* GSK executive: may be "last generation" of R&D spending
* Lilly CEO says investors have less belief in R&D returns
* Pfizer research cutbacks highlight industry dilemma
By Ben Hirschler
LONDON, Feb 10 Drug companies are drinking in
the last-chance saloon and have just two to three years to prove
to investors they can generate a decent return on the billions
of dollars thrown annually at research and development.
That's the view of some industry executives whose
soul-searching has increased after Pfizer (PFE.N), the world's
largest drugmaker, said last week it was slashing R&D and closing
its huge site in Sandwich, England, where erectile dysfunction
drug Viagra was discovered.
"I am absolutely convinced that this will be the last
generation of R&D spending unless a decent return is generated,"
David Redfern, GlaxoSmithKline's (GSK.L) head of strategy, told
a pharmaceuticals conference on Thursday.
"The industry will not go forward another 10 years spending
the money that it has been spending unless the return to
investors is dramatically greater than it has been in the last
Big Pharma faces a stark dilemma; it doesn't have nearly
enough new drugs in the pipeline to replace all those it is
about to lose as patents expire on many top-sellers.
Despite pouring bumper amounts into research -- more than
$65 billion in 2009 in the United States alone -- the number of
new drugs launched annually has fallen 44 percent since 1997,
according to CMR International, a Thomson Reuters subsidiary.
Ten years ago, pharmaceutical sector shares traded at around
30 times expected earnings per share. Today most Big Pharma
stocks are bumping along with forward multiples of less than 10,
compared with an average for the S&P 500 stocks of 13.2.
Eli Lilly (LLY.N) CEO John Lechleiter, who has eschewed the
merger path adopted by some rivals and is banking on Lilly's own
crop of experimental drugs to resurrect profit growth,
acknowledged investors' impatience.
"They see us as investing large sums of money and, in
American baseball parlance, hitting for the fences with less
hope of being able to achieve blockbuster status," he told the
"There's less belief on their part that we would make the
sort of returns that would make that sort of risk justifiable,"
Pfizer jolted the industry on Feb. 1 when it said it would
cut its 2012 R&D spending by as much as $2 billion from a
planned $8.0-8.5 billion, including the shuttering of Sandwich.
"Pfizer cut their R&D site in Sandwich and got rewarded by
the market for doing so. Other companies are increasing their
R&D spend and don't get rewarded by the market," Kemal Malik,
Bayer's (BAYGn.DE) head of pharmaceuticals development, told
"That tells you the market has a degree of scepticism ...
There is real doubt about whether the sustainability model of
pharma can be maintained with our current R&D productivity."
Many companies are banking on doing clinical trials in a
smarter, more effective way. However, Lilly's Lechleiter said
greater adoption of novel processes for assessing new drugs,
such as biomarkers, would require the buy-in of regulators.
GSK, unlike other companies, has an explicit target for
improving its return on R&D investment from 11 percent today to
14 percent over the next few years.
Redfern said he was "optimistic" such an improvement was
achievable, but not all drug companies would pull through.
"There will be winners and losers, and investors and funders of
R&D will be increasingly differentiating," he said.
Still, Ponni Subbiah, Pfizer's head of global access
emerging markets, is confident research and innovation will
"If the current companies aren't successful, there are going
to be others that will maybe look at different ways of
modelling, because this is a not a luxury item we are making,"
she said. "I don't think society will allow this industry to go
Special Report on R&D: r.reuters.com/muk24m
(Editing by Will Waterman)