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While annual reports show broadly similar R&D strategies among Merck & Co., Pfizer, Johnson & Johnson and AbbVie, their 2020–2023 financial metrics reveal a concerning trend. Merck & Co. may be the new top dog of Big Pharma, but the firm’s 1.4% revenue growth in 2023 represents a significant slowdown. Pfizer’s 41.7% revenue decline from its COVID-inflated $100.3 billion peak in 2022 is even more stark. Similarly, J&J’s modest 4.2% growth and AbbVie’s 6.4% revenue dip also signal a departure from previous patterns.
In raw numbers, R&D spending in the pharmaceutical industry has surged over the past few decades, jumping from about $30 billion across the industry to more than $200 billion annually by the 2020s. Despite record-breaking R&D spending hitting $161 billion in 2023, marking a nearly 50% increase since 2018, as IQVIA has noted, revenue growth is broadly plateauing. Deloitte’s 2023 analysis reveals that the average projected return on investment (ROI) for R&D fell from 6.8% in 2021 to just 1.2% in 2022 for the top 20 pharma companies. This decline raises questions about whether Big Pharma’s R&D spending itself needs reengineering.
Merck & Co.’s R&D strategy has made it the top Big Pharma company, but can momentum continue?
Merck & Co. has consistently been one of the top pharmaceutical companies in terms of R&D spending. In 2022, it invested $13.5 billion in R&D, second only to Roche’s $14.7 billion. But in 2023, Merck dramatically increased its R&D expenditure to $30.5 billion, primarily as a result of charges associated with business development. That figure includes significant investments such as $10.2 billion for the acquisition of Prometheus Biosciences, another $5.5 billion related to forging a collaboration with Daiichi Sankyo, and $1.2 billion for acquiring Imago BioSciences. These charges represent a steep increase from the aggregate charges of $690 million in 2022, which were related to collaboration and licensing agreements with Moderna, Orna Therapeutics and Orion. The surge in R&D expenses also reflects higher development spending, including for recently acquired programs, and increased compensation and benefit costs resulting from a rise in headcount.
Meanwhile, the company’s 1.4% revenue growth in 2023 is significantly lower than the steady growth it experienced from 2020-2022, but the figure was still sufficient to make it the top Big Pharma company of the year on a revenue basis.
Merck & Co.’s most recent annual report acknowledges a continued reliance on Keytruda for revenue generation but also outlines plans to expand its pipeline and bolster long-term growth prospects. The Prometheus acquisition provide Merck access to tulisokibart (MK-7240, formerly PRA023), a humanized monoclonal antibody targeting tumor necrosis factor-like ligand 1A (TL1A), associated with intestinal inflammation and fibrosis. A Phase 3 study in ulcerative colitis is underway. Additionally, Merck has forged a partnership with Daiichi Sankyo for antibody-drug conjugates (ADCs). In October 2023, the two firms entered a global development agreement for three of Daiichi Sankyo’s DXd ADCs candidates: patritumab deruxtecan (HER3-DXd), ifinatamab deruxtecan (I-DXd), and raludotatug deruxtecan (R-DXd). The companies plan on co-developing these ADCs, in various stages of clinical development for treating multiple solid tumors. Merck made upfront payments totaling $4.0 billion and will make two one-time continuation payments of $750 million each to Daiichi Sankyo.
Analysts are generally moderately upbeat about Merck & Co.’s R&D strategy, given its pipeline. The company continues to diversify its oncology focus across immuno-oncology, precision molecular targeting, and tissue targeting, while also expanding into new therapeutic areas like vaccines, cardiometabolic diseases, and neurosciences. The company demonstrates confidence in its pipeline potential for generating significant revenue, particularly from small molecules in oncology, antibody-drug conjugates, and strategic partnerships like those with Moderna and Daiichi Sankyo. Merck also sees substantial opportunities in cardiometabolic treatments, specifically with their TL1A antibody for conditions like ulcerative colitis and Crohn’s disease. The company anticipates $20 billion in oncology sales thanks to the ADC and Moderna partnerships.
Pfizer’s COVID-19 rollercoaster
Pfizer’s R&D investment and revenue took a wild ride between 2020 and 2023, directly influenced by the success of its COVID-19 vaccine. In 2020, the company’s R&D to revenue ratio soared to 22.5%, the highest among its competitors. However, this ratio tumbled to 11.4% in 2022 before partially recovering to 18.3% in 2023. This volatility mirrors the vaccine’s impact on Pfizer’s revenue, which nearly doubled from $41.9 billion in 2020 to a peak of $100.3 billion in 2022 and then declined to $58.5 billion in 2023. Pfizer’s R&D spending surged from $9.4 billion in 2020 to $13.8 billion in 2021 to fuel vaccine development, then dropped with declining revenue to $11.4 billion and $10.7 billion in 2022 and 2023, respectively.
