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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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July 13, 2006

J&J Shrinks Their Labs Again

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Posted by Derek

I'm starting to wonder what Johnson & Johnson is up to with their research departments. Earlier this year they had layoffs and reorganizations on the East coast, and now they're announcing similar cutbacks at their sites in California.

J&J had bought Scios in 2003, and it looks like that site is no more. Some employees are being shifted to other sites, but several hundred jobs are vanishing in the process. There had been some layoffs there at Fremont back in February, but at the time there was plenty of talk about how R&D wasn't being touched. Well, it's being touched now. Jobs are also being lost at J&J's Alza subsidiary.

One problem is that Natrecor, which is the product that made Scios, has been running into potentially severe safety problems since last year, and sales are correspondingly dropping. (And as bad as the current cuts are, this could have been even worse for Scios if they'd remained an independent company taking a hit to their lone moneymaker). Ironically, Natrecor had a rough time even getting through the FDA in the first place, and it was only due to the persistance of the Scios people that it became a success for a few years.

So, what's J&J's strategy? They seem to be doing a lot of big collaborations and inlicensing deals, but they're scaling back their in-house research pretty drastically, at least by the standards of profitable big pharma companies. Is this their new business model?

Comments (28) + TrackBacks (0) | Category: Business and Markets


1. burt on July 13, 2006 8:02 AM writes...

I think they are shifting to the same strategy as Pfizer and much of the rest of Big Pharma. Slack off , savaging R&D as a "cost" in the process. Pillage start-ups for your next product.

Is it just my perception or are things still generally horrible in the business? Anyone have an idea of whether this marathon slump is a trend or part of the business cycle?

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2. Still Scred of Dinosaurs on July 13, 2006 9:19 AM writes...

All this and YET they had $22B or so to spend on Guidant. They may be glad the deal didn't go through, however.
I vaguely appreciate how a dollar isn't always a dollar when comparing operating costs versus capital expenditures, but what percentage of $22B would be required to keep all the labs open for a few years? What manouvers could get around the problems of moving one category to another?
I'm reminded of an observation James Grant once about the price of gold stocks versus gold itstelf. He noted that at prevailing prices at the time, if you were to spend a billion dollars on gold, bury it, dig up 5% of the initial load every year and call it a mining company the value of the shares should have brought more than a billion dollars.
Seems like we may be at a similar place with R+D expenditures. Put $1B into a company, spend 5% a year on R+D, and make in an independent company but with a buyout option.
Maybe J+J should create 22 of them.

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3. Palo on July 13, 2006 11:26 AM writes...

"In recognition of our solid results in 2005, our very strong financial position, and our confidence in the future of the corporation, the Board has voted to increase our dividend for the 44th consecutive year," said William C. Weldon, Chairman and Chief Executive Officer of the Company.
J&J 2006 press release.

2005 Net earnings: $10.41 Billion
2005 Percent return on average shareholders' equity: 29.9

J&J 2005 Annual Report

Record profits, increased dividends: "necessary to bring innovation". Perhaps a larger investment in R&D then?. Nah.

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4. qetzal on July 13, 2006 12:03 PM writes...

"Pillage start-ups for your next product."

And why not? There are hundreds or thousands of biotechs out there, trying to develop products using investor capital. Big pharma can look through and pick out the ones that show the most promise, fund their further development, and ignore the rest. In a real sense, venture capitalists and biotech shareholders are essentially funding pharma's discovery efforts.

Wouldn't you take advantage of that if you could?

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5. burt on July 13, 2006 12:11 PM writes...

""Pillage start-ups for your next product."

And why not?"

I guess it all hinges on what happens to the Acquired.

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6. Hap on July 13, 2006 12:16 PM writes...

I don't know if I'm mistaken (having never worked for one), but I assumed that startups paid considerably less than larger drug companies (making up the difference in equity which in most cases will not be worth much). I also assumed that people in startups worked longer hours, meaning that people in them are paid far less than the larger drug companies (in cash, anyway) - this would explain the shift, where pharmaceutical companies can effectively outsource R+D to startups (without going out of country, which may be politically problematic at this moment) and pay less in the process.

Of course, one then wonders how research is going to attract smart people, if one can make twice or three times the salary of a chemist doing something that requires half of the schooling. This works well in the short term, but only works in the long term if you will be able to recruit chemists from other places to make up the difference.

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7. burt on July 13, 2006 12:56 PM writes...

"Of course, one then wonders how research is going to attract smart people, if one can make twice or three times the salary of a chemist doing something that requires half of the schooling...."

You hit the nail on the head. And keep in mind, we med chemists think in terms of 5 year (or so) projects; decision makers have a per-quarter mindset.

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8. Still Scared of Dinosaurs on July 13, 2006 12:59 PM writes...

