Talking about the fix that Merck (and the rest of the industry) is in, Jesse Eisinger of the Wall Street Journal used some strong words in his Wednesday "Long & Short" column:
"How did the pharmaceuticals industry get into this situation? Most followed the imperiatives of Wall Street. Investors and analysts demand fast growth from drug companies, but can't abide the risks. They want to be able to draw a ruler under their earnings projections. So most big drug companies relied on brand extensions and raising prices, not breakthrough drugs. They merged with each other to smooth out earnings in bad times, thinking that they were diversifying. But since the industry has huddled around a small number of huge therapeutic categories like hypertension and cholesterol-lowering, the diversification turned out to be largely illusory."
Well, one reason we ended up in those categories is that we know how to do something about them - they have good druggable therapeutic targets, and it sure doesn't hurt that they're huge markets. (Of course, there are other huge markets that we don't have a clue of how to go after.) But he's right that Wall Street (and too many pharma executives) want our earnings to be much more predictable than they ever can be.
What business and accounting types don't want to recognize is the level of crazy risk-taking that the drug industry is founded on. As I've pointed out before, in business school they teach you all about risk: how to avoid it, amortize it, outsource it, hedge it and minimize it. But what if risk is your whole business? How do you get around it then? Being the first to market with an innovative therapy, which is what both pharma management and the industry's worst critics both would like for us to spend more time doing, is insanely risky. No one wants to admit it, but it is.
Remember that 90% attrition rate I was quoting the other day? We can go years and years before we ever find anything, and it takes years of work before we know if it's any good. If we make it all the way to the market, there's no way we can know everything our compounds are capable of doing. We have to do what we can to find out, then get them out into the real world and hope for the best. Then we can spend huge amounts of money promoting something that not many people want to buy (Clarinex! Get your Clarinex!), or watch our biggest sellers turn into horrible hydras of liability (Baycol! Vioxx!)
Despite the huge financial rewards waiting for anyone who solves these problems, they're still out there and they're not a bit smaller than they ever were. But some investors and managers would rather convince themselves, against all evidence, that the world is a more orderly place. So let me be blunt: if anyone thinks that a pharmaceutical company can deliver predictable earnings under the current conditions, they're delusional. Or grievously misinformed, or just plain slow. You pick.
Eisinger goes on to point out that analysts say that they love Pfizer's get-big-and-sell-like-crazy strategy, but Prizer's stock is back where it was in 1998. Meanwhile, they're spending much more per new molecule than, say, Merck or Lilly, two of the industry's go-it-alones, and they have major trouble looming with competition and patent expirations:
"Merck is the ghost of Pfizer's future. . .Investors are slowly realizing that pharmaceutical companies should stay as small as they can, avoid distracting megamergers, invest large amounts in R&D, partner aggressively across the biotech spectrum and strive for novel, breakthrough medicines that add value."
These are noble goals, which I endorse while having few good ideas of how to live up to them. That's especially true in a publicly traded company, which brings us right back around to the beginning, and a question I'd like to throw out: how would some drug companies fare if they were held privately, away from the glare of the stock market? There aren't many of them, but should there be more?