The crackerjack Calcbench research team then wondered: how accurate is that hypothesis? What data do we have that might suggest where things are going? 

To answer those questions, Calcbench examined a group of roughly 120 pharmaceutical firms making at least $250 million in annual revenue, tracking their R&D spending as a percentage of revenue for the last 14 quarters. See Figure 1, below.

The blue line is actual spending per quarter, and as you can see it has fluctuated from 15 to 25 percent since the start of 2021. The red line is the underlying trend, and that has been gliding up nicely, even though R&D spending levels have gyrated more wildly in the last year or so.

But that’s not the whole tale, is it? We also looked at trends in free cash flow for that same group of pharmaceutical firms, since free cash flow tells investors how much more money the company could devote to various projects — like, say, new R&D spending. See Figure 2, below.

Oh dear, that’s not good at all. Free cash flow has clearly been on a downward path. If it continues on that trajectory, pharma companies are bound to feel a spending squeeze. Yes, preserving R&D is likely to be a priority; but pressure is pressure, so perhaps Charles River Labs’ warning about an R&D slowdown should not be a surprise after all. 

Some fussbuckets out there will inevitably say that free cash flow fluctuates too wildly from quarter to quarter, and measuring it annually would be more productive. OK then, see Figure 3.

Ack! Free cash flow dropped 17.2 percent from 2022 to 2023! That puts 2023 spending back on par with 2020, the whack-a-doo year of pandemic disruptions. 

The question now is whether that decline in free cash flow will continue through the rest of 2024. If it does, and if the pharma industry’s R&D spending goes into decline for some unknown period — well, that’s not the end of the world, but it does lead to certain strategic questions analysts might want to ponder. 

For example, big pharma might decide to spend more on acquisitions, scooping up privately held pharma or life science startups that are targeting one specific product that might make a nice addition to the acquirer’s pipeline. That’s a time-honored strategy for this sector; maybe it will come back in vogue.

Calcbench can’t predict that future, of course. But we do have all the data you need to ponder the future in more precise terms, and then tailor your investment or financial planning decisions to follow.