The job cuts are part of the company’s restructuring program that began after the merger with Schering-Plough (Kenilworth, NJ). Certain manufacturing facilities and research and development (R&D) operations will be consolidated, but the company has not yet said which. In addition, positions that are considered “duplicative” will be eliminated.

Job cuts such as these, although unfortunate, are commonplace after mergers. For example, Pfizer (New York) has eliminated positions as part of its own restructuring program since it acquired Wyeth (Madison, NJ). But terminations are occurring even at companies that have not merged with or purchased any competitors.

One case in point is Eli Lilly (Indianapolis, IN), which will cut 5500 jobs worldwide. The cuts are intended to reduce costs and dodge the one-two punch of upcoming patent expirations and competition from generic drug companies. In 2009, the value of Lilly’s stock fluctuated widely and ultimately fell by 11%. The compensation of John L. Lechleiter, Lilly’s top executive, increased, however, by as much as 44%, depending on how you look at the numbers.

And, as I noted previously, AstraZeneca (London) will cut 3500 R&D jobs by 2014 to achieve “flexibility” and “effectiveness.” The company is hunkering down and cutting costs for reasons similar to those given by Merck.

Lean workforces seem to be the order of the day for Big Pharma. As a cost-reduction strategy, job cuts might be effective. Some manufacturing operations might be larger and less efficient than they could be. Yet the industrywide terminations do make me worry about the industry’s future. The cuts to R&D operations are particularly troubling, considering the industry’s recent history of lackluster pipelines.

I hope we are not witnessing Big Pharma cutting its nose off to spite its face. And I hope that laid-off employees can find rewarding work elsewhere and can continue to pursue pharmaceutical innovation.

The job cuts are part of AstraZeneca’s restructuring program, the goals of which are to cut costs and achieve an “effective and flexible R&D operating model.” In a report of the company’s 2009 annual results, Anders Ekblom, executive vice-president of development, said AstraZeneca would focus investment on “prioritized disease areas.” This might be the strategy for achieving “effectiveness.”

After the in-house R&D employees are let go, AstraZeneca will hire contractors to discover and develop drugs, presumably to attain the desired “flexibility.” Observers say that firms in China, Europe, and the United States likely will be beneficiaries of this strategy, according to in-Pharma Technologist. This could be an opportunity for scientists unfortunate enough to be dismissed from Wyeth (Madison, NJ) and Schering-Plough (Kenilworth, NJ) during the consolidations that have followed the acquisitions of these companies. AstraZeneca’s plan might provide a glimmer of hope for scientists in my home state.

But why are R&D workers being shown so little love? One theory is that AstraZeneca’s plan is partly intended to reduce the effect of generic competition. Money budgeted for in-house R&D could be used to realize AstraZeneca’s stated intention to add more branded generics to its portfolio. That’s plausible. Asthma drug Pulmicort and breast-cancer treatment Arimidex will both lose patent protection in 2010, which will be two blows to the company’s bottom line.

Still, I can’t help but be skeptical about the wisdom of the company’s plan. Cutting R&D jobs to invest in branded generics might boost AstraZeneca’s revenue stream in the short run. But the company will still need to discover and develop innovative products to remain competitive. As I recently wrote, outsourcing R&D might not be the best way to discover new products. In this competitive economy, sponsors might choose to work only with discovery teams that can prove that their drugs will be successful. Likewise, contract researchers are less likely to spend money on potentially groundbreaking research if the risk of failure is high.

Tight funding will favor conservatism in R&D, which is not likely to yield promising or exciting discoveries. Unless the economy improves, or AstraZeneca’s outsourcing plans prove disastrous, it may be a while before R&D scientists get their props.

The loss of these jobs is certainly a blow to my home state, and it also made me wonder about the future of innovation in the pharmaceutical industry. As Pfizer and Merck absorb their respective acquisitions, their R&D staffs will become leaner. But will this mean that they will be more efficient or better able to find new drug candidates? R&D isn’t necessarily a clear process with a defined endpoint like manufacturing is. I don’t think R&D efficiency could be gained by using the same strategies that improve production processes.

One might also argue that mergers are bad for pharmaceutical R&D because, besides reducing the number of active researchers, they also reduce the amount of competition between companies. The greater the number of drugmakers battling for market share, the greater the incentive for creativity and persistence in R&D.

