Big Pharma and Buyer’s Remorse
To make up for weak pipelines, and to take arms against a sea of generic-drug competitors, many large pharmaceutical companies have pursued mergers and acquisitions. This strategy began to gain popularity about 10 years ago, and the industry’s new motto seems to be “When the going gets tough, the big get bigger.” Has this strategy improved drugmakers’ pipelines or bottom lines?
Not at all. In fact, it’s been a resounding failure, according to an analysis by Burrill & Company. Acquisitions have not improved Big Pharma’s pipelines. The industry now produces roughly the same number of new drugs annually as before, even though it’s spending more money on research and development (R&D). To add insult to injury, small drug companies are producing a growing share of new drugs—and doing it more cost effectively than their bigger competitors.
Acquisitions have translated into financial losses, too. Ten years ago, “the combined market capitalization of 17 of the industry’s most active acquirers was $1.57 trillion, excluding Johnson & Johnson,” according to Burrill & Company’s research. “By Dec. 31, 2010, that figure had shrunk to $1.04 trillion, a loss of more than $500 billion in market value.” The picture is worse when you subtract the value of these companies’ acquisitions: about $425 billion. That adds up to a loss of about $1 trillion.
Mergermania has been profitable for law firms, banks, and investors, though. In one three-month period in 2009 alone, pharmaceutical-company mergers and acquisitions yielded $500 million in advisory fees for investment banks, The Wall Street Journal reported. Merger activity provided banks, such as J.P. Morgan Chase, Goldman Sachs Group, Citigroup, and Morgan Stanley, with much-needed business at a time when the financial sector was struggling, according to Pharmaceutical Technology Europe.
Maybe Big Pharma’s advisors are steering it in the wrong direction, but I think the industry’s best hope is in R&D. If small companies can do it, and if the National Institutes of Health is offering its help, I don’t see why Big Pharma can’t improve its pipelines and secure its profitability by discovering more new drugs.
And yet no response from the boards of these companies and their shareholders in terms of demands for change and real changes in the leadership of these same companies. Clearly, a different set of skills is necessary for senior executives in the world of pharma moving forward versus the prior world. You can see why Ichan cleaned house of the top lays of management at Biogen and put multiple bankers on the board. These companies need leaders who understand how to create value.
Pharmaceutical companies may have been hoping that mergers and/or acquisitions would lead to more products and revenue, but most companies enter into mergers and acquisitions as a cost-saving strategy. Savings are found in reducing corporate jobs and possibly rationalizing manufacturing. Trimming sales forces is another source, which is very productive for pharamacuetical companies. All these have the goal of increasing profitabilty growth via cost cutting, even if top line growth is not achieved.
Merging only saves costs , R and D makes money , big pharma always cuts R and D defensively but also the regulatory climate is more to blame for poor pipelines than mergers as it starves the individual inventor of a route to bigger companies where it sells its research,
Nothing has been more destructive for clinical trials and hence new products than the EU clinical trials directive as it has both reduced the number of clinical trials by 80% and increased the cost of clinical trials by a massive amount and also delayed them by about 2 years .
A doctor or pharmacist thinking of a new product would spend more time and effort overcoming the beaurocracy than trying the product even if he could afford it as the the path to registration is littered with pitfalls
The moral of this is it does not matter how big you are legislation makes it almost impossible to bring to the market a NCE hence single digit figures for new products each year
The problem with M&A is that effective communication is inversely proportional to size and that it only offers temporary relief, from the key activity which is research productivity, and the ability to pick the winners which will succeed at Phase III and make it to the market. Being too big can impede effective and timely decision making.
Automation of aspects of drug discovery in the last decade has been of limited benefit, despite heavy investment by big players in the industry, since they are simply means of exploiting, not making, exciting new findings. You cannot automate innovate imagination or innovative thinking.
The biggest challenge to senior executives in the industry is to create the right climate for imagination, innovation and collaboration to flourish. Costs/efficiency focus is fine but there is a difficult trade-off between this and strangling discovery pipelines, which must balance the short and long term business needs.