The company feels it needs to cut R&D spend to maintain profitability as revenues from its marketed products fall. However, the reduction breaks the trend across the pharmaceutical industry and may have long-term repercussions for Sankyo's competitiveness, as well as restricting its efforts to break into global markets.
On 31 July 2001, Sankyo, Japan's second largest pharmaceutical company by ethical sales, announced its intention to restructure its R&D operations to drive down costs and maintain levels of profitability, triggering a credit rating downgrade from Moody's. The announcement comes two months after Sankyo announced that it would shed over 15% of its work force in a bid to cut costs.
Behind Sankyo's move to decrease R&D expenditure is the decline of the company's currently marketed product portfolio. Sales fell by 4.5% from $4,199 million in 1999 to $4,012 million in 2000. The weak performance was largely driven by slowing sales of Mevalotin (pravastatin), which accounted for an estimated 42.3% or $1,698 million of Sankyo's ethical revenue stream in 2000.
The decreasing demand for Mevalotin will have a wider impact across Sankyo's cardiovascular portfolio, particularly before the company can switch customers to itavastatin, its follow up statin which will be marketed in conjunction with Novartis. With cardiovascular products contributing to 57.5% of ethical revenue in 1999, the R&D cuts will lead to further entrenchment within the cardiovascular market and significantly less diversification of revenues.
Culling R&D expenditure and focusing on cardiovascular at the expense of franchises such as CNS and anti-infectives has significant ramifications for Sankyo's long-term competitive potential. During 2000, the average increase in R&D spend for the top 18 pharmaceutical companies was over 9.3%, with Pharmacia the single company decreasing its investment in R&D.
Japanese pharma companies are currently making efforts to diversify on a geographical basis, due to the weakening domestic market, Sankyo, among other Japanese firms, has undertaken sizeable investment into expanding overseas marketing and sales operations - a factor which will further compromise the company's ability to maintain a competitive advantage in R&D.