Big Pharma Slims Down

Major restructurings of R&D operations were announced earlier this year by two of the world’s largest pharmaceutical companies, Pfizer and Roche. Such announcements are becoming more common for so-called “big pharma” (see IBO 4/15/05, 4/15/06), as many of the world’s 10 largest drug firms struggle to maintain historical levels of profitability during a period of patent expirations and weak product pipelines. As the latest announcements suggest, big pharma is increasing R&D productivity by centralizing research operations and outsourcing research functions to Asia.

According to an analysis by the Pharmaceutical Research and Manufacturers Association (PhRMA) and Burrill & Company, R&D spending growth by the biopharmaceutical industry slowed in 2006, growing 6.6% after increasing 8.8% in 2005. However, a survey by PhRMA of its members revealed that their R&D expenditures grew 7.8%, the same rate as 2005.

Year-over-year increases in R&D spending remained strong at the top 10 pharmaceutical companies (see table). However, these figures also include restructuring and acquisition expenses. For example, Merck’s R&D expenditures increased 24.3% in 2006, but rose 17.3%, excluding acquisition expenses associated with the purchase of Sirna Therapeutics and restructuring costs. Excluding charges, R&D spending by Wyeth increased 12.9%. R&D spending by UK-based GlaxoSmithKline increased 11% in British pounds and was 16.2% of sales. However, excluding restructuring costs, R&D spending rose 8% in British pounds.

The continuing pressure on pharmaceutical companies to increase R&D productivity was illustrated by Pfizer’s announcement in January that it plans to close five research sites. The closures are part of an effort by the company to save between $1.5 billion and $2 billion in costs by the end of 2008. The company will shut down R&D sites in Ann Arbor, Kalamazoo and Plymouth, Michigan as well as R&D facilities in Nagoya, Japan and Amboise, France by the end of 2008. The closures are also part of a wider reorganization of Pfizer’s research operations that will consolidate research teams at four sites according to a specific therapeutic area. Cardiovascular, infectious disease and neuroscience research will be located at Pfizer’s Groton, Connecticut site. Asthma and respiratory research, as well as virology research, will be consolidated at the Sandwich, UK site. The company’s La Jolla, California site will house oncology and eye disease research, while its St. Louis, Missouri location will focus on inflammation research. Each therapeutic area will be managed by one leader, who will be given greater responsibility and control over resources.

In the US, Pfizer’s R&D operations will be organized into four business units, as well as a unit for customer support. The company also announced it will no longer conduct discovery research on gastroenterology and dermatology, but will continue to develop compounds for these areas that are already in the pipeline. The company will also increase investments in vaccines, antibodies and business development.

In addition to research, the reorganization will also affect manufacturing, sales and administrative operations, ultimately resulting in the loss of 10,000 jobs, or 10% of the company’s workforce. Pfizer will shut down manufacturing sites in Brooklyn, New York and Omaha, Nebraska and sell a site in Feucht, Germany. Pfizer aims to reduce its number of manufacturing facilities from 93 to 48 by the end of next year. Cuts to the sales organization include the elimination of 2,200 positions in its US sales representatives announced last year. The company also announced that additional streamlining measures, including greater outsourcing and savings related to procurement.

Less than one month later, Roche unveiled an overhaul to its R&D operations that, like Pfizer’s, emphasizes centralized research units. Roche will reorganize its R&D operating model by Disease Biology Areas (DBA). Each DBA will be centered on one of five therapeutic fields: oncology, virology, inflammation, metabolism and central nervous system. Each DBA will include all research functions, from discovery through clinical development, as well as marketing resources. A cross-functional management team in each therapeutic area will decide which drugs to develop and, in turn, will report to the new Strategic Portfolio Committee. The company will continue to operate other research sites, such as its Penzberg, Germany site, where research on therapeutic protein is being “intensified.” Roche currently conducts discovery and development research at four facilities and all pre-clinical and clinical development at one site.

Pfizer and Roche appear to be the latest converts to an R&D approach that concentrates research on a specific therapeutic area at a single facility. In 2005, Merck announced a reorganization of its research efforts around 11 therapeutic categories with development concentrated at single sites (see IBO 11/30/05). GSK operates nine Centers of Excellence for Drug Discovery for preclinical development, six of which are focused on specific therapeutic areas and are clustered at specific locations. The CEDDs operate with their own budgets, product portfolios and decision-making power about which drugs to develop. Although not organized by single sites, AstraZeneca realigned its R&D resources in 2005 into four therapeutic groups and a new opportunity group, to be run by cross-functional teams that guide development of internally and externally developed compounds from lead optimization through Phase II.

Pharmaceutical companies adapting such a model emphasize that R&D centralization creates greater autonomy and accountability, eliminating the bureaucracy that can slow development times. It is also easier to track projects, fully utilize existing resources and enable cross-disciplinary approaches. As a company with one of the more promising pipelines among big pharma, Roche’s restructuring suggests that the benefits of centralizing R&D are greater than cost savings.

To increase productivity and move closer to the fastest growing markets, big pharma has also increased its research presence in Asia. Earlier this month, GSK announced that it plans to establish an R&D facility in Pudong, China. This follows the November 2006 announcement by Novartis of a $100 million investment in a 410,000 sq. ft. Shanghai research center, which will house 400 researchers to develop drugs for Asian markets. According to China Daily, Novartis currently operates small research units in Beijing, Shanghai and Tianjin (see IBO 11/15/06). AstraZeneca has also announced a $100 million Chinese investment to build its first research center in China (see IBO 9/15/06).

Outsourcing of big pharma R&D to India is also increasing. So far this year, three companies have announced partnerships with Indian firms for research outsourcing. GSK expanded its 2003 R&D agreement with Ranbaxy Laboratories. The original agreement, which was for the optimization chemistry of drug leads to candidate selection, now includes the advancement of leads to clinical proof of concept. Merck Serono announced that it will work with Aurigene Discovery Technologies to conduct lead generation and optimization of small molecule drugs for treating autoimmune diseases. Last year, Merck established its first Indian research collaboration with Advinus Therapeutics to develop clinically validated drug candidates for metabolic diseases (see page 5). Like R&D centralization, this trend is not new, but is now more widely adopted. AstraZeneca has been working with India’s Torrent Pharmaceuticals since 2005 to find a drug to treat hypertension. Wyeth Pharmaceuticals outsourced synthetic chemistry research to GVK Biosciences in 2005 in a five-year deal estimated to be worth $40 million.

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