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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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December 18, 2006

ICOS In Pieces?

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Posted by Derek

There are two recent items about Eli Lilly that I'm going to cover this week. They're both Big Corporation Throws Weight Around headlines but, they reflect different underlying behavior. Today we'll do the more defensible one, and tackle the harder stuff in the next installment.

The first one, then, is Lilly's purchase of their Cialis partner ICOS. They came in offering $32/share, but one of the big ICOS shareholders objected, saying the company should go for $40. I see that Lilly is out today with what they say is a final offer of $34, so we'll see if the big shareholders find that insulting or not. If the whole process reminds you of someone pretending to walk out of a stall in the bazaar while bargaining over a carpet, you've got the right idea about how M&A deals work.

The thing is, Lilly has made it clear that if the deal goes through, all the employees at ICOS will be laid off. There are various efforts up in Washington state to alter this decision, but I don't think that they're going to get anywhere. Lilly wants all the rights to Cialis, and to the intellectual property ICOS might have, but they don't need several hundred more employees two time zones away from Indianapolis.

My feelings about this are mixed. For obvious reasons, the phrase "laid off" is not a favorite around here these days. But on the other hand, Lilly has every right to do what they're doing, and no doubt it makes sense from the business end to do it. When you work for a small company (and especially a small company that's done a lucrative deal with a big one), you know that being bought out is one of the things that can happen to you, with results that can't be predicted.

Still, I'm not a fan of the buy-'em-and-fire-'em style, which I associate with Pfizer more than with Lilly. There's more value in a small reseach company than its patent portfolio shows, or at least there should be. The more I've thought about it, the more I think that startups and small pharma/biotech are going to be a bigger and bigger part of the research environment here in the US in the years to come. (For the details, you'll have to read my next Contract Pharma column). And although I think that Schumpeter's creative destruction is necessary, there's always room to try to make it a bit more creative and a bit less destructive. Wiping out a possible biotech cluster by razing the largest local firm isn't an outcome that I'm happy with.

The only alternative I can come up with, though, is to have some mechanism where a portion of such buyout money is available for employees of the smaller firm to try to start another one (or more). That's tricky, though, since you'd figure that most of the IP that you could start a new company with is being purchased already. Any other ideas?

Comments (29) + TrackBacks (0) | Category: Business and Markets | Business and Markets


1. milkshake on December 18, 2006 12:49 PM writes...

I lived through five mergers including one that resulted closure of my employer in San Francisco -and in most cases these mergers were a pretty traumatic experience.

'Buy them and fire them' is incredibly wasteful and the long-term effect of killing projects and dispersing productive teams of scientists (and decent managers that can motivate their people) is going to be empty pipeline. Exactly what we see in big pharma.

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2. Adam on December 18, 2006 3:05 PM writes...

There may be times when 'buy-em-and-fire-em' makes sense, but this case seems like short-sided hubris to me. When I track my investments (coff*Pfizer*coff) over the last ten years, I can see exactly what this sort of strategy "adds" to the bottom line. Why is Lilly afraid of doing research outside the state of Indiana?

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3. TW Andrews on December 18, 2006 3:15 PM writes...

I'm not at all convinced that this sort of thing makes business sense. It seems like if you're a pharmaceutical company and you've got a good relationship with a creative biotech, buying them and firing all their employees is just about as close to killing the goose that lays the eggs as you can get.

If they want Cialis that badly, why don't they just pay for the rights to it? It's not as if any of their other IP is going to be worth much when all the people who understand the first thing about its applicability are job hunting, or in the best case, at other research organizations. And it can't be as expensive as purchasing the entire company + the costs of shuttering ICOS.

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4. Hap on December 18, 2006 6:08 PM writes...

Smaller companies are likely to be a growing part of the pharma environment because they are cheaper to operate - the people in them are accepting less pay than at larger companies in return for equity. (I am assuming that people at smaller companies are likely to work more hours - previously there might have been a job stability difference, but that seems less true now than earlier). This environment seems to favor younger people with few responsibilities outside of work and entreprenurial or risk-taking people - it seems analogous to the computer science/engineering world of ten years ago. Shifts in the pharma job market that appeal mainly or exclusively to the risk-taking people with skills to play in biology or chemistry seems to limit the segment of people who will work in the field, not only by limiting the people who will work there currently, but also making it hard to recruit people who in the future might want to have children or a life outside of chemistry or biology. In addition, computer science startup may be recruiting B.S. candidates or less, while pharma requires people with higher degrees and higher investments in skills; if those skills may be expendable later on, it seems like it would be difficult to bring people into the industry (or the sciences in general) with the desired abilities.