Mergers are also heightening companies’ desire to outsource R&D. Jim Miller writes that contract research organizations (CROs) are receiving more requests for proposals and more new project awards. Outsourcing R&D could certainly bring cost benefits, but I doubt that, on average, CROs are better able to discover new molecules than in-house R&D departments.

So, in New Jersey and around the world, we’re left with smaller workforces and an uncertain future for pharmaceutical pipelines.

In a speech last week to the City Club of San Diego, John Lechleiter, chairman and chief executive officer of Eli Lilly, offered very candid remarks about the state of innovation in the pharmaceutical industry, saying that the engine of biopharmaceutical innovation is “broken.” His comments may be a bitter pill to swallow in light of escalating investment in research and development (R&D), but his frankness may just be the remedy the industry needs to reinvent itself.

“At a time when world desperately needs more new medicines—for everything from H1N1 to Alzheimer’s disease—we are taking too long, spending too much, and producing far too little,” said Lechleiter. “Repowering pharmaceutical innovation is an urgent need not only for our company and our industry but for our nation—and for communities like San Diego and Indianapolis [the headquarters of Eli Lilly] that have a huge stake in the life sciences. We remain dependent on a society that welcomes and values new ideas, and public policy that enables innovation to be rewarded for the value it creates. But we also know that we need to change.”

Lechleiter outlines three major challenges for the industry. These include: a loss of trust in product safety and in the honesty of pharmaceutical businesses, for which he said, “we mostly have ourselves to blame;” a risk-averse policy and regulatory environment that has led to hurdles for new drugs; and the pressure of the healthcare system, where the pharmaceutical industry has become an attractive source for policymakers to seek cost savings, even though prescription-drug spending accounts for only 10% of healthcare spending.

Lechleiter suggested using the three “C’s” for pharmaceutical innovation: collaboration among the large pharmaceutical companies with smaller companies, academia, and government; competency by advancing scientific tools to better understand human biology; and culture by developing a mindset that places patients and improved outcomes at the center of the research process. On a company-specific note, Lechleiter said that Eli Lilly is espousing those philosophies. He points to the company’s fully integrated pharmaceutical network (FIPnet) model as a vehicle for external collaboration; the company’s use of advanced analytics and clinical trial designs; and cultural changes to create a greater focus on the patient.

It is clear that the pharmaceutical industry is at a moment of change. In 2008, the US biopharmaceutical industry spent a record $65.2 billion on R&D, according to a report by the Pharmaceutical Research and Manufacturers of America (PhRMA). At the same time, however, the the level of innovation has not appreciably improved. The average number of new drugs approved in the US (as measured by the number of NMEs and new biologic license applications approved by the US Food and Drug Administration’s Center for Drug Evaluation and Research) between 2005 and 2008 was 21. Moreover, only 2 of 10 marketed drugs ever return revenues that match or exceed R&D costs, according to the PhRMA report.

Some pharmaceutical majors have turned to a proven formula in seeking to improve near-term and long-term results, namely building critical mass through mergers and acquisitions (M&A). Pfizer’s $68-billion acquisition of Wyeth, Merck’s $41-billion pending acquisition of Schering-Plough, and Roche’s $47-billion acquisition of Genentech are three large-scale acquisitions in 2009. What remains to be seen is whether the new R&D structures announced by these companies will be able to succeed in improving R&D productivity.

In announcing its integration with Wyeth, Pfizer said it will operate through “patient-centric” business units in its two major areas: biopharmaceuticals and diversified businesses. It formed two R&D groups in biopharmaceuticals, one focused on small molecules and related modalties (the PharmaTherapeutics Research Group) and one on larger molecules and vaccines (the BioTherapeutics Research Group). The individual units within these two research organizations are led by chief scientific officers, who will act as single points of accountability for delivering proofs-of-concept for development.

In acquiring a full stake in Genentech earlier this year, Roche said it hoped to continue its successful relationship with Genentech in drug innovation by allowing Genentech to operate as an independent research and early-development center within Roche, seeking cross-fertilization of technologies and expertise between the two companies as a vehicle for innovation.

