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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: derekb.lowe@gmail.com Twitter: Dereklowe

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January 29, 2009

Opportunity Costs

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Posted by Derek

We’re seeing an example right now of one of the big costs of a drug company acquisition. While the Pfizer / Wyeth deal winds along, with all the regulatory and financial details being slowly worked out, what happens in the R&D organizations?

Well, at Wyeth, I’d imagine that things have slowed down a great deal. No one knows what the future will be like, what parts of the company will stay, and which people will be asked to stay with them. How do you make plans under those conditions? For many people, the project they’re working on is now very much a secondary consideration.

Even outside the personal level, there are a lot of paralyzing influences. The same uncertainties about individual jobs apply to development projects. Some of what Wyeth is working on surely overlaps with what Pfizer’s already doing. So which project goes forward? Not both of a matched set, that’s for sure. There are some projects at both companies that are dead in the water, but no one can be sure which ones, and no one will know for some time to come.

That’s because you can’t really start ironing out these details until the deal goes through. Legally, Pfizer and Wyeth are separate companies, and there are a lot of difficulties involved in sharing information in such depth. Even when that eventually happens, there are going to be plenty of other things to work out. Let’s say that Project Y from Wyeth looks to be in better shape than the corresponding Project Y-Prime from Pfizer, so it goes on through. Fine! But under whose rules does it proceed?

Every company has its own culture about these things – the criteria that are used to recommend a compound to the clinic, the ways those boxes are filled in, the sorts of people who have to sign off on them. A project caught in the middle can stall while all these details are cleared up, losing months (or even a year or two) in the process. You can imagine the disconnects: you guys did check this compound for hERG activity, right? With what assay? And with what cutoff? That’s not the one we use, anyway; we’ll have to run it again, and get that signed off on by. . .hmm, well, by someone, we’ll figure out who’s in charge of that sort of thing soon, about the same time that we figure out who reports to them. Now, about your formulations work. . .you used what, again?

No, all this has a ferocious price, when you measure it in opportunity costs. The people caught up in all this could be doing something much more productive with their time, for sure. This sort of thing doesn’t show up on the books. And the longer the process drags on, the worse it’ll be.

Comments (23) + TrackBacks (0) | Category: Business and Markets | Drug Development


COMMENTS

1. Kay on January 29, 2009 10:09 AM writes...

If Pfizer is good at anything, it is good at the fast hack and grab. Picture the way an alligator twists off a leg, for example.

What does this say about the very-brusk Ruffalo approach? Buffalo chips, only?

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2. Mr. AtoZ on January 29, 2009 10:23 AM writes...

I'm sure all your valid points in this column were a mere bullet point on some marketing exec's powerpoint presentation. But that is a far as it went while they feasted on their shrimp cocktails. This deal is all about loot and scoot. Period.

"The Romulans don't take prisoners, Captain"

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3. Jose on January 29, 2009 10:33 AM writes...

Moreover, I'd love to see someone ballpark an estimate on how much this acqui has set back research at every other research corporation in the country...

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4. Hap on January 29, 2009 10:50 AM writes...

In theory, you pay for the opportunity costs of your merger with 1) all the people you're laying off and/or 2) by increasing future efficinecies in research so that people you have produce mmore per person. Unfortunately, all of the recent history with pharma mergers (maybe with any merger) suggests that only one of those will occur (and we all know which one). The lack of honesty in this whole Charlie-Fox does not suggest that there is a change of heart or competence on the part of Pfizer management (or Wyeth management, I guess, since they bought it, too).

Lots of money and jobs are being wasted, and it doesn't appear as if this will help anyone but a fortunate few. It's kind of like a reverse Rumplestiltskin - spinning profitable companies into dust. I could have seen us (the US) spending ourselves into debauchery and leaving us after not so long with nothing, but I couldn't picture so much spending far more for the same things (money that isn't saved or used for the future) and being left with nothing afterwards. I guess we really didn't need the mafiya to steal our country's resources and drag us into poverty.

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5. weirdo on January 29, 2009 11:21 AM writes...

Oh, you guys just don't see how great this merger is going to be. Spoil sports. See, Wyeth and Pfizer are pretty ALREADY one big happy family!

www.premierbiopharma.com

You're so money and you don't even know it.

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6. Bruno on January 29, 2009 11:25 AM writes...

Remember the old conventional wisdom tidbit:

"Mergers and acquisitions actually improve competition, decrease prices and improve customer service"

...or some such.

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7. Hap on January 29, 2009 12:31 PM writes...

Who the hell wrote that? Mxylplyk?

Companies don't want to increase competition or decrease prices - those acts are antithetical to their goals. They want to make more money, primarily, and competition and lower prices (unless their costs decrease even further) inhibit their ability to do so. Customer service...well, if he can show me merged companies with better customer service, I'd like to know what they are. [Maybe Sprint? (their service couldn't have gotten worse)].

Sometimes things happen that have nothing to do with what people intended to do - mergers don't seem to be that case, however. Companies merge because the converse of the conventional wisdom is the likely outcome.

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8. alig on January 29, 2009 1:13 PM writes...

I'm sure there will be great fun untangling the various partnerships each company has. Wyeth has partnered with company X to develop a drug against target Z. Pfizer has partnered with company Y to develop a drug for target Z. Both agreements require large payments if you stop working on them and don't allow the sharing on data. So two teams at the new company will be working to develop a drug for target Z and they will not be able to share data. Great fun.

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9. Chrispy on January 29, 2009 2:56 PM writes...