Pfizer faces the challenge of maintaining its innovation momentum after this unprecedented growth surge. The company’s reliance on COVID-19 product revenue led to significant workforce reductions as part of a global cost-cutting initiative. Notable layoffs occurred at facilities in South San Francisco, Kalamazoo, Groton, Peapack, and Pearl River, as well as locations in Ireland and the U.K. Despite these challenges, Pfizer has also made a string of significant M&A deals in recent years, most notably its acquisition of Seagen in 2023 for $44.2 billion to bolster its oncology portfolio and pipeline.
The company’s stock has fallen consistently for much of the past year, dropping by about one-third to $26.79 as of March 7. Pfizer’s ambition to capture the obesity treatment market, despite its potentially vast potential, has encountered analyst skepticism. Additionally, the pressure from expiring patents on key drugs could erode future revenue streams. Some analysts, however, suggest that these headwinds could be temporary.
J&J’s slow and steady revenue climb
Johnson & Johnson’s (J&J) financial performance from 2020 to 2023 demonstrates its resilience. Pharma revenue climbed steadily from $45.6 billion to $54.8 billion, representing a 20.2% growth over four years. Still, 4.2% pharma revenue growth in 2023 represents a slowdown from the 10-15% annual increases seen in the prior three years.
J&J consistently invests between 20.9% and 22.8% of its revenue in R&D. This translates to an annual investment ranging from $9.5 billion to $11.9 billion. To maximize its R&D impact, the company has strategically narrowed the focus of its Innovative Medicine segment to high-potential areas like immunology, neuroscience, oncology, and cardiovascular and metabolic diseases.
The 2023 annual report acknowledges challenges and occasional delays in the company’s development pipeline. To address this, J&J actively explores integrating data science, machine learning, and other forms of AI into its development and operations. That year, it strategically exited several programs in infectious diseases, vaccines, hepatitis, and HIV. Despite these shifts, 2023 saw several regulatory submissions and approvals for new drugs and additional indications.
Analysts are generally bullish on J&J in general, even with JNJ’s stock trading below its target price.
AbbVie experiences revenue dip after growth streak
AbbVie’s R&D investment from 2020 to 2023 was among the lowest of its peers (11.2%-14.3% of revenue). Despite its thriftiness in this area, the company experienced initial revenue growth ($45.8B in 2020 to $58.1B in 2022) before a decline in 2023 ($54.3B). This dip is primarily attributed to the expiration of patents on its blockbuster drug Humira and the subsequent rise of biosimilar competition.
The company’s 6.4% revenue decline in 2023 breaks a multi-year growth trajectory, with revenues previously expanding from $45.8 billion in 2020 to $58.1 billion in 2022.
AbbVie projects strong revenue growth despite the challenges posed by Humira’s loss of exclusivity. Their adaptable Humira strategy, along with their multi-pronged R&D approach focused on innovation, collaborations, and acquisitions, position the company for continued success in the evolving pharmaceutical landscape.
Its pipeline includes roughly 90 potential products in development individually or under collaboration or license agreements. This expansive pipeline spans several key therapeutic areas, including immunology, oncology, aesthetics, neuroscience, and eye care.
How Big Pharma firms’ R&D spending levels stack up
Analysis of top pharma firms’ financials highlights consistent R&D spending in recent years, ranging from billions to tens of billions of dollars annually. In 2023, Roche’s pharma division and Novartis had the highest R&D spending at $14.7 billion and $13.7 billion, respectively, while Sanofi ($7.3 billion) and Bristol Myers Squibb ($9.3 billion) had lower expenditures. Most of the companies increased R&D expenditure from 2020 to 2023. The R&D to Revenue ratio varies among top pharma companies. In 2023, AstraZeneca and Novartis had the highest ratios at roughly 23.9% and 30.1%, respectively, while Pfizer and J&J had lower ratios at around 18.3% and 21.8%, respectively. Check out this feature describing the R&D spending of Big Pharma firms in 2022.
The new R&D playbook for Big Pharma
The recent lukewarm pace of Big Pharma giants’ growth highlights the need for novel R&D strategies. Key challenges include declining R&D returns, looming patent cliffs for blockbusters, and rising development costs. To overcome these hurdles, Big Pharma must take decisive action. This includes calculated strategic M&A and partnerships, as well as a rapid upscaling of data science and AI capabilities. While building the necessary talent and infrastructure poses a challenge, it’s essential. Additionally, focusing on fields with significant unmet needs, like oncology, neuroscience, rare diseases, and gene editing therapies, offers opportunities for breakthrough innovation. Early signs of increased pipeline success rates, as noted in IQVIA’s report, demonstrate the potential of this strategic shift. While 2023 clinical trial starts fell 15% compared to the prior year, the composite success rate increased to 10.8%, driven by advances in therapeutic areas like oncology and rare diseases.