M a n a g e m e n t of Industrial Research in a Period of Economic Change M . L. TASNTER, Director, Sterling-Winthrop
Research Institute,
and Vice President, Sterling Drug, Inc., Re\\i-2sse\aer, Ν. Υ. 9 ^%>, Writîng-nduring the recent Interval—when industriaS indexes w e r e plunging sharply d o w n w a r d , the author h a s suggested a g e n e r a l p l a n of action d e signed to cope w i t h the problems created w h e n economic depression threatens
JL HE management of industrial research in a period of economic change involves more than consideration of means by which to meet a threatened financial stringency. Rather, there are three major research management problems at such a time. One is the short-term problem of how to meet an impending depression, assuming that such a slump actually makes itself seriously felt in the pharmaceutical industry. The other two, both long range and of considerably greater importance, are posed by government incursion into the field of medical research and the trend to socialized medicine. Business Recession An idea of the normal pattern of change during a business slump m a y be gained by glancing backward at the years 1930-33. Completely reliable detailed figures of the effects on the pharmaceutical industry are not available for that period. However, Maurice Holland has summarized the changes that took place i n research and development in industry in general (Dun's Review, 54, 46, December 1946). Holland's figures indicate that the total expenditures for research during the 1930-33 slump dropped materially. The decrease was not caused b y abandonment of research by the firms covered by his survey. Out of 1,600 laboratories, only 150 discontinued activities either through complete stoppage of research or through being merged with other units of the same company. During the same period, 100 new laboratories were established, so that the net change was only a decrease of 50 or about 3 % . However, an important decrease in expenditures was made by diminishing the size of t h e staffs. Out of an estimated total of 30,000 research workers at the beginning of this period, 12,000 were dropped from t h e payrolls. Also of interest were t h e types of research which were particularly stressed during that time. Out of 209 reporting companies, the distribution of emphasis was as follows: 334
(1) (2) (3) (4 (5)
JSiew products 37.7% Improvement of quality 37.0% Heauction of production costs 19.4% !New fields of application 4.5% By-products a n d new materials 1.4%
It will be seen that improvements in the quality of existing products and the development of entirely n e w products made up'about two thirds of the total research efforts in that period. The recent recession affected many consumer-goods lines a n d also some of the capital investment fields. However, it is well known that t h e pharmaceutical industry is much more stable in both its gross business a n d earnings than most other sectors of our economy. This was borne out when pharmaceutical sales volume held up better than general averages. About the only evidence of a recession in pharmaceuticals which could be derived from the figures then available was that an upward trend of continuous sales expansion may have been reduced in rate or checked. An actual decline in volume was reported only by a small number of companies and those were not large. However, it is entirely possible that. if the slump in business had developed further, there may have been greater decreases in the pharmaceutical industry as well. What happens t o research costs in a depression? Approximately one third of the
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cost of research in industry is made u p of relatively fixed charges. These consist of such items a s amortization o n buildings and capital equipment, taxes, expenses of heat, light, water, and power, which are nearly constant as long as a laboratory is kept open. These do n o t change appreciably w i t h the activity of t h e laboratory, since t h e y are governed largely b y t h e size of t h e physical facilities. Another item of expense, amounting to about 1 0 % of the research laboratories' costs, is that for expendable supplies. I n a period of severe depression, the cost of these m a y go d o w n through decreases in their unit prices. However, s u c h declines are apt t o be minor, unless t h e depression is of unprecedented magnitude, since the purchase of research chemicals and laboratory equipment is not to a n y significant extent influenced by their cost. Therefore, there is not t h e pressure for reduction of price which is seen in other types of more highly competitive commodities. Certainly, t h e inventory of supplies, chemicals, and glassware should be worked off until the laboratory is going on as near to a day-to-day basis as is practical without creating shortages and delays. This will have the effect of reducing the cash expenditures during the period of retrenchment. When it appears that the bottom in prices has been reached, t h e inventory
L. TAINTEH
is director
of
Sterling-
±T-L Winthrop Research Institute, Rensselaer, Ν. Υ., and vice president of Sterling Drug, Inc. H e attended the University of I o w a from 1916 to 1920 and put in five years' further study at Stanford University, where he took a n M . D . degree in 1925. He taught there in the department of pharmacology until 1943, w h e n he was invited to come East to direct research at Winthrop Chemi cal Co. I n 1945 h e was asked b y the Egyptian government to visit Cairo to assist in research on tropical diseases. H i s publications number ap proximately 2 0 0 , a n d he holds membership i n a long list of scientific societies.
