Healthcare Economy

"Merck & Co. CEO Ken Frazier took steps that are likely to anger Wall Street, saying the company won't (emphasis mine) make the cuts necessary to meet its long-term forecasts. Instead, it will focus on investing in drug development to drive growth after spending $8.1 billion on R&D last year." Merck's annual revenue is $46 billion.

"By contrast, Ian Read, Pfizer's CEO, pleased shareholders by vowing to slash the company's spending on drug R&D by about a third and to spend an additional $5 billion to buy back its stock. Pfizer spent $9.4 billion on R&D last year, but plans to cut it to as little as $6.5 billion in 2012." Pfizer's annual sales is $65 billion.
Investors punished Merck with a drop in its share price the day this was announced, while Pfizer's stock went up smartly.

The divergent R&D models can be summarized thus:

Model A - Invest in drug research & development for long-term growth. Based on the assumption that cutting costs is at the expense of top-line and the long-term growth of the company. Shows confidence in the company's ability in generate a promising pipeline.

Model B - Leave it to others to do the basic research, and see if they can acquire or license those that show a demonstration of strong potential. Based on the premise that much R&D spending isn't cost effective, the approval process faces long odds for success, and provides returns only if one or more drugs becomes a blockbuster.

Each strategy carries its own risks. By most estimates, bringing a new molecule to market costs more than $1 billion! The chances of hitting upon a blockbuster drug that can recoup that investment are low. On the other hand, it could become expensive to acquire new products at a later stage of their lifecycle. 

The new few years will show us which model carries the day!