Developing new drugs represents an enormous expense for pharma companies with top firms spending up to £4bn (€6bn) a year on R&D, according to new industry report.
New data gathered by the Financial Times Research Centre shows that on average, the top 30 pharma firms spent almost 17 per cent of sales on research last year, not so surprising considering that bringing a new drug to market can now cost anything between $900m (€715m) and $1.2b.
As expected, the big spender is Pfizer, with over 14 per cent of its £27bn sales invested in R&D in 2005, followed by GlaxoSmithKline with over £3bn spent on research during the same year, and French giant Sanofi-Aventis with £2.7bn.
Meanwhile, it seems that Big Pharma is changing its approach on how to spend it.
The report suggests that relying on in-house research and development only has become increasingly complex in terms of budget and resources and it is now almost unviable for companies to have control over all the aspects of drug development.
As a result, companies are staying away from big mergers with other giant companies and are instead buying smaller biotech companies, entering joint ventures or in-licensing drugs, according to the report.
"Shifting away from over-reliance on in-house R&D makes sense, but brings new risks too," the report said.
This is due to the failure of the majority of biotech start-ups and to the fact that academic researchers now try to commercialise their work at a much earlier stage.
According to the report, this leads to companies rushing to buy overpriced acquisitions of academic ventures with no real product in sight.
Meanwhile, the report also shows that the biggest players are not necessarily the most profitable.
The most profitable companies last year were either young biotech firms with successful drugs or reputable pharma companies with off shored operations taking advantage of the lower costs and high-skill base of developing countries.
Leading the bunch is Imcor Pharmaceutical, a US based company formerly known as Photogen Technologies, with a return on capital employed (ROCE) of over 600 per cent, followed by Canadian firm Medmira with a 270 per cent ROCE for 2005.
In addition, the report also provides a snapshot of the world's biggest players in the pharmaceutical industry. Here again Pfizer is the leader with a market capitalisation of over $100bn. GlaxoSmithKline is just behind with a stock-market value of $85bn.
Roche Holding comes third with a stock market value of almost $84bn. Novartis, Sanofi-Aventis and AstraZeneca come in next with $79bn, $63bn and $52bn respectively.