As it waits for its acquisition of Schering-Plough to be finalized, Merck announced a new structure for Merck Research Laboratories. Merck says the structure is designed to foster innovation and create greater accountability at all stages of research and development through two core functions: (1) discovery and preclinical development and (2) clinical development and regulatory affairs. In addition, a new central franchise structure focused on portfolio management will be aligned with the company’s global human health division. Also, the new Merck Research Laboratories will include a worldwide licensing group.

The impetus behind M&A activity often leaves companies in a “Catch-22” situation, a problem not unique to the pharmaceutical industry. On one hand, greater critical mass is required to fund product development, but as organizations increase in size, size itself can stifle innovation. Let’s see if the pharmaceutical industry is up to the task in overcoming that challenge.

A prime benefit of the acquisition is that it gives sanofi a portfolio of new vaccines in development, said Christopher A. Viehbacher, the company’s CEO, in a press release. This emphasis on biological medicines was a major reason behind Roche’s (Basel) purchase of Genentech (South San Francisco, CA), Merck’s (Whitehouse Station, NJ) acquisition of Schering-Plough (Kenilworth, NJ), and Pfizer’s (New York) purchase of Wyeth (Madison, NJ). The sanofi–Shantha deal also provides more evidence that Asia and emerging markets are where it’s at.

Several factors should make the transition a smooth one. For starters, sanofi aventis is no stranger to large-molecule production. In 2008 alone, the company’s vaccines division, Sanofi Pasteur, produced more than 1.6 billion doses of vaccines to protect against 20 diseases.

What’s more, sanofi is buying a majority stake in Shantha from a subsidiary of Mérieux Alliance (Lyon), which has its origin in Institut Mérieux (Lyon) just as Sanofi Pasteur does. Alain Mérieux, chairman of the Mérieux Alliance, will chair a strategic committee to oversee the acquisition. Mérieux’s stewardship will surely bridge any cultural gaps there might be between sanofi and Shantha, but the companies’ common heritage makes me doubt that a clash would arise.

The New York Times suggested that Roche’s acquisition of Genentech would be relatively easy because of the two companies’ long history together. I’d expect smooth sailing for sanofi and Shantha, too. Let’s see whether the deal brings sanofi even closer to the top of the pharmaceutical-industry pyramid than it already is.

Wyeth’s chairman, Bernard Poussot, stated in a release the deal will bring added resources to the company’s biopharmaceutical division as well as to its human, consumer, and animal healthcare divisions. But some industry observers have speculated that Pfizer may sell off Wyeth’s consumer healthcare units. Last week, the European Commission approved the $68 billion deal but required the companies to divest its animal healthcare businesses.

The dwindling number of new chemical entities and the shrinking number of small-molecule blockbusters have made expansion into biologics a necessary strategy. Still uncertain, however, is the effect these shifts will have in employment. Observers have speculated whether the Pfizer-Wyeth deal will include a repeat of the job cuts Pfizer imposed after its mergers with Warner-Lambert in 2000 and Pharmacia in 2003. Pfizer claims the Wyeth deal will be different. The focus, it says, is on building a strong biopharmaceutical unit, not cutting costs. Job cuts will be relatively minimal at 15% (or 20,000 jobs), and the number of sites will most likely be reduced from 46 to 41.

Perhaps the greatest uncertainty is whether the Wyeth deal will echo results from the Warner Lambert agreement, under which Lipitor became the world’s best-selling drug, or will it flake like the Pharmacia deal, under which Celebrex nose-dived Pfizer’s stock?

PhRMA represents innovator-drug companies and its core membership, although not restricted to, primarily consists of the large pharmaceutical companies. PhRMa says it it is forming the committee to address the particular issues facing smaller companies, including the impact public policy may have on this sector. David Holveck, CEO of Endo Pharmaceuticals, will chair the committee. Additional committee members have yet to be selected.

“Specialty pharmaceutical companies, are in many ways, impacted very differently be federal legislative and regulatory proposals than large PhRMA member companies,” said Holveck in a PhRMA press release. “Now more than ever, we need to be proactive as the industry continues to transform. This new committee will focus on developing solutions to policy issues that are most important to smaller companies.”

