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Long-Term Problems, Short-Term Solutions



What do the latest round of pharma cuts signify?



By Derek B. Lowe



Published November 14, 2011
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No, this isn’t going to be one of those “The Crisis in Pharmaceutical R&D” pieces. I inveighed against those just recently in this very space, and I’m not ready to reverse course just yet. Instead of describing the problem for a thousand words or so and then suggesting (in the last paragraph) that we really ought to do something about it, I thought it might be useful to look at what people actually have been doing about it.

The problem is, the list of things that haven’t been tried is a lot shorter than the list of things that have. That’s a little disturbing, since it reminds me of one of my Laws of the Lab, “When there are dozens of ways of doing a given reaction in the literature, it means that there is probably no good way to do it.” And in this case, if companies have been trying a dozen different ways to get out of trouble, it probably means that none of them have been very effective.

One of the first responses (we’re going back a few years now) was Get Bigger. That was quite fashionable, and for a while there, every big pharma CEO either had to explain how rapaciously his company was on the prowl for big acquisitions, or be ready to give some good reasons why not. There was a lot of talk about Critical Mass, and how if you weren’t bulked out to some rather hefty size, then you just weren’t going to be able to survive. It’s hard to remember now, but the likes of Novartis and Bristol-Myers Squibb seemed like behemoths walking the earth, drug companies of a size that no one had envisioned before. So why not get even bigger, eh?

Well, we all know how that strategy worked out, and I’d like to take a moment to thank Pfizer for providing the reductio ad absurdum demonstration for everyone else’s benefit. The big deals still go on (most recently, Merck and Schering-Plough), although they’re now mostly in the service of a different rationale. You don’t hear so much about Getting Bigger for the sake of Getting Bigger. Instead, one of the other supposed benefits has moved up a notch. There are, as you may have heard, all these synergies to be picked up, you see, synergies littering the ground so thickly that you’d trip over them, and a good hefty merger just lets you scoop them up with a net. So now you Get Bigger in order to Get Smaller, and you do that by closing as many sites and by laying off as many expensive people as you can reasonably get away with. Then you do it some more, because this isn’t a time to be reasonable.

Cutting costs is a reasonable idea, up to a point. After all, the only way to fix the bottom line is to find a way to come up with more drugs, or to come up with a way to make more money off the ones that you’re able to find. And since we don’t have many good ideas about how to do the former, we’re stuck with the latter. Raising prices can only be taken so far, and isn’t a very popular strategy with the rest of the world, so that leaves you with the plan of spending less money. One thing that all executives know how to do is cut costs, and you can see the benefits almost immediately — as opposed to changes in research strategy, where benefits might take years to show up (if they ever do). As an executive, you might not even have a job by that time. Get Smaller is really just a way of saying Get Cheaper.

These days, though, no one’s waiting for a merger before doing all that. (To be sure, there aren’t as many companies to merge with as there used to be, are there?) It’s hard to talk with a straight face about achieving synergies when you don’t actually have any overlapping functions to straighten out. Now people just get right down to the slicing for the sake of slicing. The latest rounds of layoffs — from Amgen, AstraZeneca, Sanofi, Novartis and others — have mostly been from companies in this position. You do hear them talk in the press releases about how leaner is better, and about how the company has to focus on its priorities and get rid of all those costly superfluities. But as mentioned above, just a few years ago it was supposed to be true that a drug company needed as many therapeutic areas and as big a marketing team as it could swing. The little guys wouldn’t stand a chance! But apparently the big guys don’t, either.

One of the most audacious strategies has been Abbott’s recent announced spinout of its whole branded drug business. This is another thing that seems hard to believe now, but at one time, diversified companies were trying to break into the drug discovery business because that’s where the big money was supposed to be. Now they’re spinning out the drug labs because they’re a drag on earnings. Abbott has indeed decided to Get Focused, but its focus turns out not to be on pharmaceuticals. Who knew?

So for the companies sticking with drug research, is Get Focused just another way of saying Get Cheaper? Focus isn’t such a bad thing in itself — there really have been R&D organizations that have tried to do too many things in too many directions, just because they had the money and the people. But just because you can mess up in one direction doesn’t mean that you can’t mess up in the opposite one. If you focus all the way down to a short list of possibilities, well, one or more of those had better work out. That’s a process, though, that will take a few years to go wrong, and again, if you’re an executive, what are the odds that you’re going to be around to see how things come out?

That, in my view, is one of the big reasons that the industry has gone into what I’m calling Headless Poultry Mode. We’re applying short-term solutions to long-term problems, because short-term solutions are all that anyone can imagine being around to feel the benefits of. And if you get too cheap, then you risk hurting your productivity even more than any cost savings could possibly be worth. No one can see the compounds that never got made, the leads that never got followed up on, or the drugs that never got into the clinic. What they can see are earnings per share, quarter over quarter. We did not get into this fix quickly, and we’re not going to get out of it in a couple of 10-Q filings, either. The shareholders, though, aren’t so thrilled with that line of reasoning, and as long as there’s someone willing to tell them different, then different is what they’ll expect. No one wants to hear about the problems of running a long-term business in a short-term world.

Derek B. Lowe has been employed since 1989 in pharmaceutical drug discovery in several therapeutic areas. His blog, In the Pipeline, is located at www.corante.com/pipeline and is an awfully good read. He can be reached at derekb.lowe@gmail.com.


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