Jose, I know one company which is now more productive since the purchase of Wyeth means they won't be purchasing US!

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10. Hap on January 29, 2009 3:51 PM writes...

No, it just means they'll be purchasing you in a few years after they've merged, digested, and excreted Wyeth and realize they still have an empty pipeline.

Cthulu saves...in case he's hungry later.

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11. fred on January 29, 2009 4:23 PM writes...

Hap: Rlyeh Cthulhu!

http://www.hello-cthulhu.com/

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12. Fat Old Man on January 29, 2009 8:59 PM writes...

So far, I have not seen any irresponsible behaviour. We are professionals, and there are timelines for projects that we must honor. For projects in development, there are patients that need uninterrupted supplies. Of course, many have a heavy heart right now, but as long as I am in the game, I will play it the best I can.

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13. milkshake on January 29, 2009 11:53 PM writes...

Old man: Playing it by the rules + the best we can is fine - after we return from the pitchfork rally.

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14. Chemjobber on January 30, 2009 2:07 AM writes...

Reports are that some folks decided to lower potential opportunity costs by contacting their new brethren directly, until told to cease from above. After all, the deal is not yet done.

(Wouldn't this be a fine time for Wyeth employees to throw their wooden shoes into the machinery, so to speak?)

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15. drug_hunter on January 30, 2009 8:20 AM writes...

Actually, the quote is:

"Sir, the Romulans do not take captives"

and was muttered with clenched teeth by Ensign Chekov to the bumbling Commodore Stocker.

I point this out merely because I know we all pride ourselves on accuracy and such an important matter could not be left unattended.

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16. Chemjobber on January 30, 2009 9:47 AM writes...

Ah, yes, but what about "Wrath of Khan?"

"Any suggestions, Admiral?"

"Prayer, Mr. Saavik. Klingons don't take prisoners."

http://www.youtube.com/watch?v=xDE8pjiCnSw

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17. Hap on January 30, 2009 1:31 PM writes...

NYT is reporting that Roche is lowering its offer for Genentech and making it hostile. Apparently, the Pfizer/Wyeth deal made Roche decide that there was enough funding to acquire the remaining shares of Genentech at reduced price (a 3% premium over its selling price). Wow, what a deal!

I'm sure that'll keep things humming at Roche and Genentech. "I know we just lowballed your bosses, but we really think you're valuable." Oh, and doesn't lowering your bid only make sense if your target is looking to sell out? If you're not looking for money, and someone gives you a crappy offer, why are you going to take it? You might take it if you figure the stock price will drop further, but since Genentech is actually productive (and others are getting less so), it's probably in a position to gain more business, and thus that might not make sense.

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18. Pfizerite on January 30, 2009 9:03 PM writes...

The problem Old Man is that while I am still working on my projects I am also sending out resumes as fast as possible since J Kindler has said that he needs to recover 8 billion dollars so my guess is that either St. Louis, La Jolla or Sandwich is on the block and I don't want to be there when it happens. Like wise at Wyeth anybody with any ability should be looking for an exit.

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19. Anonymous on January 30, 2009 9:56 PM writes...

Kindler actually said $2 billion on new PFE restructuring plus $4 billion from merger synergies, i.e., $6 billion.

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20. Fat Old Man on January 31, 2009 10:40 PM writes...

Pfizerite:

Any bites on those resumes??

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21. pfizerite on February 2, 2009 2:09 AM writes...

Some bites and in answer to anonymous the 4 billion in merger synergies is elimination of duplicate personnel for example the new Pfizer only needs 150 med chemists and has 200 well 50 chemists get the ax, so I repeat better to bail now then wait and get cut later. P.S. all of Pfizer preclinical research is about 2 billion or a little less, Pfizer clinical is around 6 billion.

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22. Chemjobber on February 2, 2009 2:27 AM writes...

PFEite: If I may, are your bites big or small pharma? My blog has my e-mail address, if you're so inclined. Anonymity is just fine.

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23. srp on February 3, 2009 4:28 PM writes...

As a business school strategy professor, I usually try to get the MBAs to be skeptical about mergers. Horizontal mergers of equals have a terrible record overall, especially in knowledge-intensive industries. Vertical integration is often undertaken under rationales that are provably erroneous. Unrelated diversification often turns the firm into an inefficient mutual fund with an additional penalty for political allocation of capital post-merger. And of course often any benefits from the merger are often captured by acquired firms' shareholders.

On the other hand, some large mergers actually work out well. Procter & Gamble did pretty well with Charmin long ago and now seem to be doing a good job with Gillette. HP and Compaq wasn't that great a strategic idea but was executed OK. The EDS acquisition is more of a stretch and it remains to be seen if HP's very specific plans for EDS turn out to be successful. The AVery Denison merger was a winner. And companies such as Emerson Electric and GE have had success over decades acquiring many good-sized companies.

The big pharma mergers of late haven't looked too good. But I wonder if the economics of putting more drugs through the same distribution and marketing pipeline aren't fundamentally correct, if such a pipeline has excess capacity. Is there any other way of getting drugs into a pipeline other than by acquiring the whole company, which clearly has huge costs? Obviously, licensing and co-marketing agreements have been tried and have their limits.

I suspect that the fundamental fact is that we don't need 12 separate marketing and distribution systems for prescription drugs, given the huge scale, volume, and learning economies these present. If that is correct, but we need way more than five or six drug development research centers then the problem is going to be to find a setup other than vertical integration to link research to marketing and distribution.

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