Restructured, refocused, retooled

Big Pharma’s R&D divisions roll out strategies to combat market challenges

Amy Swinderman
LONDON—In a move that underscores the challenges facing Big Pharma R&D today, GlaxoSmithKline announced last month it will cut up to 850 R&D jobs—about 6 percent of its total R&D staff—in the U.S. and England in an effort to "compete effectively in what is a rapidly changing and challenging environment for pharmaceutical companies."  The cuts came after GSK handed 350 R&D employees pink slips earlier this year as part of a "restructuring program."

Similar job cuts have been announced by most of the large pharmas this year, which have also responded to market pressure by outsourcing their R&D work—particularly to Asia, where according to market research firm Frost & Sullivan, employment costs one-tenth in of what it does in the U.S. or Europe.

But many analysts have suggested that it will take more than staff cuts and outsourcing for R&D to weather the storm.

"I don't think they are cutting back on R&D—it's more like they are choosing to focus on R&D," says Mary Anne Crandall, a writer for market research firm Kalorama Information. "At the same time, taking a really good look at the market a product is going to be entering is something that is really critical to being a success in R&D."

Big Pharma is responding to the call for improving R&D efficiency in many ways, most often in the form of risk-sharing partnerships with academics, federal agencies, contract providers, biotechs and other pharma players. Finding partners for R&D work has become a mantra for Lilly, which sold its Greenfield Lab to CRO Covance in August.

"Limited-infrastructure biotech and virtual clients have substantially more resources to allocate to deepening pipelines, requiring the use of CROs to facilitate more efficient drug development and allowing CROs to become more valuable and necessary partners," writes Robert W. Baird & Co. analyst Eric Caldwell in a recent research note.

Companies are also restructuring their business units to be more efficient by combining areas of operation. GSK, for example, recently "realigned" its development teams and oncology Centre of Excellence for Drug Discovery (CEDD) into a new, cancer-focused R&D group.

Other companies are ending less lucrative programs and creating smaller, disease-based R&D units. This is the case at Pfizer, which late September put the brakes on its heart disease, obesity and bone health programs in order to focus research on oncology and five other therapeutic areas.

"We've tried to dismantle this monolithic structure of R&D and create smaller therapeutic areas," Pfizer CEO Jeffrey Kindler told Bloomberg recently. "There absolutely needs to be more efficiencies in research and development across the industry, and Pfizer is no exception."

Many pharmas are also exploring the concept of personalized medicine. Speaking to the Economic Club of Indiana last month, Lilly President and CEO John Lechleiter said new science is making it possible to focus R&D efforts on a subset of patients who have not been helped by earlier treatments.

"It's also within our grasp to determine why a certain prescription therapy doesn't work in certain patients and to spread that knowledge to doctors, maybe in conjunction with a diagnostic tool that pinpoints the right patients for a particular medicine," Lechleiter said. "The result will be fewer treatments that are costly and futile, fewer patients with dashed hopes, and the flip-side: more unmistakable benefit."

Finally, many companies are implementing strategies to speed up the drug discovery process and bring more drugs to market. Last year, the FDA approved just 19 new medicines—the lowest number of new approvals in any year since 1983, when aggregate R&D spending was one-tenth of what it is today.

"In our current situation, all companies need to work to shorten the cycle and improve the probability of success," says Andy Dahlem, vice president of operations for Lilly Research Laboratories. "We in R&D are the beneficiaries of a generous allocation of our corporate investments, and we have a responsibility to be careful stewards of that investment and get as much benefit as we possibly can."

No matter what approach these firms take to counter some of today's challenges, R&D pipelines may be their saving grace, says John Paul, a research analyst at Frost & Sullivan. Paul tells MarketWatch that Big Pharma is taking the appropriate measures to protect and boost its R&D investment, although time will tell whether these strategies will achieve their desired outcomes.

"Be it layoffs or outsourcing, the pharmaceutical industry is geared up to fight the decline," Paul tells MarketWatch. "For the moment, the pharmaceutical industry has to be in fighting trim until the investments in R&D start producing results."

Posing the question, "are drug companies being short-sighted with R&D?" Motley Fool contributor Brian Orelli stresses the importance of R&D investment and writes, "There's no easy way to sugarcoat this: Many pharmaceutical companies are in for a world of hurt. Sure, companies can cut back on staff and announce major restructuring plans. But they shouldn't reduce research and development spending; it's the lifeblood of drug developers, and a major determinant of a company's future growth prospects." DDN

Amy Swinderman

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