PhRMA’s decision to form a committee to provide a voice for small companies is a good one as it shows an understanding of the important role that these companies play in drug development for the industry as a whole and as partners for their Big Pharma brethen. Big Pharma, no doubt, will continue to be the dominant financial force in the industry. The top 15 pharmaceutical companies accounted for 65% of the sales of the US prescription drug market in 2008 and more than 50% of the global market, according to IMS data. But the future of the pharmaceutical industry is increasingly being shaped by dynamics in which smaller companies play a significant role. The erosion of the blockbuster model and the ensuing focus on developing specialized drugs or more targeted therapeutic agents for niche patient populations is a paradigm that fits smaller companies, many of which carve out their spot in the marketplace using a specialized-drug approach. IMS projects that approximately 50–60 new chemical or biologic products are expected to be launched during the next two years, and about two thirds of these products will be specialist-driven. Sales of specialist-driven drugs are projected to increase 8–9% in 2009 and contribute 67% of total pharmaceutical industry growth, according to IMS. At the same time, external collaborations, whether among Big Pharma and biopharmaceutical companies or among biotechnology companies, is significant. Financing in the US biotechnology sector through partnerships and external collaborations was $20 billion in 2008, only slightly down from $22.4 billion in 2007, according to a recent analysis by Burrill and Company.

Roche’s defection from PhRMA to BIO is emblematic of the larger trend toward broadening drug development from small molecules to biologics. Roche’s strategic focus on biologics was punctuated by its $47-billion acquisition of Genentech this year, and this emphasis on biologics is also reflected in other large-scale acquisitions. Some notable recent deals with a biologic component include Pfizer–Wyeth ($68-billion, pending acquisition), Merck-Schering Plough ($41 billion, pending), AstraZeneca-MedImmune ($15.6 billion, 2007), Novartis-Chiron ($5.4 billion, 2006), and Merck-GlycoFi ($400 million, 2006). Growth in biologic-based drugs are projected at 11-12% in 2009, far outpacing the projected growth of 2.5–3.5% (on a constant dollar basis) in the global pharmaceutical market as a whole, according to IMS.

The ability of the pharmaceutical industry to adapt to these changes both as individual companies and aggregately as an industry in policy formation and implementation is critical. Let us hope that it is up to the challenge.

Big Pharma is banking on an unequivocal “yes” to that question as evidenced by its mergers and acquisitions activity during the past several years. In addition to the pending Pfizer-Wyeth deal, some notable recent deals with a biologic component include Roche-Genentech ($47 billion, completed in 2009), Merck-Schering Plough ($41 billion, pending), AstraZeneca-MedImmune ($15.6 billion, 2007), Novartis-Chiron ($5.4 billion, 2006), and Merck-GlycoFi ($400 million, 2006). Big Pharma is also proceeding with large, capital projects in biologics such as Bristol-Myers Squibb $750-million bulk biologics manufacturing facility in Devens, Massachusetts, Novartis’s $700-million cell-culture production facility in Singapore, and Eli Lilly’s $1-billion investment in biologics research and production capacity since 2004, including its acquisition of Applied Molecular Evolution in 2004.

But will biologics be the profitable panacea that Big Pharma hopes they will be? After 25 years, the biotechnology industry as a whole is still not profitable although its financial fortunes have improved. In 2007, the global biotechnology industry (as measured by publicly trade companies) posted a net loss of nearly $2.7 billion compared with a net loss of $7.4 billion in 2006, according to an Ernst & Young analysis. In 2007, US public biotech companies posted a net loss of $277 million, which was the closest the US biotech industry has come to reach aggregate profitability.

Biopharmaceuticals account only for approximately 10% of the global prescription drug market, based on a 2007 global prescription drug market of $712 billion, but are considered an important engine for growth for Big Pharma. The compound annual growth rate (CAGR) of prescription drug sales from Big Pharma is expected to be only 1.8% through 2013, increasing from $366.6 billion in 2007 to a projected $407 billion in 2013, according to a recent analysis by Life Science Analytics. As small-molecule drug sales are pressured, sales of biologics from Big Pharma are expected to rise, with biologics expected to account for 20% of Big Pharma’s prescription drug sales by 2013. At the same time, sales from its core products are expected to fall by nearly 50% to $47 billion by 2013.