Publicly nuking a small company you just bought seems to emphasize even more the uncertainty in the job market. I think that I'm being somewhat unrealistic in my stability expectations or I'm too distant from the engines of capitalism to see how everything works, but I wonder how many people are going to put in the years of effort to work in chemistry or biology if, for most, the best case scenario is a position as cannon fodder. What am I missing?

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5. daen on December 18, 2006 6:24 PM writes...

Back in the late 80s I worked for an Aussie financial data company called Pont Data. They had a research and development centre just outside the town of Colchester in North East Essex, England, employing around 60 software developers, system administrators and database maintenance staff. Globally, Pont employed about 500 people at sites in Paris, Amsterdam, Sydney, New York, Chicago, London and Colchester. The company, for various reasons finally couldn't pay its hefty bills from the financial exchanges, then couldn't pay the salaries (see for the sordid details which include heavy borrowing from the Kuwaiti Investment Office and dodgy IPR transfers). Pont disintegrated acrimoniously and totally. The interesting thing is that an entire IT cluster was unexpectedly created in rural Essex from the fragments. Four or five small companies got started up by ex-Pont employees (myself included), with varying degrees of success ranging from outright financial and commercial failure through to a sale of one company (Equisoft) to Reuters for a multi-million pound sum, making the founders millionnaires within 4 years of starting the company. I appreciate that the cost of entry to the biotech/pharma business arena is a bit higher than getting a bunch of pizza-chowing, Jolt-cola-swilling software developers hooked up to some nifty workstations, a few servers and the internet, but still ... if I was a venture capitalist, I might take a trip up to Snohomish County, and if I worked for ICOS, I might have cause for a little hope over Christmas.

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6. Daniel Haszard on December 18, 2006 6:46 PM writes...

Eli Lilly Zyprexa scandal

Zyprexa off label promotion scandal is all over the news now.
Lilly drug reps are alleged to have called their marketing ploy,"Viva zyprexa".

Eli Lilly zyprexa cost me over $250.00 a month supply out of my own pocket X 4 years and has up to ten times the risk (over non users) of causing diabetes and severe weight gain.

Zyprexa which is only FDA approved for schizophrenia (.5-1% of pop) and some bipolar (2% pop) and then an even smaller percentage of theses two groups.
So how does Zyprexa get to be the 7th largest drug sale in the world?
Eli Lilly is in deep trouble for using their drug reps to 'encourage' doctors to write zyprexa for non-FDA approved 'off label' uses.

The drug causes increased diabetes risk,and medicare picks up all the expensive fallout.There are now 7 states (and counting) going after Lilly for fraud and restitution.

Only 9 percent of adult Americans think the pharmaceutical industry can be trusted right around the same rating as big tobacco.

Daniel Haszard

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7. Srikanth on December 18, 2006 7:13 PM writes...

Don't know anything about ICOS but the laid off people should have no problem finding new jobs. There is is a shortage of scientists in America.
Everyone tells me this. I am sorry for anyone who loses their job. Another friend just hired by east coast Pharma. If people fly him all the way from Asia, dont see a problem with everyone getting jobs at ICOS soon. Save your money, move to dehli or china, live like kings, everyone welcome. America bad country anyway.

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8. Another Kevin on December 18, 2006 8:28 PM writes...

Buy-em and fire-em for the patent portfolio?

Sounds a bit like cutting open the goose for the golden eggs, no?

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9. Derek Lowe on December 18, 2006 9:37 PM writes...

Srikanth, I asked you in another comment thread about just where you're getting this mighty education of yours, and how close you are to entering the real world of the job market.

Permit me to ask you again. And permit me to express my scepticism about whether you are who you say you are - since every Indian of my acquaintance (and I've know plenty), speaks more grammatically than that last comment of yours.

