Btobioinnovation.com 

Author: Jean-Claude Muller, 穆卓Executive Editor at BtoBioInnovation  jcm9144@gmail.com

SPECIAL REPORT

The analysis of biopharma R&D needs to be improved.

When investors and financial analysts assess the yearly progress of the biopharmaceutical industry, they usually consider two main figures: the number of new drug approvals and the research and development budgets of each of the companies.

In the first days of every year, the US Food and Drug Administration (FDA) publishes a list of medicines approved during the previous 12 months, identifying them by type as either small molecule drugs, biologics, vaccines, or cell and gene therapies. The agency also gives the approved indications of the new medicines, their mechanisms of action, their positions within the treatment hierarchy and the names of their sponsors. This information is extremely useful to investors and analysts, enabling them to assess the clinical benefits of the new drugs and their commercial potential. The FDA uses the same comparators for all of the new drugs making it easy to identify real progress in pharmaceutical innovation and predict the short and long-term sales potential of new drugs.

In addition, many companies organise R&D days where management discusses the company’s priorities and strategy. This is usually accompanied by in-depth presentations of the entire portfolio by the heads of specific therapy groups. The status of high priority and late-stage products is always updated on a quarterly basis, together with the release of the company’s quarterly financial results.

It is far more difficult to make a similar assessment on the basis of what a company discloses about its R&D budget in its quarterly financial reports. Every year, the news agency Fierce Biotech ranks the 10 largest biopharmaceutical companies according to their R&D spend. For many years it has always been the same European and US companies that make the rankings. In spite of significant growth through mergers and acquisitions, Japanese companies have yet to make it onto the list.

In a nutshell, R&D spending by the 10 largest biopharmaceutical companies has steadily increased and in 2022 it was close to $100 billion. By comparison the proposed budget for the US National Institutes for the fiscal year starting 1 October is $51.1 billion. As a public agency, the NIH is required to make its funding decisions fully transparent. It does this in its annual budget. It is less easy, from an investor perspective, to compare and contrast the spending priorities of the largest publically listed biopharmaceutical companies.

The conventional approach in trying to assess the trend of innovation among companies is to calculate the ratio of R&D spending to revenue for each company. For successive years this ratio has been largely steady for the largest companies at 20% to 30%. In 2022, Eli Lilly and Co, Merck & Co Inc, Roche, AstraZeneca Plc and Novartis all reported R&D ratios of 20% or higher. In the first half of 2023, the ratio for Lilly was 28%; for Roche, 23%, for AstraZeneca, 23.7% and for Novartis 20%. Merck had a high ratio of 60% in the first half which was affected by its acquisition of Prometheus Biosciences Inc in June for $10.8 billion. Meanwhile, Pfizer reported an R&D ratio of 11.4% in 2022, and a ratio of 17% for the first half of the current year.

Taking these figures at face value, one might conclude that Lilly invested proportionately twice as much as Pfizer in R&D in 2022. This rather low R&D ratio does not reflect a reduction in Pfizer’s R&D spending in 2022 but is primarily due to its high Covid-19 vaccine sales in that year

The upshot is that it will become increasingly necessary to dig deeper into pharma’s financial reports – in addition to attending quarterly briefings for investors – to understand how the innovation challenge is being met. This means thoroughly analysing changes in R&D strategy and in particular, the weight of external collaborations and how they are being reported financially.

The only fully comparable figures are those linked to internal R&D charges. But these are not publicly available and are even treated confidentially within a company’s own R&D organisation. By comparison external project charges, which can be handled very differently from company to company, can be as high as one third of a company’s entire R&D budget. We are aware of one situation where the development costs of a group of external projects represented more than half of the entire development budget of a company. A newly inked collaboration pact can be tied to a one-time in-process R&D milestone charge by one company, whereas it can be supported by corporate finance in another company if the deal is heavily structured with an equity investment. The failure of a late phase external project can become a multi-million dollar write-off when the fate a similar internal project will not even appear in the books.

Another major issue is linked to the way indication extension expenses are handled. This becomes highly relevant in the oncology field where not only new indications are always evaluated but where massive combination therapies trials are continuously being explored. Some may be fully supported by the main sponsor, some may be shared with another company, and some might even be financed by academic institutions. Such cumulative study charges can reach hundreds of millions of dollars and dramatically affect the ratio of R&D spending to overall revenue depending on the therapeutic focus of a company. Comparing the R&D budget structure of a highly innovative specialty company such as Novo Nordisk A/S to that of Johnson & Johnson Inc, which has medical devices and diagnostic divisions, is not appropriate.

To sum up, the measures used by analysts and investors to evaluate the relative R&D performance of the largest biopharmaceutical companies need to be improved.

This article was first published in the September issue of MedNous

Paris September 11, 2023.