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Nokia President and CEO Stephen Elop (left) and his ex-boss, Microsoft CEO Steve Ballmer at the joint Microsoft – Nokia partnership announcement, London, Feb. 11, 2011.
Innovation: In London this week the
spotlight was on the woes of some of the world's biggest R&D spenders, Nokia and
global pharmaceutical leaders, known collectively as Big Pharma.
Conventional wisdom says that
countries should spend at least 3% of GDP (gross domestic product) on R&D
(research and development) but data on company spending shows that as the
Beatles' song goes, "money can't buy me love," it could be a similar
refrain when it comes to research.
At a country level, according to the
OECD Factbook 2010, R&D spending
in 2008 (pdf) as a percentage of GDP, was 4.86% in Israel; 3.75% in Sweden;
3.49% in Finland; 2.77% in US; 2.53% in Germany (2007); 2.72% in Denmark; 1.88%
in UK and 1.43% in Ireland.
Pleaders for more Irish public
spending on R&D should not get away with basing their case on the low Irish
metric. It is in fact a respectable level given the overwhelming dominance of
foreign firms in the Irish internationally tradeable goods and services sectors
and the related unsurprising situation that very little original research is
done by these firms in Ireland.
Last November, former Intel CEO Craig Barrett said in Galway that a 3% target of investment of Ireland’s GDP into
research and development is no longer a reasonable target and that we
“have now to compete with the rest of the world to get paid.”
said at that time that Dr. Craig Barrett is an accomplished engineer who
headed one of the world's most successful companies but his advice on Ireland
should be ignored.
As for company R&D spending,
in a ranking of 1,000 global firms, Swiss pharmaceutical giant spent 20.1%
of revenues on R&D in 2009 followed by Microsoft at 15.4% and Nokia at 14.4%.
Pfizer, the world's biggest pharmaceutical firm, was the fifth biggest spender
with an intensity of 15.5% of revenues.
Nokia's R&D spend for 2010 on mobile
was $3.9bn - - almost three times the average of its rivals’, according to
Bernstein Research estimates.
Apple launched the iPhone in 2007, a
smartphone that is in effect the modern microcomputer.
Key to its success are the
applications written by the large developer population in the US and with the
launch last year of the iPhone 4, it ate into Nokia's once dominant markets such as
The Economist says that while Nokia
still ships a third of all handsets, Apple astonishingly pulls in more than half
of the profits, despite having a market share of barely 4%.
Apart from the challenge in the
smartphone market, the Finnish firm is also under siege in Asia at the commodity
end of the market.
Bernstein analyst Pierre Ferragu
said Nokia’s business appears to be melting like an ice cube. “At this stage,
we believe that even a good success of Symbian^3 (its existing main software
platform) would barely stabilize the
business,” he says. “A real comeback will need much more effort … and a
lot more time, unlikely to happen in the next couple of years, in our view.”
As for Big Pharma, on Feb 1st,
Pfizer shocked the UK by announcing the closure of its research facility in
Sandwich, Kent with the loss of 2,400 jobs.
The facility in the impressive
Tudor-era town, is Pfizer's biggest R&D facility in Europe and the largest R&D
site of any foreign-owned drugmaker in the UK. It has been a base for drug
discovery at the group since 1954 and the erectile dysfunction drug Viagra was
Pfizer will lose its patent for
Viagra in March, 2012, at which point any drug company will be able to make and
sell a cheap generic version of the blockbuster. Pfizer manufactures the active
pharmaceutical ingredients for Viagra at Ringaskiddy, Cork Ireland, which
accounts for about 15% of its total output.
Besides closing the Sandwich facility, Pfizer
said it would cut its 2012 R&D spending by as much as $2bn from a planned
Finfacts has in the past year
reported that more than $65bn was spent by Big Pharma on R&D in the United
States alone in 2009, while the number new drugs launched annually has fallen
44% since 1997.
In a scathing memo to employees, Nokia CEO Stephen Elop said the company “fell behind, missed big trends, and lost time.” Matthew Thornton of Avian Securities and David Garrity of GVA Research weigh in:
Last August, Eli Lilly, which has an Irish
plant at Dunderrow, near Kinsale, halted two late-stage clinical trials of an
experimental Alzheimer’s treatment.
The drugs firm has had no successful launch
in the past five years and the New York Times reported that Lilly is
already facing the biggest “patent cliff” in the industry. Five of its
six leading products face generic competition in the next four years. Barbara
Ryan, a stock analyst with Deutsche Bank, said Lilly’s earnings will decline 35%
by 2014 unless it makes one of the larger acquisitions it has historically
In London this week at an Economist
conference, Lilly CEO John Lechleiter said in regard to investors' impatience:
"They see us as investing large sums of money and, in American baseball
parlance, hitting for the fences with less hope of being able to achieve
blockbuster status. There's less belief on their part that we would make the
sort of returns that would make that sort of risk justifiable."
"I am absolutely convinced that this will
be the last generation of R&D spending unless a decent return is generated,"
David Redfern, head of strategy at GlaxoSmithKline, Europe's biggest drugs firm,
told the same conference on Thursday.
"The industry will not go forward another
10 years spending the money that it has been spending unless the return to
investors is dramatically greater than it has been in the last 10 years," he
According to a Reuters report on the
Big Pharma, Small R&D (pdf), Big Pharma has to rethink its business model as
a huge number of patents are set to expire over the next five years. As patents
run out on blockbuster prescription tablets like Pfizer's $12bn-a-year
cholesterol medicine Lipitor and AstraZeneca's $5bn heartburn pill Nexium,
cut-price generics are sure to rush in and slash margins. Between now and 2015,
products with sales of more than $142bn will face copycat competition, according
to IMS Health, the leading global supplier of prescription drug data.
It can cost up to $2bn to launch a potential blockbuster drug
and according to US investment bank, Morgan Stanley, $1 invested by a big
drugmaker in a product licensed from outside researchers will deliver three
times as much value as the same dollar invested in in-house research.
As for Nokia, Europe's most successful technology company, it
too plans to cut R&D spending after billions have flowed down a sinkhole in
developing software platforms.
On Friday in London, the new CEO, Canadian Stephen Elop who was
hired from Microsoft last year, announced an alliance with his old firm to use
the Windows Phone 7 software platform on its smartphones.
It is a big boost for Microsoft who has seen its old rival
Apple, steal a huge march on it in recent years.
Microsoft will get between $10 to $20 per Nokia handset sold,
the Bing search engine will we used and the humbled Nokia does not even have
The upside for Nokia is that it may be able to get traction in
the US market and be able to offer a much wider array of applications.
Nokia's woes are not good news for Finland while the challenges
facing Big Pharma are not good news for Ireland.
from the pharmaceutical/medical devices sector grew by 38% in the period
2004-2010 but direct employment remained in
the low 40,000's;
from the pharmaceutical/medical devices sector account for over 60% of
merchandise exports (in 2009, merchandise exports were 55% of total exports
20 large mainly American-owned firms are responsible for about 33% of total
Irish annual exports.