Where are R&D budgets headed? In the first and second halves of last year, drugmakers estimated 2011 R&D budget growth of 1 percent and 8 percent, respectively. But a survey conducted in the first half of 2012 showed that R&D budgets actually expanded by about 4 percent in 2011. The latest survey, which looks ahead, projected that average R&D budget growth will hit 6 percent in 2012.
The survey, which was conducted by RW Baird analyst Eric Coldwell, queried 140 respondents, including 92 from North American companies and 48 from Europe and the rest of the world. In addition, 48 were large firms, 45 were mid-sized companies and 47 were smaller companies. Of the respondents, 28 percent were solely dedicated to clinical development, versus 25 percent, on average, last year; 15 percent were dedicated to preclinical development, compared with 26 percent, on average in 2011, and 57 percent perform functions across R&D, compared with nearly half in 2011.
The overall growth of 5 percent to 6 percent for 2011 and 2012 exceeds his forecast, which called for flat growth, plus or minus two percent. Why? Those who responded are "gainfully employed, which excludes responses from terminated staff, failed firms, divisions that have been shuttered, etc," he wrote. In other words, the survivors are apparently more optimistic about the workloads ahead.
Coldwell also believes that "nominal budget cuts seen among many larger, publicly traded pharmas are cuts of passive spending, internal facility reductions, reductions in wages and benefits of internal staff," and overhead spending "that might not be visible to line staff working on specific projects or functions. Our conclusion is that overall R&D budgets are likely not increasing at the pace reported by our survey respondents, yet clearly better than we originally expected and clearly improving across a broader spectrum of small and mid-sized clients."
Meanwhile, regional preferences for conducting research indicates some big shifts in preference. Eastern Asia, which of course includes China, fell to 41 percent from 59 percent from the survey that looked at the first half of 2012 compared with the look ahead at this year's second half. When asked in which country would respondents invest if they ran a global contract research organization, 30 percent named China, down from 36 percent earlier this year.
Similarly, interest in conducting research in southern Asia, which includes India, declined to 30 percent from 35 percent, but more respondents would invest in India if they were running a global CRO - 13 percent versus 11 percent from the earlier survey. And North America fell from 58 percent to 51 percent, although 23 percent named the US as a country in which they would invest more heavily if running a global CRO, up from 21 percent in the previous survey.
Smaller Asian countries, such as Vietnam and Singapore, generated more interest, rising to 13 percent from 8 percent. Meanwhile, interest in Central and Eastern Europe rose to 49 percent from 38 percent, and preferences for Western Europe and the UK increased to 45 percent from 40 percent, Coldwell continues.
As for R&D phases, 50 percent versus 49 percent in 2011, on average, listed clinical development as the area most likely to see increased investment, with 24 percent selecting preclinical, down from 27 percent last year, on average. Discovery was listed by 8 percent, down from 14 percent in 2011 and 18 percent in the first half 2012 survey. And 18 percent mentioned late phase, compared with 9 percent in 2011, he writes.
Overall, Coldwell notes that nearly 68 percent, compared with 58 in 2011, of responses highlight a clinical and later-phase investment focus, whiles about 32 percent, versus 41 percent in 2011 foresee higher relative future investment in early stage areas. When asked in which R&D phase respondents would invest most heavily if they ran a global CRO, 50 percent mentioned clinical, versus 47 percent. By contrast, the other stages warranted declines or flat investments.
Not surprisingly, when asked in which therapeutic categories respondents would invest if running a global CRO yielded oncology as the top choice, with 66 percent, up from 62 percent last year. Immunology and infectious diseases similarly registered increased interest - up to 42 percent from 39 percent, according to Coldwell. However, interest in cardiology and vascular fell to 39 percent from 41 percent. Similarly, interest in neurology declined to 21 percent from 28 percent.
As for outsourcing, 46 percent of the respondents expects R&D budgets to be farmed out in 2012, this is up from 44 percent last year. As a result, Coldwell looks for growth in outsourcing penetration to reach 5 percent this year, which is similar to what was seen last year. Only smaller companies project less outsourcing - 55 percent compared with 53 percent in 2011, he writes.
"The cycles within this long-term secular upswing are simply noise, in our opinion, and can result from short-term issues related to client financing availability, M&A rushes, regulatory, economic and/or political change, etc.," Coldwell concludes. "We have believed that the ultimate end game is for outsourcing penetration to settle between 60 percent to 80 percent. At current growth rates, the market will hit the low end of the range within the next decade."
As for pricing changes sought by outsourcing providers, 22 percent of the survey respondents reported price increases compared to only 7 percent reporting price reductions, he adds. Among those reporting price hikes, the average increase was 7 percent, while that reported price drops reported average declines of 12 percent, he writes.