Big pharma cuts R&D, sending shudders through industry
Summary
Results from Charles River Laboratories, a provider of drug-discovery services to pharma companies, signal an era of cost cutting.The pandemic led to massive increases in research and development among pharmaceutical companies as they raced to discover vaccines and treatments for Covid-19. But those days are over, and many pharma companies are looking to cut costs as they contend with a slowdown.
While many companies, from Pfizer to Bristol-Myers Squibb to Bayer and Novartis, have announced big layoffs, news from a key outsourcer on Wednesday showed that the industry’s cost-cutting ways are intensifying.
Charles River Laboratories International, which provides drug-development services, plunged 12.6% on Wednesday, the most in four years, after sounding the alarm over pharma research spending plans. The Massachusetts-based company said it now expects to post a decline in sales for the full year, primarily owing to lower demand from pharma clients. The company previously expected to grow this year. “There are profound cuts at pharmaceutical companies," James Foster, Charles River’s chief executive officer, told analysts. Foster called the reduction in pharma research spending “unusual" and “sudden."
Foster said his clients are blaming the cuts on the Inflation Reduction Act, which allows Medicare to negotiate some drug prices directly with manufacturers, and a looming patent cliff, which will see more than $200 billion in annual drug sales come under threat from copycat generics.
For the past few years, pharma companies have been warning that they might need to cut back on innovation as the U.S. government forces some companies to negotiate prices of their top-selling drugs. There was always some level of bluster to those comments, but a sharp decline in early research lends some credence to the claims.
More pointedly, several prominent pharmaceutical companies’ stocks have been hammered in recent years as key drugs face competition or go off patent. In response, management is cutting costs aggressively. Bristol-Myers and Pfizer are two prominent examples. Both companies are expected by analysts to see sales contract later this decade. Pfizer in May announced a new multiyear cost-cutting program that will save about $1.5 billion by the end of 2027. That is on top of an existing $4 billion cost-cutting effort announced this past year. And Bristol-Myers recently said it would cut 2,200 jobs this year as part of an effort to save $1.5 billion by the end of 2025.
Cost cuts can juice earnings in the short term and boost stock prices. Both Pfizer and Bristol-Myers have been up in recent weeks. But if done too aggressively, they can cause harm. Cuts to marketing efforts could lead to lower future sales. Cuts to R&D could lead to less innovation. Clinical trials were already on a downward trajectory post-Covid. In aggregate, clinical-trial starts in 2023 were down 22% from 2021, according to data from Iqvia, a provider of health analytics.
A reduction in preclinical testing, the kinds of services that Charles River provides, is the sort of thing that will only be felt in the long term. By that time, current management teams, desperate to lift their stocks now, might be long gone. Charles River’s Foster said it would make sense in theory for companies to “double down" on R&D to offset pressure on earnings, but “strategically and structurally and organizationally, we just don’t see them doing it right now."
Big pharma wants to clean house. Expensive studies of drugs that won’t make it to market for many years to come are an easy target.
Write to David Wainer at david.wainer@wsj.com