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should be built u p quickly to a high level to take advantage of the savings t e m p o rarily available. Much of the laboratory equipment and chemicals are such that they could be stockpiled for later use. T h e sums saved in this way might not b e large proportionately but still would b e worth while. Capital expenditures for equipment or expansion of laboratory facilities should b e m a d e , if possible, during times of financial recession. These can b e made most e c o nomically at this period, not only because o f t h e low costs of materials but also b e cause building labor will be more efficient w h e n jobs are scarce. The expenditure of funds for such purposes during periods of retrenchment also helps t o overc o m e the business slump and therefore i s a n antidepression measure of general benefit. However, management may b e loath to dissipate its resources during p e riods of depression. Unless unusually w i s e decisions are made at executive levels, t h e t e n d e n c y will b e to restrict capital e x pansion during such a period. Another question w h i c h should b e faced i s whether, as basic policy, the research e x p e n s e should b e pared in proportion t o t h e decrease in earnings or sales v o l u m e o f the company. If the company i n question has such limited resources that m o n e y c a n n o t be made available for research, t h e n o f course all possible assets must b e h u s b a n d e d as a way of assuring t h e survival of the organization. However, most companies in t h e pharmaceutical indust r y h a v e adequate assets and reserves, s o t h e y c a n take a long-range view e v e n duri n g periods of relatively severe depression. It i s uneconomical to reduce research e x p e n s e by drastically decreasing t h e size o f the staff during such periods of retrenchment. Any general salary reduction, e v e n if applied fairly to all, is destructive t o laboratory morale unless business conditions are so bad that the justification for s u c h a cut is unanimously recognized. T h e alternative is to reduce the number o f investigators t o bring the expenses t o t h e required level. Whenever possible, seniority in the organization should b e g i v e n full consideration in the selection o £ those w h o are to b e retained. T h e a c cumulated experience of a research worker represents a large investment on t h e part o f his company. In losing an employee of m a n y years much more is lost than just a pair of hands. Every effort should b e made t o retain those people w h o s e experience i s particularly valuable. Selections should also b e made on the basis of the present efficiency a n d prospective growth in importance of the scientist. Every research administrator recognizes that all people o n his staff are not equally valuable. Some a r e intelligent, interested, and show initiat i v e a n d good judgment. Others are less useful and d o not have the potentialities f o r long-term development. T h e latter s h o u l d be eliminated at t h e first opportunity; this will raise the laboratory average and permit an increase in t h e tempo o f all. It is quite possible that a depression might stimulate t h e strengthening of the V O L U M E
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Table I. Comparison of National Research and D e v e l o p m e n t Expenditures, 1 9 3 0 - 4 5 (Excluding Atomic E n e r g y ) Percentage of Millions of Dollars Expended Total Expenditures Federal Federal UniverUniverGovern- IndusIndusGoverntry try sities Other sities Other" ment Year Total ment u $116 S 23 12 4 $166 70 1930 $20 $ 7 63 120 20 191 39 13 4 25 7 1932 73 124 172 21 12 11 4 19 8 1934 70 152 218 33 15 11 4 25 8 1936 67 177 264 48 18 11 4 28 11 1938 68 234 345 67 19 9 4 31 13 1940 13 80 83 600 500 2 2 10 10 1941-45'' • State go vemm ents, private foundations, and research institutes, including nonprofit industrial institutes. b Average.
staff in this way so that its net effect might not b e nearly so deleterious as might b e feared. Finally, it should b e considered whether the research effort should be intensified or even expanded to h e l p pull the organization out of the business slump. Certainly, one of the best w a y s to maintain business activity is to have new and improved products which create sales volume b e cause of their greater value or because they fulfill needs w h i c h previously had not been met. Something can b e accomplished b y concentrating on short-term projects. However, it is ordinarily implicit in this type of work that increases in sales w h i c h might be secured by such means are apt to b e modest in nature. I n contrast, if a major contribution can b e m a d e through the development of a brand n e w medicinal which fills a long-felt need, then sales rewards might b e of considerable magnitude, and in the long run b e much more important than the sum of any corresponding number of alternative short-term projects. Another way in w h i c h stability may b e maintained during a period of depression is for the research laboratory to assist in driving down production costs. T h e fact that business is tapering off means that materials which may have been in scarce supply are available more freely and usually at lower cost. It may be possible for production methods to b e modified t o take advantage of the savings made available in this way. T h e result is to cut down the cost of a product and thereby increase its earnings. In t h e case of many proprietary items, in particular, a saving of this sort oftentimes is sufficient to change entirely the profit picture of the product, even though there is n o appreciable change in t h e total sales. Research management has to b e alert t o t h e s e opportunities and make conscious efforts to ferret them out and to induce production directors t o take advantage of them w h e n they become available. The Government in Medical Research Until near the outbreak of the last war, governmental research had been on a relatively modest scale, particularly in the field of pharmaceutical development. Between $20 and $30 million a year were spent by the Government altogether for research, as shown b y the Steelman report.
