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The Pharmaceutical Industry's 10 Biggest R&D Budgets

Monday - 9/23/2013, 5:28am  ET

Innovation is everything when it comes to the pharmaceutical sector. Behind those glorious 75%-plus gross margins associated with branded and patented drugs is billions of dollars worth of research and development money that keeps the sector running.

Ultimately, branded drugs have a finite time period where they can be sold exclusively without generic competition of 20 years. However, the clock on patented drugs starts ticking when the Food and Drug Administration grants a biopharmaceutical company the right to investigate a new drug in clinical trials. Therefore, you can knock off an average of eight to 10 years from of a drugs' patented lifespan before it even makes it to market. This should give you a better indication of why innovation and R&D spending is so vital to big pharmaceutical companies.

According to research firm Kalorama Information, global R&D spending in the pharmaceutical sector increased from just $35.3 billion in 1996 to more than $95 billion in 2009, so we know the investable money is there. Let's have a look at the 10 biggest pharmaceuticals R&D budgets in fiscal 2012 and see how they compare to corporate R&D spending in 2009.

Company

2012 R&D Spending

% Change From 2009

Roche (NASDAQOTH: RHHBY)

$9.3 billion

7%

Pfizer 

$9.1 billion

23%

Merck

$8.5 billion

52%

Johnson & Johnson

$7.7 billion

16%

Novartis

$6.7 billion

(5%)

Sanofi

$6.7 billion

7%

GlaxoSmithKline

$5.6 billion

0%

Eli Lilly

$5.3 billion

28%

AstraZeneca

$4.5 billion

6%

Bristol-Myers Squibb

$3.9 billion

12%

Source: Individual company annual reports for 2012 R&D spending; 2009 comparison data courtesy of FiercePharma. Data rounded for convenience.

A big surprise
Probably the biggest surprise here was Roche jumping out as the No. 1 spender on R&D. I was already shocked to see it ranked No. 1 on FiercePharma's analysis back in 2009, but was even more surprised to see the company retain its top ranking three years later. Clearly the big R&D driver for Roche, and the disease opportunity that presents enormous growth from a profit and quality-of-life standpoint, is its cancer research.

According to Roche's pipeline statistics, which were current as of July 25, it has 113 ongoing clinical studies of which 73 are tied to its oncology department. Few of its studies should draw more attention than its partnership with ImmunoGen, which combines existing chemotherapy agents like Herceptin with ImmunoGen's antibody-drug conjugates that are capable of carrying this toxin directly to targeted cancer cells. More R&D spending than its peers won't guarantee it success, but it's hard to see Roche struggling given the success of Avastin and Herceptin as well as a robust and diverse pipeline.

Two big pharmas demonstrating big R&D growth
Merck and Eli Lilly may not spend nearly as much as Roche on R&D, but they stand out in their own way for having the biggest R&D spending jump since 2009. Of course, the downside to this is R&D spending is an expense, which ultimately lowers profitability. But, then again, there is no profitability without a sustainable pipeline.

Merck showed the biggest jump by far in R&D spending at 52% and has, according to its website, 22 experimental drugs currently in mid-stage trials, 13 in phase 3, and an additional eight currently under review by the FDA. Perhaps no two experimental therapies stand out that could offer more of an immediate impact (assuming approval) than sleep-maintenance drug suvorexant and osteoarthritis therapy odanacatib.

Suvorexant was recommended for approval by a vote of 12-4 by the FDA's panel, but was ultimately rejected by the FDA because of the high dosage and its potential to cause somnolence in patients. When Merck resubmits at a 10 mg dose, it could have a $1 billion to $2 billion drug on its hands assuming it can get the drug approved.

Odanacatib, on the other hand, is all set for an early 2014 new drug application filing with an independent monitoring committee stopping late-stage trials early because the drug was proving so effective. With peak sales potential of $3 billion, it could easily help stem the downside associated with the patent cliff.

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