If all you're here to do is say the same thing over and over, consider your message delivered. And please move on. If, on the other hand, you actually have something to add, you're welcome to stay.

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10. weirdo on December 18, 2006 10:08 PM writes...

I don't know, Derek, I'm not sure I see the big downside here, except of course to Washington State biotech. I mean, anyone who has been at ICOS for a while has plenty of equity and that's why you go to a biotech, isn't it, to grab a Golden Ticket? And, if you were a recent hire, it should have been pretty obvious that this was a distinct possibilty. That seems to be SOP for many Big Pharma/Biotech deals that actually deliver blockbusters. Heck, it was SOP for Pfizer/Warner Lambert!!

And the fact of the matter is that the vast majority of the ICOS scientists wouldn't get a sniff at a Lilly job if they applied. No offense against ICOS meant here. The Lilly culture is so vastly different from any found at any Biotech that keeping the facility and its people would have been bad, certainly in the long run if not the short. This way, however, everybody gets a nice severance package and isn't made to go through terrible times. Seems pretty civilized altogether.

Unpleasant, certainly. Everybody would have been better off if ICOS were purchased by a company with a compatible culture. But that horse left the barn when the original PDE5 deal was signed. . . . .

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11. cf on December 18, 2006 10:08 PM writes...

I am still a postdoc, and still expect, if they don't move all of their research to the 3rd world (Why are the Chinese and Indians willing to work for "an apple and an egg a day"?), to get a job in the pharmaceutical industry some day. But what I am wondering now is, how does it feel to be a researcher in a pharmaceutical company, such as Icos, if your hard and dedicated work results in a good drug, ... and what do you get as a reward: you get fired!!

Why aren't (at least small) biotech/pharmaceutical companies being owned by the scientists who work there? Then self-destructing business decisions would not happen.

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12. daen on December 18, 2006 10:27 PM writes...

@cf: The money to get a biotech off the ground rarely comes from the scientists. It's usually venture capitalists who invest the money and in return demand a (often substantial, sometimes majority) stake in the new company. In my humble opinion, the exact valuation of the company owes more to tea-leaves and chicken entrails than anything resembling science or business.

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13. Chrispy on December 19, 2006 12:35 AM writes...

Lilly's not totally stupid: if ICOS had a solid research/development line they would've kept it.

Seattle cannot absorb 700 laid-off people, though. That's really too bad: people in Seattle generally want to stay in Seattle.

I'm curious: what's a typical severance package? I was in a crappy job, applying for others, for over a year without results. To the point where the crappy job got better and I dropped the search. So maybe I suck, or maybe didn't have as much time as I would've if I was unemployed, but the process does seem very slow.

My answer to the situation would be to give the employees more ownership so that if the company gets bought they cash in/out.

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14. milkshake on December 19, 2006 3:58 AM writes...

"Lilly's not totally stupid: if ICOS had a solid research/development line they would've kept it."

The vested interests are decisive in a big job-cutting merger like this - it may not be feasible to fire Lilly people for example even if they happen to be less capable and more overpaid than people at ICOS - just admiting such thing would be a career suicide.

The problem with pharma is that the business cycle is slow - there is long interval between a bad decision about early research and the resulting lack of new clinical candidates. It is hard to look back and guess what could have been achieved if some projects were continued or if some good people were retained. (Not that such introspection is ever encouraged)

In big pharma it is much easier to manufacture alibi. Even if bad consequences are pinned down to a particular decision it is always possible to say "we had this technology transfer plan that we all agreed on and it turned out it did not work as expected."

There are some remarkable parallels between big pharma management and Brezhnev-era communism.

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15. milkshake on December 19, 2006 3:58 AM writes...

"Lilly's not totally stupid: if ICOS had a solid research/development line they would've kept it."

The vested interests are decisive in a big job-cutting merger like this - it may not be feasible to fire Lilly people for example even if they happen to be less capable and more overpaid than people at ICOS - just admiting such thing would be a career suicide.

The problem with pharma is that it is that business cycle is slow - there is long interval between a bad decision about early research and the resulting lack of new clinical candidates. It is hard to look back and guess what could have been achieved if some projects were continued or if some good people were retained. (Not that such introspection is ever encouraged)

In big pharma it is much easier to manufacture alibi. Even if bad consequences are pinned down to a particular decision it is always possible to say "we had this technology transfer plan that we all agreed on and it turned out it did not work as expected."