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1950
Reference to the table will show that, between the years 1930 and 1936, there was no apparent growth in federal research expenditures. However, beginning at that time w h e n the prospects of war became greater, research expenditures of the Government went up very rapidly, and during the war years 1 9 4 1 - 4 5 , they were at an all-time high. During this period, industry did not lag, although the proportionate increase nowhere nearly approached that of the Government. The universities continued to expend sums at their normal peace time rates, except in so far as they were supplied extra federal monies for specialized projects. In 1947, the same source (Table II) reports the Federal Government expending $625 million out of a total national research budget of $1,160 million. This means that well over one half t h e national expenditure for research came directly from t h e Federal Government. T h e universities dropped back t o spending only about 4% of the total.
Table
II. T h e National Research Development Budget, 1947 (Excluding Atomic Energy)
and
(In Millions of Dollars) Expenditures in 1947 Applied Research Basic and Research Development Agency Federal Government War and Navy $ 465 S 35 Departments 105 20 Other departments 440 10 Industry 10 35 University 30 10 Other $1,050 $110 Total
While this tabulation shows that the universities spent $45 million of their own money on research in 1947, Table III shows that industry and the universities spent $425 million of federal funds. It should be noted that these figures do not include those for atomic energy projects. If these were included, the figures would demonstrate a vastly greater federal participation in research. It is apparent that the Federal Government is now doing itself, or hiring outside agencies to carry on, such a large proportion of our total national research that complete domination of this field threatens to be exerted b y our Federal Government within a very few years unless the trend is soon reversed. Such a situation poses a most serious 385
Table I I I . Distribution of F e d e r a l Research F u n d s in 1947 ( In Millions of Dollars ) War and Navy Government laboratories $100 Industrial and university laboratories on contracts 400 Total $500
Other $100 25 S125
problem for industrial research management, since it raises the question of w h e t h e r industry can compete effectively i n t h e pharmaceutical field with t h e Government, not only in the amount of research being done, b u t also in the utilization of such research. It is implicit in this situation that more and more discoveries, not only of a fundamental nature, b u t also of possible therapeutic import, will b e m a d e in the governmental laboratories or through government funds. It is practically certain t h a t no special protection will be provided to industrial research organizations which contribute materially to these governmental discoveries. Therefore, an increasing segment of newer effective medicinal agents will b e available to all manufacturers indiscriminately. T h e manufacture and distribution of a n e w medicinal compound under intense competition from many companies do not ordinarily promise sufficient profit margin to justify substantial investments in research expense nor in t h e expensive e d u cation of the medical profession in t h e use of the n e w compounds. Certainly, if t h e major n e w products a r e to b e available t o all manufacturers, an organization which produces and sells these u n d e r government license without incurring any research * educational expense is going t o operate more economically than one which attempts to develop n e w products through expensive investment in research personnel and facilities followed by training physicians in the applications of t h e new remedies. This situation cannot help b u t seriously impair the quality and a m o u n t of industrial a n d pharmaceutical research over t h e course of time. P a t e n t Problems One way in which such a situation might b e forestalled would b e if t h e Government took out patents on t h e discoveries of its federal researchers, and then m a d e these available t o certain industrial organizations for appropriate development and commercial distribution. T o do this, however, would inevitably mean that there would have to b e some selection of t h e companies which were to market the p r o d ucts. This would inject considerations of favoritism and politics which probably would b e m u c h worse than t h e situation they w e r e intended to correct. It is difficult to see h o w industry can afford to carry out expensive long-range research programs in competition with t h e Federal Government under t h e conditions described w h e n t h e federal monies a r e derived in part from the pharmaceutical firms through their contributions to tax funds. 386
