Research cuts may haunt Pfizer, ex-R&D chief says

NEW YORK Tue Jul 5, 2011 2:56pm EDT

NEW YORK (Reuters) - Pfizer Inc (PFE.N) may have won over shareholders with its recent decision to pare back research and development spending but could be shortchanging them in the long run, according to its former research chief.

Pfizer, the world's largest drugmaker, said in February it would cut its planned research spending in 2012 by as much as one-fourth. The drugmaker is laying off more than 2,000 researchers and closing a prominent site in Sandwich, England, where it created the Viagra erectile dysfunction drug.

In an interview with Reuters, John LaMattina, who led Pfizer's research organization from 2004 to 2007, said he was surprised by Pfizer's planned cuts.

Trimmed down to $6.5 billion to $7 billion, Pfizer's research budget will represent around 10 to 11 percent of the company's estimated revenue in 2012.

"That's a pretty low percentage for the largest pharmaceutical company in the world," said LaMattina, now senior partner at healthcare venture capital firm PureTech Ventures.

"This industry historically has spent anywhere from 15 to 20 percent of top-line sales in R&D," LaMattina said. "It's their lifeblood. If you don't have new products you don't have a business anymore."

LaMattina's comments add fuel to a debate over the industry's research spending.

Many investors want drug companies to be more efficient with their research dollars, and assure more return on their investments, after companies have struggled to develop new medicines. But some executives say such a posture risks sacrificing discoveries and the industry's very future.

Pfizer shares rose when it announced the research cuts, which helped support its 2012 profit forecast, along with a $5 billion stock buyback. LaMattina noted that shortly thereafter Merck (MRK.N) shares fell when its CEO said the company would refuse to take a hatchet to its research budget.

"In the short term, I guess that's OK in terms of delivering for shareholders," LaMattina said. "But four, five, 10 years out, I'm not sure that is going to be a very good position to be in."

LaMattina contrasted Pfizer with Eli Lilly (LLY.N) and its CEO John Lechleiter, who last week vowed continued research spending and questioned cutbacks by rivals.

"It was nice to see John Lechleiter come out and say what at least me and other people have to be thinking," said LaMattina, who like the Lilly chief is a chemist by training. "And that is: What's going on here? R&D is our engine and we have got to basically support it as best as we can."

GOOD MONEY AFTER BAD?

Despite hefty research budgets, drugmakers such as Pfizer and Lilly have struggled to develop enough successful new products as their best-selling products lose patent protection, leading some companies to take down spending.

The global drug industry cut research spending for the first time ever in 2010 after decades of relentless increases, according to Thomson Reuters data released last week.

In an interview with Reuters in March, Pfizer's current research chief, Mikael Dolsten, said that the drugmaker still maintained a "large R&D budget ... and that will allow us to drive innovation in a number of areas.

"I'm not convinced that more is necessarily better," Dolsten said. "If you take the perspective of science, business and finance together, where you want to deliver a good return of investment to shareholders and future investors as well as providing important products to patients, and we have tried really to have a comprehensive approach."

LaMattina worked at Pfizer for 30 years, beginning as a chemist in the labs. He retired in 2007, not long after Pfizer's previous CEO, Jeffrey Kindler, took charge. Kindler resigned abruptly in December and was replaced by company veteran Ian Read, who announced the research cuts in February.

In recent years, LaMattina said, development costs rose because of requirements for studies from both regulators wanting more data on safety and efficacy and healthcare payors seeking evidence they should pay for these new products.

When he was at Pfizer, only about 15 percent of the research budget went to the preclinical work of discovering new medicines.

"A lot of the increase in R&D budgets in the last decade have done more to development and not necessarily to discovery aspects of it," LaMattina said.

The spate of mergers in the past decade has also disrupted pharmaceutical research efforts, LaMattina said. Even in mergers where cost cuts are not a major driver, he said, deals can be problematic simply as the combined entities determine which scientists will work on various research projects.

"I don't think people have recognized the impact that has had on R&D organizations and R&D productivity," he said. "When you have just about every company in the industry doing this, that really jolts the situation quite a bit."

(Reporting by Lewis Krauskopf, editing by Matthew Lewis)

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