Slashing What: R&D Costs or the Rationale for an Industry?

A line from the Wall Street Journal’s January 23 front-page story on the Pfizer-Wyeth merger discussions begs a little deconstruction.

“Combining major drug companies doesn’t solve the industry’s short-term need for new drugs, but it would allow the industry to slash research-and-development spending, which accounts for nearly 20% of sales at many companies.”

It is clear where the Journal writers are coming from: they accept outright the hard logic that holds that Big Pharma is fat and and is characterized by excessive, wasteful R&D costs. Whether the Journal writers are right or not is not what is important: it is that they feel comfortable stating the opportunity for cutting R&D as a line of accepted wisdom -- that doesn't even need much explanation.

After another year of mediocre production of innovative new products, it is easy to see where the perception arises that pharma is spending too much, getting too few products and there needs to be another round of large mergers and subsequent blood-letting.

That might actually be good cover for Pfizer: making the company look less like a desperate raider, trying to cover its own lack of R&D success and more like an agent of positive change taking inefficiency out of a broken system.

But the general acceptance that pharma spends too much on R&D runs directly counter to the image that the industry is trying to sell in policy circles: that it is a national resource – a pillar of the knowledge economy.

PhRMA President Billy Tauzin put it this way in a recent press briefing on the association’s plans for the first year of the Obama Administration. The drug industry spends “more per employee on research than any other industry in America (about $75,000 per worker),” Tauzin declared in full political voice, showing that he and PhRMA are well-prepared for attacks on the industry.

“No other industry comes close to that” R&D spending level “not even the high technology industry.” The drug industry’s support of R&D is “an amazing contribution to the American economy and one that we ought to be very proud of.”

PhRMA is preparing a report on the value of the drug industry’s R&D intensity to use against any attempts to punish the industry for high prices or profits. Taking a page from the fragility arguments of the biotech sector, Tauzin says that he is afraid that other countries will move in to assume the high rates of support for drug development and the U.S. could lose leadership to other countries.

“You know what concerns me the most," Tauzin asks, that “other people around the world are going to figure out” how to support the research system and funding for new types of specialized medicines “and then we would suffer the loss of this amazing research engine that we have in America.” He noted that there are “a lot of people who would love to have it in their country.”

He suggested that U.S. oil dollars could be turned back to taking the research industry away form the U.S. “A lot of countries pick up a lot of oil money from us and they could spend a lot of money to incentivize great research projects in their country.”

Those kinds of arguments to save a national treasure can be useful in Washington, but not while the message of the financial community is that pharma is a clear story of over-capacity and inefficiency.

One of the stories – inefficient duplicative sector or national treasure -- is going to have to go. We hope the industry doesn’t go also.