R&D costs and pharma CEO salaries

SUMMARY:  While pharma CEOs pull tens of millions of dollars in compensation, the return on investment in R&D is dropping. So what will be the legacy of retiring pharma CEOs? Will it be the dividends paid to shareholders, their salaries, or the decline in R&D breakthroughs?

The list of pharma CEO salaries is enough to make one ill with a sickness that prescription medicine can’t cure. At the top of the list is Len Schleifer of Regeneron, who makes over $100 million. Richard Gonzales of AbbVie, made $24 million just for keeping their top-selling drug tied up in patent litigation, so a generic equivalent can’t be made. In the meantime, the ROI on R&D is dropping quickly as new drugs seem elusive to companies.

Could you live off $18 million for the rest of your life? Remember these are annual salaries so these CEOs have built big bank accounts so they can retire quite comfortably despite the fact that real breakthrough drugs are becoming harder to find.

One could make an argument that the pharma industry is allowing our country to get over the pandemic with the development of potentially life-saving vaccines. Still, both Pfizer and Moderna stand to make billions from the sale of these vaccines. But where will that money go? Will they give more to R&D, or will they use it to increase stock buybacks and dividends?

R&D Challenges

President Biden’s hope for a cancer moonshot is wel intentioned but may be a bigger challenge than putting a man on the moon. Cancer actually includes a large group of diseases. Each person’s cancer may have many different causes. Despite advances in diagnosis and treatment, doctors still have much to learn about what triggers a cell to become cancerous and why some people who have cancer do better than others. In addition, cancer is a moving target. Cancer cells may continue to mutate and change during the course of the disease. This may lead to the cancer cells no longer responding to the chemotherapy drugs or radiation treatments that were given initially.

A pharma company could spend billions developing a treatment while never developing a drug that puts cancer in remission. Does this mean they need to spend more or less on R&D? The answer is bith.

New digital technologies are helping people in R&D develop new drugs via blockchain simulations. Digital clinical trials are also saving money, but that’s not enough. As the development of the COVID vaccines shows, we need new thinking on how to attack different cancers in different patients. We need that common denominator that punches cancer cells in the gut while allowing patients to live the lives they want to live.

As this chart from the Economist shows, the return on investment for pharma R&D has declined in recent years. Smaller firms outperformed the giants and have an average 9.3% R&D return because they can both attract people who aren’t limited by big pharma bureaucracy and focus on specific health issues.

The Economist forgot to mention that a lot of new drugs are being developed through mergers and acquisitions of smaller companies and that many drugs fail in early clinical trials before a lot of money has been spent.

The challenge for pharma CEOs is going to be one of principle: do we spend more money on R&D to develop new drugs or cut R&D so we can please The Street? You can’t do both.

The challenge for the public is, “should pharma CEOs be making tens of millions of dollars in compensation while we are all paying more for prescription drugs? If that money is going to R&D, I think they would agree it’s worth it, but if that money is being used for stock buybacks, like the tax cuts enacted by Trump, then there is a major disconnect.

Invest more in R&D when new drugs seem elusive and keep investing until we can say “because patients are worth it”.