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Pharmaceuticals: With in-house R&D pared down, companies will look outside for innovation

by Lisa M. Jarvis
January 13, 2014 | A version of this story appeared in Volume 92, Issue 2


Although 2013 brought an end to the parade of patent losses that had for several years plagued the pharmaceutical industry, drug companies still struggled during the year with how to reinvigorate their portfolios. Big pharma firms will continue in 2014 to reconsider their R&D strategies, focusing on fewer therapeutic areas and relying more on outside sources to fill their new-product pipelines.

After a decade spent diversifying their businesses, major drug firms began in 2013 to reverse course to concentrate on what they, in theory, do best: develop new medicines.

Among the most notable shake-ups last year was the creation of AbbVie, the innovative medicines business that split off of Abbott Laboratories last January. Pfizer unveiled plans to break into three units: innovative pharmaceuticals; generic drugs; and vaccines, oncology, and consumer health care.

The trend to pare back businesses will continue this year, says Patrick Flochel, global pharmaceuticals sector leader at the consulting firm Ernst & Young. Companies will sell off products and units, while also potentially revamping their portfolios of drug candidates.

Such revamps often come at the expense of jobs, and last year was no different. Merck & Co. and AstraZeneca both announced major job cuts in 2013, while other big pharma firms made smaller, but still significant, layoffs.

Flochel expects the headcount reductions to continue in 2014 but says they will be weighted toward sales, manufacturing, and supply-chain positions, rather than the deep cuts to R&D seen in recent years. “There’s a limit to how much you can cut because then you cut in the muscle rather than the fat,” he says.

With smaller internal R&D operations, drug firms will rely even more heavily on academia and biotech firms to fill their early-stage pipelines. As such, several big pharma firms will be looking to recently created external innovation offices in life sciences hubs around the globe in order to cultivate relationships with key scientists.

But along with that greater reliance on external research comes a need to support it. Although the public markets opened up in 2013, the cash primarily went to companies with drug candidates that have already undergone significant clinical testing. Entrepreneurs continue to have a tough time finding the funds for early-stage projects.

Venture firms willing to put money into discovery-stage programs “are few and far between,” observes Jay Lichter, managing director of the venture capital firm Avalon Ventures. “It will be incumbent upon the pharmaceutical industry to figure out creative ways to support start-ups,” he says.


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