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Pharmaceutical cost cutting still includes R&D for some: Fitch

The degree of cost cutting has varied among these firms, but the future could see more cutbacks, according to Fitch Ratings

November 05, 2013 9:46 IST | India Infoline News Service
Some branded pharmaceutical companies reported additional cuts in third quarter research & development (R&D) costs despite their heavy dependence on its innovative success. The degree of cost cutting has varied among these firms, but the future could see more cutbacks, according to Fitch Ratings.

R&D spending for companies such as Bristol-Myers, Pfizer and Merck will likely be restrained in the near term, possibly through timing of late-stage development projects, collaborating with other market participants or the prioritizing of pipeline candidates. Eli Lilly said it would spend heavily on R&D although this company could join its peers should pipeline successes fall short of plan.

Drug development is a high-risk endeavor with significant rates of attrition. The drug industry lives and dies by its ability to introduce innovative, value-added medicines to offset the sales lost as older drugs face generic competition. Successful pipelines depend on how much a company spends on R&D and on how productive that spending is.

Despite the critical nature of R&D to the drug industry, companies also need to live within certain financial constraints. Recent years have been challenging for the branded drug industry, given the magnitude of patent expiries during the period. While R&D budgets are usually the least desirable area for cutbacks, expense cutting has occurred as the industry responded to financial and operational pressures resulting from patent expiries.

While Fitch expects continued restraint on R&D spending, we also believe most cuts have already occurred. The industry faces a somewhat more stable intermediate-term environment as the magnitude of patent expiries becomes slightly less onerous owing to recent successes in the industry's drug development efforts.

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