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News : Innovation Last Updated: Feb 15, 2011 - 3:01 PM

Innovation: The woes of world's top R&D spenders - - Nokia and Big Pharma
By Michael Hennigan, Founder and Editor of Finfacts
Feb 13, 2011 - 5:41 AM

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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.”

We 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.

Apple, the world's most valuable high-tech company, got an 81st rank with an intensity of 3.1% 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 Malaysia.

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 discovered there.

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 $8.0-8.5bn.

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.

Pharmaceutical Industry: Proportion of sales from newer drugs drops; $65bn spent in US on R&D in 2009; 200,000 jobs to go in 2009-2015

US Food and Drug Administration approved as many drugs in 1950 as it did in 2008; Pfizer's CEO announces retirement

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 resisted.

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 added.

According to a Reuters report on the industry, 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 exclusivity.

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.

  • Exports from the pharmaceutical/medical devices sector grew by 38% in the period 2004-2010 but direct employment remained in the low 40,000's;

  • Exports from the pharmaceutical/medical devices sector account for over 60% of merchandise exports (in 2009, merchandise exports were 55% of total exports including services);

  • So about 20 large mainly American-owned firms are responsible for about 33% of total Irish annual exports.

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© Copyright 2011 by Finfacts.com

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