There are some remarkable parallels between big pharma management and Brezhnev-era communism.

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16. BeenThere on December 19, 2006 6:32 AM writes...

Consider an insider’s pov;

Let us begin with the facts… To put it mildly, since its inception, ICOS’ history of drug discovery & development has been less than stellar. A close reading of their financials tells any objective reader that their ROI for R&D, even compared to their peers, has been abominable (btw, Cialis DID NOT originate w/in ICOS R&D). For this reason, I find it hard to believe that anyone worth their salt at ICOS didn’t know in their “heart-of-hearts” that this tragic scenario was inevitable.

Allow ICOS and organizations like it, to serve as a cautionary tale; you cannot spend hundreds of millions (billions?) of dollars forever… eventually the music will stop. Your organization better be producing INDs, NDAs & FDA approvals or else this kind of thing is going to happen. That’s just the way pharma works, it’s a tough business. I suppose I could go on & on about why ICOS turned out the way it did. My diagnosis is straightforward; the managers running R&D were mostly full of themselves. My own experience is that filling labs with the status quo “best & the brightest” often creates a type of myopic arrogance. Aside from working smart and honest-to-goodness hard labor, there is no formula for producing a valuable research product. Often times (but not always) newby “intelligent” scientists are too full of themselves to realize this basic fact.

ICOS had a long ride, longer than most, certainly longer than it deserved with its consistent underachievement. Shame on you ICOS for spending all that money for all those years yet producing so little lasting value to show for it! Good riddance & thank you Lilly.

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17. milo on December 19, 2006 6:39 AM writes...


Could you post a link to any data supporting your claim that there is a shortage of scientists in America? I don't mean to be a stickler, but I have a bunch of friends (BS to Ph.D.) who would gladly disagree with you since they have been without jobs for a while now.

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18. chris on December 19, 2006 7:19 AM writes...

I've seen this from both sides, many people from biotechs don't feel happy if they are absorbed into a major Pharma the culture is very different. Severence package from a big Pharma is usually quite generous and many would take the money and move to another small biotech. I'd be very suprised if anyone joined a company financed by venture cap was looking for a long term career in the company, it is just not what the business model is designed to do.

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19. Kay on December 19, 2006 7:47 AM writes...

Love the comparison of big pharma to 'the big sleep' as the Brezhnev period has been known.

The Kalamazoo, MI area did something similar to Derek's musings in his final paragraph. I don't know anyone who thinks that lasting or important events occurred as a result, however. Most people just fled town for the next big pharma job.

Entrepreneurs are rare.

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20. Don B. on December 19, 2006 11:14 AM writes...


From several friends at Warner Lambert/Parke Davis, the Pfizer severence package is very generous. I assume that Lilly's is competitive.

With that said, most of the good researchers would rather have a position than "the package"!

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21. MolecularGeek on December 19, 2006 12:42 PM writes...

I'm not so sure that the main motivator for researchers joining a smaller/early stage biotech/pharma is financial. Yes, you typically get an equity position and there is the chance it can pay off big, but I think that it's as much a function of the general environment as anything else.

The poster above who compares big pharma to a Brezhnev-era command economy hits the nail on the head. Any organization as large as the big centralized pharma research labs has an amazing institutional inertia and phenomenal latency in communications. Decisions sometimes get made based on marketing data and incomplete research data taken out of context (or outright proctonumerology). This is not to say that smaller companies are immune to bad decisions, but at least the process seems more visible, and reaction to changing conditions can happen faster, either from necessity or by design. The chance to hit the stock-option lottery is nice, and certainly helps rationalize the decision to take such a big chance to those around us who don't understand how much being allowed to do our best work matters to so many in research. But I think the absence of a risk-averse management structure matters more.