Such a rise of government research creates personnel problems for industrial research laboratories. T h e government laboratories compete for scientific workers with the universities a n d with industry. T h e r e has been little indication so far that the kind of considerations determining the salary scales which can b e offered in industry and universities apply with similar force to those hiring scientific personnel in government. I n the ypast, government scientific services were notorious for being underpaid and the positions were, for that reason and others, oftentimes unattractive. At t h e present time, the situation is quite the reverse. T h e governmental positions offer salaries which are in many instances considerably in excess of those available from university sources a n d in many cases equal to those offered by industry. This is particularly true in the lower brackets where the salary a n d benefits of a government job h a v e a particularly strong appeal to those embarking on a career. As a result, the government is now able to attract scientists of highest ability. This diversion of personnel into tremendously augmented governmental laboratories has created a temporary shortage of well-trained research workers. T h e r e fore, there is such a demand for scientifically trained people that increased n u m bers of scientists are being developed by the universities, and will eventually enter the scientific labor market. W h a t the situation will b e when a new balance is struck cannot b e predicted at this time. T h e r e can b e no doubt, however, that there will be a considerable increase in the total scientific population. T h e research workers of the nation 5 w h o were estimated to number 137,000 in 1947, may well b e doubled in t h e next decade. T h e r e is also the possibility that t h e government system of grants-in-aid and fellowships at various university a n d governmental laboratories may produce a superfluity of personnel, particularly if a financial recession or t h e demands for federal budget economies r e strict appreciably t h e expansive projects now being p u t into operation. O n e point which should give concern to every responsible private citizen is certain evidences of unwise expenditure of government funds in the provision of r e search facilities in government laboratories. Everyone must be tremendously inrpressed by t h e imposing buildings going u p for various government research agencies. It is evident that no expense has been spared in architecture or w h e r e it might b e thought to contribute in any way to efficiency of operation. However, t h e impression is also gained (at least b y t h e writer, who has h a d some exrperience in trying to build research laboratories economically) that facilities of equal utility could have been provided much more cheaply if there h a d been adequate, conscientious consideration of costs. T h e result of such overly great capital expenditures is that any reasonable amortization of t h e building costs will weigh heavily on the research costs in these laboratories in the future. T h e cost of maintenance a n d CHEMICAL
operation of these "research palaces" is also going t o b e out of proportion to what could have b e e n d o n e with more economical building. I t remains to be seen whether these n e w laboratories will b e so attractive for research workers as to make it difficult for industry, w h i c h must build more realistically, to secure desirable scientists with t l i e types of research facilities which it will be able to provide. A question which, must be faced b y industrial researcli management is how this competition of governmental research can be met, a n d wliat m a y b e its import for the long-range prospects of industrial research in t h e pharmaceutical industry. It must b e a p p a r e n t to all that, at the very least, such major participation of the Federal Government in medicinal research is going to s p e e d greatly t h e elaboration of fundamental knowledge. However, as a corollary t o this, a n d in all probability as an essential part of the government studies, also w i l l b e the development of pharmaceutical products. T h e money for this governmental program comes from industry, a n d from the private citizens whom industry is suprposed to support. To the writer i t appears somewhat ironic that our industry should b e called on to make such heavy contributions t o t h e costs of research of its major competitor. Apparently, even t h o s e who w r o t e the Steelman report a r e s o m e w h a t confused in their thinking o n t h i s issue, because (on page 37) they indicate a m u c h needed expansion of industrial research facilities ought not t o come a b o u t through government grants, b u t rather t h r o u g h providing a favorable climate for expansion of industrial research t h r o u g h tax incentives and other established m e t h o d s . Industry will feel much, relieved w h e n some tangible evidence of such a policy to encourage industrial r e s e a r c h expansion first becomes a p p a r e n t . T h e T h r e a t of Socialized Medicine T h e other long-range t h r e a t to t h e welfare of t h e pharmaceutical industry, and thereby pharmaceutical research, arises from the t r e n d to socialization of medical practice. I t is, of course, impossible to be sure at this t i m e w h a t t h e ultimate pattern for supplying medical care at state expense is going to b e . However, it seems certain t h a t over a period of years the practice of medicine will b e m o r e and more paternalized a_nd will come under the direction o f t h e Federal Government to an ever-increasing extent. Along with this will inevitably come supplying drugs and medicinals to the patients treated under federal auspices. W h e n socialization first develops, it can be anticipated that there will be a great increase in the amount of drugs being prescribed, b e c a u s e of pressure o n the physicians by the patients. Ample evidence of this p h e n o m e n o n is available today in Great Britain a n d elsewhere. T h e increased tempo of t h e p h a r m a c e u t i c a l industry that will result will not, however, indicate improved well-being, b u t r a t h e r will b e com( Continued on page 4S6) AND
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