If it’s true that “you have to spend money to make money” and “you get what you pay for,” then investors should pile into the stocks of the pharmaceutical companies plowing the most into research and development.
At the top of that list are Roche (RHHBY, Financial), Johnson & Johnson (JNJ, Financial), Merck & Co. Inc. (MRK, Financial) and Novartis (NVS, Financial). Last year, these four--along with six other members of Big Pharma-- spent a collective $82 billion in their quest for new drugs, diagnostics and vaccines, around $4 billion more than the previous year, according to FierceBiotech.
But a word of caution here: bigger is not always better. It’s often the smaller biotechs that are coming up with new therapies, according to a 2019 report from the research group Iqvia.
Despite large research and development budgets that are only a fraction of those of the largest drugmakers, emerging biopharma companies developed 38 of the 59 therapies approved in 2018, Iqvia found. Moreover, emerging biotechs accounted for 70% of the drugs in late-stage clinical testing in 2018, and that percentage has grown steadily over the past 15 years even though the industry pipeline has expanded.
The success of the smaller companies seems to indicate that they will be relying less and less on licensing, partnership deals and even outright sales of the company to Big Pharma, instead seeking to commercialize the drugs they developed.
The top 10 pharma R&D budgets in 2019
- Roche
- Johnson & Johnson
- Merck & Co.
- Novartis
- Pfizer (PFE, Financial)
- Sanofi (SNY, Financial)
- AbbVie (ABBV, Financial)
- Bristol-Myers Squibb Co. (BMY, Financial)
- AstraZeneca (AZN, Financial)
10. GlaxoSmithKline (GSK, Financial)
In March, Clinical Research News reported that the average return on investment in R&D has declined. The reason, according to Valerie Kellogg, MS/MBA, analyst and author of a paper on the subject, is that viable drugs are becoming harder to find and those that are identified are becoming more expensive to test and bring to market. “The low-hanging fruit is gone,” she added.
Last year, the U.S. Food and Drug Administration approved 45 new drugs. That was down from the record 59 in 2018, but still the third-most in the past 25 years, according to FierceBiotech.
Despite its financial resources, Big Pharma accounted for less than half of R&D spending last year. This emphasizes again the growing role newer biotech companies are playing in drug discovery and in taking their products to market without the help of a larger partner.
Cancer treatments dominate the R&D efforts of the top 10 companies. Work on these therapies is expensive and time consuming, but the FDA has demonstrated that it’s willing to greenlight drugs in this category with less data because of the critical patient need. Cancer drugs are usually sold at a premium cost, so healthy returns justify the companies’ substantial investments.
Disclosure: The author has positions in Johnson & Johnson, Pfizer and Bristol-Myers Squibb.
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