On a little bit of a tangent, the ancient Athenians had a concept of a polis, a city that was large enough to be self-sufficient, but small enough that every citizen was able to be actively involved in the governance and affairs of it. If I remember correctly, they had a theoretical upper limit of about 20,000 citizens in the polis before they felt that detachment from civil affairs by the citzens and the rise of a professional political class was inevitable. By analogy, how big can/should a pharmaceutical/biotech research facility be before that same sort of malaise and organizational ossification begins? I'm inclined that the sweet spot is somewhere between 500 and 1000 researchers, and associated support staff. I think that once you can't realistically fit the research staff into a single room (granted an auditorium, but still...) there is a line that gets crossed. It's primarily psychological, I think. As long as it's possible to sit everyone down to hear about results in a seminar setting, it will seem important to at least maintain a passing knowledge of all the active research program. Once it's impossible to have that kind of meeting, people start setting up mental barriers between "us" and "them", and that leads to balkanization and the growth of middle management to tie together all the labs that seem to have lost a sense of common purpose.

Just my $0.03


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22. Srikanth on December 19, 2006 6:42 PM writes...

"If all you're here to do is say the same thing over and over, consider your message delivered. And please move on. "

America supposed to be about free expression, but you do not beleive this is for all? Yes, I am not the best speaker of English or sharpest cookie in the box. You did not read my last message to you and maybe that it is the problem. My education in phd is done with. Will start next year. READ my post to you several days ago (not sure which thread) about Americans having too much education in all the wrong places. Attitude is everything and willingness to be slave is all.

To the poster milo who say there is no scarcity of scientist I say ask your American Chemical society. I talk to person at ACS meeting last year when I attend seminar on learn how to get visa. ACS man told me they are pushing hard with governmnet because of lack of American scientists. Again, everyone knows this but Americans? I think they are hiding the jobs from you. ACS guy say they push hard to double the h1B visa and give all foreign students f4 visa which is same as greencard. I am last man out before f4 visa next year because who will use the h1B and other visas when you can take Indian students right from US? Not so bad for me, but my friends will not be able to join me as they have crappy english too. I read Dereke because he writes well and is not afraid to wear a beard like a true man.

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23. jose on December 19, 2006 7:48 PM writes...

Borat? Is that you? I didn't know Sacha Baron Cohen was conversant in science, but I'm not surprised... !

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24. A-non-y-mous on December 20, 2006 6:07 AM writes...

People, people, people . . .

Don't feed Trolls.

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25. Jake on December 21, 2006 12:11 AM writes...

In my (software/dot-com) field, if a big company were to buy a smallish startup and fire everyone, after taking some time off, some higher-up-but-not-exec would start calling his former coworkers and saying "hey, wanna go get some VC money to do this again?" and it'd be off to the races.

Granted, firing everyone is less likely because a lot of the IP only lives inside the employees heads, and also the amount of VC money that you need to take a dot-com to success can be in single-digit millions, but I still wonder why this isn't an option.

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26. Rainy in Seattle on December 21, 2006 2:35 AM writes...

Word around here in Seattle is that employees at ICOS got six months severance and benefits. I think if you were there for a long time (>10 yrs?) you got more.

Although... they're not laying off 700.. I read 60-70 people got sales jobs with Lily. Also, there's 150-200 who staff ICOS' Clinical Contract Manufacturing plant. They'll stay on till the contracts are done (end of 2007) and most likely will be bought and retained by another company. Although, the market for a smaller capacity plant like that is rather limited. It's hard to imagine a solid plant like that being mothballed.

Business is business.. but it's really sad to see so many jobs go away.. We still have the Amgen Wash branch (at least 1000 people), Fred Hutch, Univ Wash., Zymogenetics, and scores of smaller startups.

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27. Milo on December 21, 2006 12:55 PM writes...

Why can't I feed the troll? They are so cute... and misguided.

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28. daen on December 21, 2006 3:52 PM writes...

Derek, what's your take on the purchae of Praecis by GSK for $5 per share ($54.8mn)?

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29. Devices R Us on December 26, 2006 2:23 PM writes...

One of the biggest difficulties in this whole story is the perception that the employees own the company or are somehow entitled to a piece of the purchase price. The company is owned by the shareholders (some of whom are actually employees, Paul Clark has aobut 200K shares and St John Thomas has 100K both of whom will do OK). The shareholders voted and so be it. It is also interesting that ICOS is somehow seen as a biotech, but so far at least only a small molecule has made it out and IC776 is the only biotech type molecule to make it to Phase I.

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