I very much enjoyed this piece by Bernard Munos on Pfizer. It follows the same method as this classic article by Matthew Herper (updated here, commented on here and here): If you want to figure out how much a company is spending per new drug, take a reasonably long period, add up all the R&D expenses from the company’s financial statements, and divide by the number of drug approvals.
It’s not a perfect method – different companies may have slightly different accounting ideas about what goes into R&D, for one thing, as opposed to Selling, General, and Administrative (SG&A) but GAAP should (in theory) cut down on that variable. But its simplicity is a feature, not a bug. These companies really did spend that much money, and they really did get that many drugs out of it. So how have BMS and Pfizer been doing for their dollar?
Since its creation in 1989, Bristol-Myers Squibb has brought to market about the same number of new drugs as Pfizer—26 vs. Pfizer’s 25 (Figure 1). Their cumulative R&D spending, however, diverges widely. BMS did it for $56 billion, while Pfizer has spent $122 billion. Much of the difference—$62 billion out of $66 billion (94%)—was incurred during Pfizer’s post-1999 mega-merger era.
Munos points out that Pfizer’s tax-inversion deal with Allergan might save it two billion dollars a year. But using these figures, they’ve been spending four billion a year more than they might have, so which problem should be attacked first? I can tell you which one can have something done about it immediately, though – the taxes. Changes to R&D strategy are slow and uncertain, and if you’re the CEO of a company this size, you’re probably not going to be around when they finally kick in, anyway. The tax fix will also immediately make investors happy, whereas a gigantic retooling of R&D, along with the (likely unspoken) corollary that they’ve been doing it wrong all these years, will do nothing but sow fear and uncertainty. No, from Ian Read’s perspective, even if he bought into this line of thinking (and I’m sure he doesn’t), the current strategy is clearly the way he feels he has to go.
But that doesn’t mean that Munos is wrong. I think he’s right, and that Pfizer has been a massively inefficient research organization. The disruptions from all those mergers are surely a big part of the problem, as is the sheer size of the company. Changing the entire course of R&D there, though, even if you knew just what to do, would disrupt things yet again. Pfizer is in a hole, folks.