly-traded global biopharma universe smaller than the Big 20 spent $27B last year (according to CapIQ this is about 700 companies on the major global exchanges).  So the Big 20, roughly 3% of the publicly traded drug companies, spent over 80% of the R&D dollars.  And 80:3 ratio is well beyond a typical 80:20 relationship; it’s a huge concentration of resources in relatively few hands.  And it seems to me those hands are unfortunately constrained by legacy infrastructure, aging assets, endless committees, burgeoning bureaucracy, etc…

Perhaps the Big 20 should be more aggressive about channeling capital to foster expanding networks of private and small-cap biotech to provide them with more innovation.   This would undoubtedly create a lot of long term value.  Sadly, I suspect the short term importance of stock buybacks and next quarter’s EPS is far too significant to overcome…

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