1. RB Woodweird on June 17, 2010 8:23 AM writes...

For those of us who did not minor in economics:

http://en.wikipedia.org/wiki/SG%26A

So - does this mean that those upper management guys will have to return their bonuses?

2. John on June 17, 2010 9:18 AM writes...

Great topic Derek.

From the NRDD article.

"Our results indicate that investments in
R&D have a positive effect on stock prices,
and thus increase a company’s long-term
value, whereas investments in promoting
existing products have a negative effect
on stock prices."

Actually all these guys did was to demonstrate a correlation, which every good scientist knows does not demonstrate cause and effect. Maybe these guys believe Alzheimer's disease causes aging?

I would argue that when share prices are rising due to high investor expectations about the company pipeline, management is likely to see R&D as a highly profitable investment, and increase R&D spending. We all saw this in the early 1990s. In the face of falling share prices due to a weak pipeline, management is likely to pump up sales and marketing to try to beat the Street's revenue and earnings estimates and thus distract attention from the longer term pipeline issues. This is unfortunately our current situation.

3. Rocky on June 17, 2010 9:21 AM writes...

I'm no expert on this sort of thing but isn't this exactly what would happen as we reach a state of 'pure competition' a la Porter's five forces? Not only should the rev/cost ratio of separate pharmaceutical firms converge, it should also get closer and closer to one.

Very interesting that mergers seem to make very little difference in increasing your ratio. Perhaps companies had to to maintain their 'average' ratio of 3? I'd be interested in looking back further, especially to see what happened after Pfizer's big acquisitions of Warner-Lambert and Pharmacia.

Post is very much appreciated. Thanks Derek!

4. john on June 17, 2010 9:31 AM writes...

I think its hard to see the effect of cost cutting on the type of graph that Jim posted. In the most extreme case you are going to cut your costs post merger by 10% or so. So your ratio of revenue to expenses would maybe drop from 3.3 to 3.0. It gets lost in the noise.

A more interesting graph would have been the ratio of profits to SG&A over time. If you operate at a 10% profit margin and you cut your costs by 10%, every dime of savings goes to the bottom line and you double your profits. And profits are what matter to investors.

5. john on June 17, 2010 9:34 AM writes...

Sorry, that second sentence should have read "...your ration of revenue to expenses would increase from 3.0 to 3.3"

6. PorkPieHat on June 17, 2010 9:46 AM writes...

This is interesting. I think John has it right about looking at profits, however. And what's going on with the 4Q effect, where you see a dip at the end of each year?

7. PorkPieHat on June 17, 2010 9:48 AM writes...

And what's Abbott doing differently at the end of the year that its numbers dont dip?

8. Anonymous on June 17, 2010 10:03 AM writes...

"And what's going on with the 4Q effect, where you see a dip at the end of each year ?"

Xmass bonus for CEO and like ?

9. HelicalZz on June 17, 2010 10:25 AM writes...

I've probably linked this here before, but a good assessment of the business of pharma is contained in this 65 page 2006 report from the Congressional Budget Office.

http://www.cbo.gov/ftpdocs/76xx/doc7615/10-02-DrugR-D.pdf

Don't eye roll, this is a very well put together industry assessment loaded with pharmacoeconomic references and considerations. It includes industry historical metrics and some comparisons with other research oriented fields. The report also considers federal R&D spending as an aid / competitor to private spending. It handles this quite well and objectively, introducing considerations that may well be new to many.

Very much recommended to those who haven't already seen it.

Zz

10. ex-Amgenite on June 17, 2010 11:34 AM writes...

Based on insider experience, I can tell you that Amgen's chart behavior does indeed parallel its real situation. The "red" and "white" franchises have progressed beyond maturity into old age. Enbrel sales remain strong, but most of the margin goes to Pfizer-Wyeth due to the structure of the Immunex acquisition. No organically derived blockbusters in 10+ years (Prolia will hopefully break this trend). Huge internal investment in small molecule R&D with zero return to date. Amgen has indeed morphed into the big pharma of biotech.

11. john on June 17, 2010 2:08 PM writes...

thanks for the link HelicalZz!

12. Morten G on June 17, 2010 8:12 PM writes...

Besides looking at profits like John said a comparison with mid-sized, 5k-50k employees pharmas would be interesting. Just to see if smaller pharma is more efficient (they should be leaner right?).

13. Morten G on June 17, 2010 8:34 PM writes...

Argh, right there at the end of his article. Embarrassing.
Okay, more than just Gilead then please. Novo, Takeda, Daiichi, Forest, etc. (http://en.wikipedia.org/wiki/List_of_pharmaceutical_companies) Actually from that link I just need to dig up some SG&A costs and I could do it myself. Or I could do some actual work. Decisions, decisions...

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