The clinical efficacy of a drug, whether a small molecule or biologic, and its ability to improve clinical outcomes ultimately determines the market success of a drug. As the industry’s understanding of the targeted mechanisms of macromolecules increases and therefore, prospects for improved clinical efficacy brighten, the future of biologic-based therapeutics bodes well. But such optimism does not come without caveats.

I recall a speech that I covered in 2000 from Juergen Drews, former head of R&D for Roche and author of a landmark analysis of the innovation deficit in the pharmaceutical industry and a book, In Quest for Tomorrow’s Medicines. At that time, Drews observed that medicinal chemistry is as much art as science. He commented on the limitations of combinatorial chemistry and high throughput screening (HTS) as a tool to improve R&D productivity. At its introduction two decades ago, combinatorial chemistry and HTS were seen as the next paradigm shift to increase R&D productivity. The approach involves the rapid synthesis of a large number of separate, but structurally related molecules that can be assessed against disease screens. To paraphrase, he said, if we are asking the same or wrong question, but doing so just 1000 more times, should we really expect a better result?

Recalling his comments makes me ponder whether a more measured view of biologics should also be applied. Do biologics simply represent the R&D approach du jour or will they truly meet the mark of fundamentally shifting the pharmaceutical industry? Time will tell.

Eli Lilly & Co. (Indianapolis) CEO John Lechleiter earlier this week told the Financial Times that he is not interested in becoming part of the recent mega-merger trend (see Pfizer+Wyeth, Merck+Schering-Plough and Roche+Genentech). Rumors and speculation have had some thinking Lilly+Bristol-Myers Squibb (BMS) would be the next big thing, but Lechleiter specifically ended rumors of that combination and remained critical of Big Pharma’s recent big deals. 

As he told the Financial Times, “I think we are seeing deals that are really driven more by weakness than what I would describe as strong strategic combinations … That will improve short-term problems but fail to answer the long-term question of research productivity.” He also said that mega-mergers were “very disruptive to research and development.”

His interest lies in smaller acquisitions of up to $15 billion. He recently told the Wall Street Journal that he “got hungry again about three weeks after ImClone got closed.” Lilly purchased ImClone in November 2008 for about $6.5 billion, successfully outbidding BMS’s two unsolicited offers that ImClone had rejected last fall.

Though Lilly is out of the mega-merger picture, there is talk around the web that BMS could be involved in a takeover deal. As PharmTech Senior Editor Patricia Van Arnum wrote in a Feb. 27, 2009 blog post, BMS could be eyeing merger plans with companies it has previous collaboration relationships with, like sanofi-aventis and AstraZeneca. Similar reports from analysts cropped up following the industry’s huge consolidation announcements earlier this year.

However, in early March, sanofi CEO Chris Viehbacher dispelled rumors of a mega-merger with BMS, telling CNBC that the two companies have “a fabulous partnership and that’s sufficient for us right now.” And AstraZeneca CEO David Brennan told Reuters last week that his company would also not jump on the mega-merger bandwagon, saying, “I don’t believe we need to engage in a large transaction.” Unfortunately for BMS, none of its rumored partners seem to be interested in pursuing a deal at this time. At least not publicly.

Trouble is, the premise might not hold water.

Mergers sometimes end up hindering innovation by creating a large bureaucracy, according to Joseph Schlessinger, chairman of the pharmacology department at Yale’s School of Medicine. The reorganization that inevitably follows a big merger is often disruptive enough to inspire coveted scientists to seek jobs elsewhere.

“It’s impossible to organize and be productive while running such a large group of scientists,” Schlessinger told the Philadelphia Inquirer. “They stop working and they talk all the time and they start to look for jobs and they are really worried. It’s extremely counterproductive for a long time, and it’s demoralizing.”

Pfizer’s own history lends credence to this conclusion. The company reaped short-term benefits after acquiring Warner-Lambert and Pharmacia, but its enlarged research budget did not yield the anticipated cornucopia of new candidates. “Even after acquiring these companies, Pfizer’s research program is mediocre at best for a company its size,” said Daniel A. Hussar, a professor at Philadelphia’s University of the Sciences, to the Inquirer.

It might not be enough for a pharmaceutical company to simply accumulate a big team of great minds. If pipelines are to flourish again, drugmakers must bring their researchers a sense of security, encourage them to take chances, and give them room to experiment.