Startups often pay comparable salaries for comparable experience, but hire people with less experience or hire fewer of them. The big savings come from rushing things through the phases of the development process faster than big pharma.
Smart people are often attracted to the higher potential reward of the equity, which is more of a compensation for the increased risk of losing your job than lower salary. Unfortunately, a lot of dumb and narcissistic people also find this attractive.
The downside to big co's of in-licensing drugs from smaller ones, or acquiring them outright, is the fact you have to pay these companies for the value they arlready created. When the market for such products or companies is bad, as it has been since 2000, it's a good business strategy. Whether the payoff will still be there for decisions made now is another story.

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9. Eric Johnson on July 13, 2006 2:52 PM writes...

What I don't grasp: how can biotechs compete library-wise, when it comes to trying to hit totally new targets? Biotechs are mostly not very old, right, so I assume they don't have acres of compounds on file like the pharmas do. But you'd think that in order to get excellent leads, their screens would have to approach the size/quality of the libraries that pharmas would run against a new target. Can biotechs buy screening access to libraries of a pharma order of magnitude for sub-astronomical prices?

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10. Eric Johnson on July 13, 2006 3:06 PM writes...

To clarify - I know compound libraries are on the market, I just havent been aware of any with sizes like, say, the high 10,000s.

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11. Bellnhopper on July 13, 2006 3:20 PM writes...

J&J is best at marketing the drugs of the small pharma they bought. Internal drug discovery (J&JPRD or before that J&JPRI) never had a great track record. Their chemists & biologists were as smart as anyone else but few if any drugs came out, it must have been management but somehow management survives. Now that J&J is reducing internal R&D there should be a greater emphasis (and more $$) for those small biotechs. This may be good news for the equity holders in the biotechs but for the average scientist it may mean less job security. What J&J buys, J&J devours & guts (eg Janssen Pharma, 3DP Pharma, McNeil pharma, Alza, Scios etc).

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12. LNT on July 13, 2006 3:46 PM writes...

One doesn't need large libraries to come up with leads. I worked at a biotech company until recently moving to big pharma. At the biotech, most of our leads came from creative modifications of known leads in the patent literature. Everyone seems to think in terms of our leads always coming from HTS -- but this definately isn't the case. I would be very interested to see some statistics about how many scaffolds in late stage clinical trials had thier origins in an HTS hit verses have thier origins in a more "rational design". My guess is that the ratio is ~1:1.

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13. cg on July 13, 2006 4:17 PM writes...

Isn't this what it always comes down: Rational design vs. HTS ???

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14. Bag Lady of Chemistry on July 13, 2006 9:28 PM writes...

I just spent most of the day going down to the old Alza labs to liberate (pillage) the leftover equipment for our academic lab. What a gold-mine it was! We got 6 high quality HPLC systems, one GC, and a bunch of other lab equipment. Right now I'm not complaining about J&J's management strategies, however when I get a real job, stuff like this will start to worry me.

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15. Still Scared of Dinosaurs on July 14, 2006 1:15 AM writes...

This is totally out of my field, but it seems to me that two things are at play in the biotech vs pharma, rational design vs HTS question.
The first is that in a lot of biotech situations the targets are well known (molecularly). Many are cellular receptors and others are large proteins you are trying to suppress with mabs. The nature of the target may even be irrelevant if the drug is a recombinant version of a naturally occurring molecule. We all know that Enbrel, Remicade, and Humira bind to tnf, but how many can name the targets that inferferons hit without looking them up?
The second is that so many biotechs start out because of findings coming out of research elsewhere, and the key factor in the discovery story may be serendipity. I just left a small biotech where, in response to a tough question, the CSO would wave his hands so fast I almost expected him to take flight. Nonetheless, his discovery was the core around which the company was founded, and his heirs will probably have millions of reasons to thank him for generations to come.

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16. Petros on July 14, 2006 2:03 AM writes...

Don't forget that J&J has also just spent $17.5 billion buying Pfizer's consumer healthcare divsvion, a price well in excess of what some analysts thought advisable.

Even before that J&J was almost alone in big pharma in not being almost exlusively dependent on drug revenues. Is the company contemplating the P&G strategy?

But its continued acquisitions of Biotech outfits leave a massive rationalisation issue to be dealt with (Tibotec is another one that no one has mentioned yet) but aside from the spectaculalry successful discovery efforts from Janssen, have any of these been a great success?

Scios was a leading player in the highly active MAP kinase inhibitor area but their development compounds seemed to have made limited progress since they fell under the J&J umbrella

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17. Sleepless in San Francisco on July 14, 2006 2:16 AM writes...

You needn't assume that biotechs are at a disadvantage compared to pharma wrt library size. Here is a quote from a biotech annual report from a couple of years ago:

"We believe that continued expansion of our compound library will increase the frequency and quality of generating active lead compounds. We have approximately three million highly diverse, quality-controlled, drug-like small molecule compounds in our screening library, and we generated approximately one million new compounds last year."

