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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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« Tie Me Molecule Down, Sport | Main | The Merck Deal and the SEC: Not a Joke »

March 9, 2009

Merck Actually Does It

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Posted by Derek

So Merck wasn’t kidding about making a large deal, were they? When I used to work for Schering-Plough back in the 1990s, there were constant rumors, the whole eight years I spent there, about the company merging or being taken over. And as far as I know, those have never really ceased – until now, that is. And Merck has always resisted the big merger route – until now.

This deal would seem to have made more sense a few years ago, when Vytorin looked ready to make huge amounts of money. (Of course, Schering-Plough was more expensive then, and perhaps Merck may have had a bit more confidence in its own pipeline back then, too). But it’s the deal we have today, so does it make sense now?

Well, up to a point. Like many of these, it works the best on paper when you talk about shedding head count and realizing all those cost savings that are supposed to be hiding in the numbers. We’ll have to see how that actually shakes out – the main research sites for the two companies are actually very close to each other in New Jersey, and I’m not sure if that’s a bug or a feature here. One interesting question is what happens to Fred Hassan, Schering-Plough’s wily and ambitious CEO. Back when the two companies first partnered up, the rumor was that Hassan was trying to use this as a springboard into Merck’s upper management, so we’ll see if that’s coming true.

As for the portfolio fit, S-P has been very upbeat about its drug pipeline, and they seem to have convinced them in Rahway. The biggest attraction seems to be the thrombin receptor antagonist program, which I wrote about here from slight personal experience. But there have been stories over the years that Pfizer was never very happy about what they ended up buying when they purchased Pharmacia / Upjohn, Hassan’s previous company. (They were primarily buying Celebrex, of course, and we all know how well that worked out, but the story is that Pfizer believed that they were getting rather more besides).

In a way, though, this deal saddens me, and that’s not because I used to work for Schering-Plough. It’s not like I’m worried about the fate of its corporate culture – to be honest, I can’t say that I much cared for a lot of that culture while I was there. But what strikes me is that Merck has been a symbol of a company that’s done well by going it alone, ruling out these kinds of deals for many years. It’s as if they’re breaking down and giving in, and since I’ve never cared much for mergers in this business anyway, seeing them do one is doubly disturbing.

And for those folks who drove Schering-Plough's stock price up 10% last Friday - hey, nice work. The SEC will be in touch with some of you shortly, I should think.

Comments (41) + TrackBacks (0) | Category: Business and Markets | Drug Industry History


COMMENTS

1. The Pharmacoepidemiologist on March 9, 2009 8:07 AM writes...

I disagree: the research sites (especially Merck's Philly site) aren't that close (esp for clinical research, which is quite a bit more expensive than discovery); the portfolios don't mesh (MRK is very vaccine oriented, SGP much less so), the corporate cultures differ a lot (maybe Hassan doesn't care about that, given his parachutte, but the stuckholders from SGP should, since as we learned with PFE-Pharmacia, the employees of the acquired company represent valuable assets who will leave if the culture is non-accomodating), and current product lines are non-integrative. All in all, a typical big pharma no-value-added M&A proposition. It doesn't help that MRK hasn't been active in big pharma M&A in a long time and it tends to be resistant to suggestions from parties external to it, so my guess is there's a lot of learning curve to be negotiated in making this merger work. That means lots of additional pain for the employees of both companies and for the stuckholders too. The lack of vision represented in this merger is striking, and the insularity of Whitehouse Station even moreso. Obviously, the place of the big pharma MBAs who know little about the drug business besides the cash flows shown in an Excel spreadsheet hasn't declined one whit in the post-Vioxx era. And the impotence of the Business Development departments in big pharma to provide value creation also appears to be in much decline if this is an example of the focus for those people during their working days and nights.

Let's go back to Astellas-CVTX. At least there are matters of value creation and the future there. This merger? My prescription is a healthy dose of financial Viagra. Maybe a double loading dose.

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2. cg on March 9, 2009 9:00 AM writes...

Best industry to be in nowadays is probably post-merger integration consulting

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3. startup on March 9, 2009 9:07 AM writes...

And if Dow and R&H settle today, together they may very well synergize more people in one day than Pfizer.

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4. darwin on March 9, 2009 9:47 AM writes...

God help the Schering unfortunates. There will be synergy (blood). Those that will be dismissed will be the lucky ones.

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5. Hap on March 9, 2009 10:02 AM writes...

Unfortunately, I doubt that the people laid off will be lucky unless they have the Indian version of a green card (if such a thing exists). No money to start other companies, and a desperate need to pay the lawyers and stock analysts who made the merger happen means lots of unemployed people in bad straits (oh, and no retirement funds to dip into temporarily).

