The Pharmaceutical Industry's 10 Biggest R&D Budgets

Innovation is everything when it comes to the pharmaceutical sector. Behind those glorious 75%-plus gross margins associated with branded and patented drugs is billions of dollars worth of research and development money that keeps the sector running.

Source: Wikimedia Commons.

Ultimately, branded drugs have a finite time period where they can be sold exclusively without generic competition of 20 years. However, the clock on patented drugs starts ticking when the Food and Drug Administration grants a biopharmaceutical company the right to investigate a new drug in clinical trials. Therefore, you can knock off an average of eight to 10 years from of a drugs' patented lifespan before it even makes it to market. This should give you a better indication of why innovation and R&D spending is so vital to big pharmaceutical companies.

According to research firm Kalorama Information, global R&D spending in the pharmaceutical sector increased from just $35.3 billion in 1996 to more than $95 billion in 2009, so we know the investable money is there. Let's have a look at the 10 biggest pharmaceuticals R&D budgets in fiscal 2012 and see how they compare to corporate R&D spending in 2009.


2012 R&D Spending

% Change From 2009


$9.3 billion



$9.1 billion



$8.5 billion


Johnson & Johnson

$7.7 billion



$6.7 billion



$6.7 billion



$5.6 billion


Eli Lilly

$5.3 billion



$4.5 billion


Bristol-Myers Squibb

$3.9 billion


Source: Individual company annual reports for 2012 R&D spending; 2009 comparison data courtesy of FiercePharma. Data rounded for convenience.

A big surprise
Probably the biggest surprise here was Roche jumping out as the No. 1 spender on R&D. I was already shocked to see it ranked No. 1 on FiercePharma's analysis back in 2009, but was even more surprised to see the company retain its top ranking three years later. Clearly the big R&D driver for Roche, and the disease opportunity that presents enormous growth from a profit and quality-of-life standpoint, is its cancer research.

According to Roche's pipeline statistics, which were current as of July 25, it has 113 ongoing clinical studies of which 73 are tied to its oncology department. Few of its studies should draw more attention than its partnership with ImmunoGen, which combines existing chemotherapy agents like Herceptin with ImmunoGen's antibody-drug conjugates that are capable of carrying this toxin directly to targeted cancer cells. More R&D spending than its peers won't guarantee it success, but it's hard to see Roche struggling given the success of Avastin and Herceptin as well as a robust and diverse pipeline.

Two big pharmas demonstrating big R&D growth
Merck and Eli Lilly may not spend nearly as much as Roche on R&D, but they stand out in their own way for having the biggest R&D spending jump since 2009. Of course, the downside to this is R&D spending is an expense, which ultimately lowers profitability. But, then again, there is no profitability without a sustainable pipeline.

Merck showed the biggest jump by far in R&D spending at 52% and has, according to its website, 22 experimental drugs currently in mid-stage trials, 13 in phase 3, and an additional eight currently under review by the FDA. Perhaps no two experimental therapies stand out that could offer more of an immediate impact (assuming approval) than sleep-maintenance drug suvorexant and osteoarthritis therapy odanacatib.

Suvorexant was recommended for approval by a vote of 12-4 by the FDA's panel, but was ultimately rejected by the FDA because of the high dosage and its potential to cause somnolence in patients. When Merck resubmits at a 10 mg dose, it could have a $1 billion to $2 billion drug on its hands assuming it can get the drug approved.

Odanacatib, on the other hand, is all set for an early 2014 new drug application filing with an independent monitoring committee stopping late-stage trials early because the drug was proving so effective. With peak sales potential of $3 billion, it could easily help stem the downside associated with the patent cliff.

For Eli Lilly, the boost in R&D is a matter of survival as it'll see nearly three-quarters of its branded pharmaceutical business exposed to generic competition between 2010 and 2017. Currently, Lilly has 22 drugs in early stage trials, 27 in mid-stage trials, 10 in late-stage, and three under review as new drug applicants. However, it's also had a rocky history of late with its Alzheimer's drug solanezumab disappointing in late-stage studies last year, the company scrapping a mid-stage Alzheimer's BACE inhibitor known as LY2886721 in June , and relapsing lymphoma drug enzastaurin failing in a late-stage study in May. This is a case where higher R&D spending hasn't necessarily translated into a growing pipeline... not yet, at least!

An alternative strategy
At the bottom of the list you'll notice Bristol-Myers Squibb with $3.9 billion in R&D spending last year, a 12% increase over 2009. What's really different about Bristol-Myers relative to the rest of its peers is that it's planning to grow its pipeline more through acquisitions than wholly through organic research (known as its string of pearls strategy). There can be both upsides and downsides to this approach, though.

In January 2012, Bristol-Myers agreed to purchase Inhibitex for $2.5 billion to get ahold of its experimental early stage hepatitis-C therapy known as INX-189. However, the reach for early stage success would come back to haunt Bristol-Myers with BMS-986094 (INX-189 was renamed to BMS-986094 after the acquisition) causing the death of a patient and hospitalizing others. All told, the drug was shelved and $1.8 billion of the transaction was written off.

Perhaps Bristol-Myers should rethink its strategy because organic partnership advancements have really been the most exciting source of its future growth. The recent approval of blood-thinner Eliquis with Pfizer has peak sales potential of up to $5 billion while its partnership with AstraZeneca has kicked out a potential blockbuster in Forxiga, an SGLT-2 inhibitor for type 2 diabetes that's currently approved in Europe. If you're listening Bristol-Myers, stick to the buddy system... it works!

An ominous decline
Last, but not least, Novartis was the odd one out delivering the only R&D spending decline of the group. Part of this could be because Novartis' patent cliff isn't nearly as steep over the coming years as its peers.

Another big reason to potentially spend less on R&D is if your success rate is higher than that of your peers. As it relates to obtaining drugs with the highly coveted breakthrough therapy designation, no company is more prolific than Novartis.

Novartis' LDK378 is a true standout as a potential breakthrough treatment for ALK-positive non-small-cell lung cancer. In a 114-patient early stage study, the highest dosage delivered an overall response rate of 60% and could give the company enough data to file for a new drug application as early as next year.

Serelaxin, in turn, reduced mortality relates as an acute heart failure therapy by 37% in a late-stage trial. If approved, it would become the first new acute heart failure drug in more than two decades.

Novartis also plays a key role in Pfizer's potential metastatic breast cancer breakthrough therapy palbociclib. You see, Novartis' Femara is given in conjunction with palbociclib and would simply come along for the ride should it be approved by the FDA. It's certainly a bit odd to see Novartis' spending down, but it's hard to argue against this success.

The takeaway
So what did we learn here? Primarily that R&D spending isn't a guarantee of success, but it does serve as a good starting point for research. Ultimately, partnerships and pipeline diversity appear to hold the biggest key to whether a pharmaceutical company is successful in replacing expiring therapies.

The path to riches
One of the best parts of owning big pharma stocks is their attractive dividends, but smart investors know the importance of diversifying -- seeking high-yielding stocks from multiple industries. The Motley Fool's special free report "Secure Your Future With 9 Rock-Solid Dividend Stocks" outlines the Fool's favorite dependable dividend-paying stocks across all sectors. Grab your free copy by clicking here.

The article The Pharmaceutical Industry's 10 Biggest R&D Budgets originally appeared on

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of, and recommends Johnson & Johnson. It also recommends ImmunoGen. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.