Today this company has eight compounds in clinical development and has been filing three INDs per year for the past couple of years; they say they are planning to continue filing at that rate for the foreseeable future. AFAIK, all of the compounds in development have come from HTS of the library.

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18. Derek Lowe on July 14, 2006 10:57 AM writes...

Who that, Sleepless? Tularik?

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19. secret milkshake on July 14, 2006 4:07 PM writes...

Do you know anybody who got a p38 MAP kinase through phase IIB? My understanding is that chronic liver tox is the recurrent problem with p38 alpha+beta compounds...

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20. MTK on July 14, 2006 5:26 PM writes...

I actually think J&J's strategy is a good one.

Based purely on the # of IND's per capitalization, Big Pharma stinks at R. Here are some facts and figures: The entire US Biotech industry had a market cap of $311B in April 2005. For comparison that's about equal to the combined market cap of Pfizer and GSK. In 2005 Pfizer and GSK combined received 11 NDA approvals (and I didn't even check to see how many of those 11 were in-licensed) Biotech received 40. It's even worse if you look at INDs.

As much as Big Pharma stinks at R, they're pretty good at D, and they're darn good at M (marketing). If you're pretty good at something, darn good at another, and crap at something else, why continue to do the something else, when there are others who are good at it?

With the advent of personalized medicine based on genetic profiling, we may see less blockbusters and more drugs in the hundred millions and less in the billions giving biotech an even better edge, in terms of return on investment. Big pharma will always play a role, but perhaps a shrinking one in R&D and a bigger one in marketing. That's not a bad thing. For those researchers who are creative, productive, and ambitious it will mean more organizations competing for their services.

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21. Hap on July 14, 2006 7:46 PM writes...

"For those researchers who are creative, productive, and ambitious it will mean more organizations competing for their services."

Such people (ambitious, productive, and creative) are not a dime a dozen. For those that want to be in chemistry or biology (or related fields), they have a variety of options if they are able enough - they more likely will start companies rather than work for them (since while the risk is higher, the reward is yet higher and their control over the outcome greater as well). For those currently in the field, it means a higher level of risk and/or a high workload, maybe with increases in compensation, but maybe not.

For pharmaceutical companies this may be a good strategy if the economics remain similar to those currently existing - however, there may be problems in the future. Drug development requires people with both above average intelligence and the willingness to make large upfront investments (4-12 years of postgraduate education) and to accept the corresponding costs (actual and opportunity) - if the risks for people in the field increase, either the compensation has to increase (changing the economics) or there are likely to be fewer people entering the field (because they are likely to migrate to other careers in which the risk/reward ratio is lower). In most fields, the majority of people are not great - selecting for only those who are great requires discarding lots of others, with a decrease in the overall number of people in the field. Other endeavors command similar commitments (sports, for example), but have higher compensation and status, while other fields (business, marketing, and law?) have similar or lower commitments and higher pay (with variable status - some higher, some lower). The target population of students with appropriate abilities to enter pharmaceutical research has many choices, and the shift from larger to smaller pharmaceutical companies is likely to shift more of the population away from fields relevant to pharmaceutical research.

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22. Derek Lowe on July 14, 2006 8:44 PM writes...

Secret, I think you're right. To the best of my knowledge, no one's really made it into phase III with a p38 compound. And boy, have there ever been a lot of them over the years.

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23. wlm on July 16, 2006 6:30 PM writes...

Incidentally, I think Sleepless was quoting from an Exelixis annual report from a few years ago...

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24. Kay on July 17, 2006 5:52 AM writes...

I chatted with the key P&G decision maker regarding their wheelbarrow fest: he spoke with glee of removing the bums from his balance sheet.

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25. mark on July 17, 2006 12:19 PM writes...

RE: post no. 17 above.

Derek, the firm in question sounds identical to Exelixis of So SF.

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26. Derek Lowe on July 17, 2006 1:50 PM writes...

Yep, Exelixis makes sense, all those kinase inhibitors. Some of those, if I recall correctly, are follow-ups in the same chemical series, so you wouldn't expect them to take all of them through once they get some readings.

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27. Sleepless in San Francisco on July 17, 2006 6:57 PM writes...

Derek, sorry to have not replied sooner but it's vacation season ;-) Yes, my message above was refering to EXEL. It ended up sounding kind of boosterish and I didn't want to come across as pumping a stock, so I decided to leave the name off.

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28. getshorty on August 14, 2006 6:40 PM writes...

J&J is embarking on one of the largest cross-company layoffs they've had since 1992...they are restructuring now, will give 45 day notice to employees in October and it will be a done deal by November 17, 2006. Just watch and see......

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