The WSJ notes that Pfizer and Merck, the number one and number two sized Big Pharmas in the world, took different tacks when confronted with prospect of cutting R&D or maintaining EPS for the coming year. Pfizer cut R&D. Merck cut its future earnings estimates. Let's take a look.
Pfizer reduced R&D so that it will spend approximately $6.5 to $7 B in 2012 vs the $9.3 B it spent in 2010. That necessitated closing its Kent facility and cutting heavily at its Groton site. It also cut several programs to "focus" its R&D efforts on a lesser number of programs. The market gave Pfizer a short-term reward by raising its stock price about 4% since the Tuesday announcement.
Merck on the other hand reduced its EPS estimate from $3.82 to a range of $3.65-$3.76. It plans to up the R&D budget from $8.1 B in 2010 to $8.5 B in 2011. Merck's CEO Ken Frazier said he "wouldn't make deeper cuts" as it woudl jeopardize Merck's future development. The market promptly responded to this long-term strategy (like pharma and investing is supposed to be) by chopping Merck's stock by 3.3%.
If I had to place my bet right now, I'd say that the company that invest in R&D and innovation will do better in offering its shareholders a long-term ROI than one that continues to reduce its R&D efforts - especially to boost short-term EPS gains. Where's the drive to innovation to meet unmet medical need in that? I guess Pfizer CEO Mr. Read gets to stay in place another quarter.
Posted by Bruce Lehr Feb 3rd 2011.
I agree that just spending money whether it be on baseball free agents, school teacher salaries or pharma R&D doesn't guarantee success. And, a model that incorporates both internal R&D and in-licensing may work well. Time/the market will tell us if Pfizer has th emix correct or not.
Posted by: bigredbruce | 02/03/2011 at 05:43 PM
R&D budgets are one thing, but we all realise by now that innovation is not working at big .
Pfizer have a very innovative model that allows late stage development teams to select compounds to develop, and they realise that this are not going to come from internal research efforts.
So we need to know what these companies are spending on in licensing and developing innovation from biotech to get a better picture
Posted by: Biotechtweet | 02/03/2011 at 05:16 PM