Monday, April 07, 2008

R&D Cuts: Killing the Sacred Cow

Big Pharma companies have not quite begun butchering the sacred cow of domestic U.S.-based R&D, but they are making the first incisions.

The industry’s annual self-portrait (Profile 2008 just released by the Pharmaceutical Research & Manufacturers of America, see here) contains employment data that show the accelerating cuts in the R&D workforce. Total U.S. employment in the R&D effort by PhRMA members declined by 3,221 positions between 2005 and 2006 (the most recent survey years available). That decline represented a 3.9% drop in total R&D headcount from 83,077 in 2005 to 79,856.

In fact, R&D employment in 2006 was less than in 2004. You have to go back to 2003 to find a year when fewer people were involved in R&D for the big pharmaceutical firms in the U.S.

And the cuts recorded in 2006 do not even pick up major events such as the Pfizer closure of the Parke-Davis research facility in Ann Arbor, Michigan at the end of last year, a move that severed the company’s ties with a number of key members of the discovery team for Lipitor, according to the Wall Street Journal.

The cuts are detailed in literally the last chart in the trade association’s appendix of survey data on the industry. PhRMA continues to tout the size and extent of the industry’s R&D effort ($44.5 billion spent in 2007 by PhRMA members alone, $35.4 billion in the U.S.). The association acknowledges that the rate of growth in expenses in that area is “more modest.”

PhRMA members spent $1.1 billion more on R&D in 2007 than 2006, an increase of 2.5%. That compares to an 8.8% increase in domestic R&D spending between 2005 and 2006. The flattening support for R&D is even more evident in the dollar figures: U.S. R&D expenditures climbed 2.7% in 2007 versus 11.3% in 2006.

That diminishing growth in support clearly leads to personnel cuts. The cuts also presumably reflect transfers of the R&D effort to less expensive offshore sites.

The cuts to the U.S. R&D effort are clearly part of the industry’s overall attempt to adjust cost structures to maturing product lines. The Pharmalot blog recently portrayed the grim trends in pharma employment at 25 firms (see here).

The first incisions into the sacred cow are small but may hurt more than are immediately evident. Two of the hardest hit areas of R&D work have been the “approval” and post-marketing (Phase IV) areas. In 2006, PhRMA members cut over 1,000 positions from the Phase IV work (trimming employment in that effort down to 8,633) and over 800 positions out of the approval groups (to 3,625). Both areas had also been cut sharply in 2005: 674 places removed from approval work and 1,935 places dropped from post-marketing research.

Cuts in those areas can probably most easily be filled by outsource firms, but those are exactly the areas where pharma will need the most skilled employees to deal with the new life-cycle management for products called for by the FDA Amendments Act and to convince an increasingly skeptical FDA to let more products onto the market (see here).

The picture is not pretty. The cow is bleeding and pharma management is getting out bigger knives to fix the situation.

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