Downsizing, outsourcing and restructuring continue to be major themes for R&D operations at the world’s largest pharmaceutical companies. Since fall of 2009, five major drug companies have announced R&D restructurings. In fact, for most of these companies, the latest announcements are extensions of similar efforts within the last two years to improve R&D productivity and cost effectiveness (see IBO 2/15/09).

As big pharma reduces its R&D structure, its R&D is being transferred to CROs, smaller drug developers and universities. At the same time, big pharma is gaining new products through in licensing, acquisitions and partnerships. In addition, some large drug companies are diversifying into areas such as generics and consumer products, which do not require as large and sustained an R&D investment. By developing products externally, big pharma can also capitalize on what some experts argue is its real expertise: gaining regulatory approval, and marketing and sales.

For the 10 major pharmaceutical companies listed in the table above (Merck’s results were not available at publication time), aggregate R&D spending for fiscal 2009 was flat in US dollars. For the seven companies that report financial results in US dollars (Abbott, AstraZeneca, Bristol-Myers, Eli Lilly, Johnson & Johnson, Novartis and Pfizer), R&D spending declined 1.4%.

So far this year, two large drug companies have announced major reorganizations affecting R&D operations. Earlier this month, GlaxoSmithKline (GSK) unveiled plans to generate £500 million ($799 million = $1 = £0.63) in pre-tax savings by 2012, half of which will come from R&D restructuring and half of which will come from SG&A changes. Reductions in R&D spending will be realized in part by exiting discovery research projects in certain areas of neuroscience, such as depression and pain. By doing so, the company stated that it can reduce fixed infrastructure costs, which amount to one-third of the company’s R&D expenditures. Reuters reported that the company plans to close its Tonbridge, UK, site and to downsize operations at its R&D sites in Verona, Italy; Harlow, England; Zagreb, Croatia; Poznan, Poland; and Mississauga, Canada.

GSK also announced the formation of a new unit for rare diseases, which will develop drugs through partnerships and in licensing, as well as in house. In 2009, GSK reported a 12.7% increase in R&D to £4,106 million ($6,173 million), or 13.9% of sales. In constant currency, R&D spending rose 2%. The company expects R&D as a percentage of sales to remain the same in 2010.

Last month, AstraZeneca reported a major restructuring of its R&D operations, including the narrowing of its areas of disease research, consolidation of selected R&D sites and greater use of external research partners. The company estimated 3,500 R&D positions would be affected, but that the net reduction would be 1,800. The restructuring is expected to save $1 billion annually in R&D expenditures by 2014. The Financial Times reported that research in a quarter of the company’s 40–50 diseases areas would be eliminated. The company will also create eight Innovative Medicines Units that will be overseen by a Portfolio Investment Board, consisting of senior executives.

In total, AstraZeneca expects to cut 10,400 jobs by 2014, generating annual savings of $1.9 billion by 2014. In 2009, reported R&D spending fell 14.9%. Adjusted R&D declined 12.5% to $4,334 million, but was down only 3% in constant exchange rates. Between 2007 and 2009, the company eliminated 1,600 R&D positions.

Both GSK and AstraZeneca have sworn off major mergers to boost R&D productivity. In contrast, Pfizer last year acquired Wyeth for $67 billion, creating the world’s second largest drug company. In addition to increasing Pfizer’s biologic and vaccine pipelines, the merger also reduces costs. At the time of the merger’s announcement in January 2009, cost savings were estimated to be $4 billion by the third year, in addition to Pfizer’s stand-alone cost reductions of $2 billion by the end of 2011. Pfizer estimated half of the savings would come from SI&A (selling, informational and administrative expenses) and half from R&D and manufacturing. The companies’ combined workforce was expected to be reduced by 15%, or nearly 20,000 employees.

During 2009, Pfizer combined the two companies’ R&D operations and divided them into BioTherapeutics Research and PharmaThermapeutics Research Groups. In each Group, smaller research groups were created to increase accountability. The company is now focused on nine businesses: Primary Care, Specialty Care and Vaccines, Emerging Markets, Oncology, Established Products, Animal Health, Capsugel, Consumer Health, and Nutritional Health.

Following the completion of the Wyeth acquisition in the fall of 2009, Pfizer announced further restructuring plans, including the closure of six of its 20 research sites, a 35% reduction in R&D footprint, and the relocation of research according to disease area. Closures were announced for: Princeton, New Jersey; Chazy, Rouses Point and Plattsburgh, New York; Sanford and Research Triangle Park, North Carolina; and Gosport, Slough and Taplow, England. Research will be centered at five central sites, with specialized capabilities at nine additional sites. The exact number of R&D positions affected was not given at the time. The Wall Street Journal reported that up to 800 R&D employees were impacted.

Announcing its 2009 results last month, Pfizer reported stand-alone cost savings of $200 million in 2009 and a 4,200 reduction in head count since the Wyeth purchase. The company also announced the termination of 100 research projects from the companies’ combined pipelines. Pfizer’s R&D spending (including one quarter of Wyeth R&D) declined 1.3% last year to $7,845 million. Adjusted R&D expenses rose 3%. In 2010, adjusted R&D spending is expected to total $9.1–$9.6 billion and, in 2012, it is estimated to decline to $8–$8.5 billion. This compares to combined 2008 R&D spending for Pfizer and Wyeth of $11 billion. Thus, their combined R&D spending will be reduced by $3 billion by 2012.

Pfizer’s R&D reorganization was comparable to the one announced by Eli Lilly and Company in September 2009. Eli Lilly’s plan to generate $1 billion in savings by the end of 2011 includes the elimination of approximately 5,500 positions. The number of R&D positions that were affected was not disclosed. However, the reorganization targets R&D. The company established a Development Center of Excellence, which uses a common operating system and “common priorities” for clinical development, including advancing analytics and tailored therapies. The company also restructured its drug business into four units: Oncology, Diabetes, Established Markets, and Emerging Markets. Each unit will be accountable for profits and losses. Last year, Eli Lilly’s R&D spending rose 12.6% to $4,327 million. For 2010, the company estimates R&D spending will increase in the low double digits.

Also announcing a reorganization last year that affected its pharmaceutical R&D operations was Johnson & Johnson. In November 2009, the company outlined a restructuring effort across its diversified businesses that is expected to result in annualized, pre-tax cost savings of $1.4–$1.7 billion by 2011. Few details were provided, except that the company plans to reduce layers of management and simplify business structures and processes. Approximately 117,000 positions, or 6%-7% of the workforce, would be affected. Discussing the cuts, CFO Dominic Caruso commented that the company plans to reduce its R&D expenses, particularly for its pharmaceutical business. According to BusinessWeek, the unit’s R&D has been split into five units (Neurology, Infectious Diseases, Immunology, Oncology, and Cardiovascular and Metabolic disease), which each combine previously separate R&D functions.

Table: FY09 R&D for Selected Pharmaceutical Cos.

R&D FY09 (US$M)% Chg.% R&D of Sales

Abbott $ 2,744 2.0% 9%

AstraZeneca $ 4,409 -14.9% 13%

Bristol-Myers Squibb $ 3,647 3.8% 19%

Eli Lilly and Company $ 4,327 12.6% 20%

GlaxoSmithKline $ 6,173 -3.2% 14%

Johnson & Johnson $ 6,986 -7.8% 11%

Novartis $ 7,469 3.5% 17%

Pfizer $ 7,845 -1.3% 16%

Roche (Pharmaceuticals) $ 8,161 11.5% 23%

Sanofi-Aventis $ 6,365 -5.4% 16%