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Big Pharma spends up to 31% of expenses in R&D to justify price of medicines

At a Senate hearing before the Finance Committee, leaders from seven of the world's biggest pharmaceutical companies sought to justify their drugs' list prices with claims that the revenue they generate feeds back into research and development, spurring innovations for the future.

The percentage of operational spending on R&D at each company shows varying degrees of commitment to that goal, ranging from 18% to 31% of the budget, according to S&P Global Market Intelligence data.

Bristol-Myers Squibb Co. led the way in the companies represented at the hearing with just over 31% of its operating expenses contributed to R&D in 2018. It also had the smallest 2018 annual revenue of the seven companies, which included AbbVie Inc., AstraZeneca PLC, Merck & Co. Inc., Pfizer Inc., Sanofi and Johnson & Johnson.

But as Rep. Ron Wyden, D-Ore., pointed out at the hearing, Bristol-Myers spent $11.5 billion on dividends, stock buybacks, marketing, sales and administrative costs in 2017. The company spent only $4.9 billion in R&D the same year, according to S&P Global Market Intelligence data.

Bristol-Myers is also poised to make one of the biggest acquisitions in industry history, as it has offered $95 billion to buy cancer-drug maker Celgene Corp., a move that would jump-start its R&D in both oncology and cell therapy. Celgene's drug pipeline includes five assets in phase 3 trials, generally the most expensive of the three stages of human testing needed for regulatory approval.

Bristol-Myers also has R&D expenses allocated to finding opportunities for the development of under-skin formulations of its cancer drugs Opdivo and Yervoy — both blockbuster medicines that generated more than $1 billion in sales in 2018 — in up to six to eight immuno-oncology targets, Executive Vice President of R&D and Chief Scientific Officer Thomas Lynch said during the company's most recent earnings call.

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Merck, which had over 28% of operating expenses attributed to R&D, expects to see an increase in R&D spending faster than sales over the next couple of years as the company makes investments in combination studies for Keytruda — which account for the bulk of the company's clinical spend — as well as further investment in cancer drugs Lynparza and Lenvima, CFO Robert Davis said on the company's latest earnings call.

Holding up the rear, Johnson & Johnson contributed just under 18% of its operating expense to R&D in 2018, though the largest healthcare company in the world has divisions besides pharmaceuticals, such as medical devices and consumer goods.

Meanwhile, Wyden noted that the New Jersey company hiked prices on hundreds of its drugs shortly after CEO Alex Gorsky said at the J.P. Morgan Healthcare Conference in January the industry needed to self-police on pricing.

"Drugmakers say changes in the status quo will hurt R&D — a quick look at these companies' finances on both sides of the balance sheet shows that isn't the case," Sen. Wyden said. "Revenue generated from American patients alone dwarfs what they spend on R&D worldwide."

"Even if you buy the specious argument that a drug's list price at launch is driven by the cost of R&D," Sen. Wyden continued, "what could justify arbitrary price increases year after year, long after the R&D spending is done?"

Insulin under the microscope

Sanofi CEO Olivier Brandicourt came under particular fire from the committee, which is conducting an investigation into insulin prices.

Wyden raised the point that "In 2010, a vial of Sanofi insulin cost less than $100 — in 2018 it cost nearly $300, and the company raised prices again in 2019."

In response, Brandicourt said insulin is not the only stake the company has. The company has shifted its research focus to cancer and raised its R&D spending by about 7% in 2018, and Brandicourt said in his prepared statement that innovation is critical to U.S. pricing.

"Sanofi plans to maintain this level of R&D investment through 2021," he said, "and our R&D pipeline now contains 81 projects, including 33 new molecular entities in clinical development, and 35 projects that are in phase 3 or have been submitted to regulatory authorities."

Sanofi's global head of R&D, John Reed, said on the company's fourth-quarter earnings call that the company had shifted R&D investment priorities in 2018 to "favor those indications in therapeutic areas where the unmet need is unequivocal, where the confidence in the biology is higher, where the regulatory path is potentially quicker and where the payers are more receptive."

According to Reed, the company's oncology pipeline has more than a dozen molecules in development, nine of which are wholly owned.

"Our strategy is to build a portfolio of complementary molecules that could enable best-in-disease drug combinations with 5 areas identified thus far: skin, lung, breast, prostate and hematology," Reed said.