How do you develop drugs with no people? I don't know of a financial analyst who's developed one on their own - I guess that the "magic of the market" I keep hearing about.

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6. Jose on March 9, 2009 10:48 AM writes...

Sliding closer and closer to having just "Pharma Corp." and "Pharma Inc."

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7. Anonymous on March 9, 2009 11:18 AM writes...

I don't know - PfizerGlaxoSmithKlineMerckNovartisSanofiAventis kind of has a nice ring to it

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8. startup on March 9, 2009 11:50 AM writes...

I was going to suggest DrugCo (as in Drew Carey show) but it seems a business by that name already exists, so how about Mizer, from M and izer. That'll certainly produce a lot of Pfercks for corporate types.

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9. Hap on March 9, 2009 12:01 PM writes...

I wonder if merging is an attempt to gain leverage if the US goes to some sort of nationalized health care system - if there's not too many drug companies to go to, it decreases some of the government's leverage in negotiating pricing decisions. It might also help with negotiating purchases of drug candidates from small companies.

Around here, one hospital group has greater than 50% of the hospital capacity, so negotiations with the major local health insurer usually threaten to go nuclear because neither the insurer (whose customers won't have anyplace to go for care if they can't go to HoCor) or the hospital group (who won't have enough paying customers if they lose most of the InCor-covered people) can afford to lose the business and both want larger shares of the money involved. I wonder if a system with very few large pharma companies and the government would work similarly.

Of course, that means BigA$$PharmaCo actually has to find drugs, and probably more profitably than currently. No one's figured out how merging does that exactly.

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10. Bruno on March 9, 2009 12:18 PM writes...

Remember the '70s film "Rollerball", where the nation was under the control of a handfull of corporations, each contolling a single aspect of world society, a product of uncontrolled M&As.

The Corps included:
Energy
Pharma
Leisure
Media
Food
Transportation
Defense

Gentle Readers, Are we there yet?

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11. ithink ithink on March 9, 2009 12:24 PM writes...

anyone want to make this into a sweet 16 bracket roster?

Big Drug Makers May Seek to Fill Holes in Roster
Link: http://www.nytimes.com/2009/02/25/business/25place.html

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12. InfMP on March 9, 2009 1:23 PM writes...

Does anybody know if the hiring freeze is on outside of the US???? I know that all interviews in rahway are cancelled, but this apply to all other countries too?

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13. biolchick on March 9, 2009 2:05 PM writes...

Hiring freeze also in place in EU

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14. Joerg Kurt Wegner on March 9, 2009 2:13 PM writes...

After the announcement of the upcoming patent cliffs I am not surprised, just look at % of expected sales
http://tinyurl.com/cvuqzt

Merck will loose 35% and Pfizer 40% from the expected 2012 sales. I am not sure if innovation alone can bridge such gaps in three years from now?

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15. CMC Guy on March 9, 2009 2:34 PM writes...

The standard question is whether the sum of the parts will equal greater than the whole? In most cases of Pharma Mergers it has not worked that way and frequently seems to be significantly less in the long term. We can hope this one will be against the trend but the fact that both entities appear in down cycles will it mean two negatives lead to a positive (guess depends on if doing addition or multiplication). I have never really comprehended the financial/stock benefits behind theses deals (save for a few Execs with Pt parachutes) but assuming the combined organization will start with >100K employees I wonder what the "right size" will be.

You imply Pfizer was "unhappy" (fooled?) by what they got with acquisition of Pharmacia etc. however I wouldn't necessary target Hussan on that. My understandings (perhaps some who lived it can elaborate directly) is there were many strong potential programs/projects in various stages that were abandoned after Pfizer post-merger. This was largely because the did not fit the "new" Pfizer "Finance models" for ROI. I would also speculate many "advocates/knowledgeable people" were not retained which more than anything undercut progress or killed projects and similarly Pfizer at that time had a strong "NIMH" prejudice so anything not "internal" was hampered/poorly handled (Merek's attitude used to be even worse although since they have absorbed projects by acquisitions/in-licensing in past several years may be will be more level assessments). Regardless most projects will likely suffer from at least some merger paralyze.

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16. CMC Guy on March 9, 2009 2:38 PM writes...

BTW- NIMH stands for "Not In My House" rather than for the NIH Branch/Rats of.

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17. Tok on March 9, 2009 2:59 PM writes...

Glad I spent the last 10 years educating myself out of a job. Anyone know if Wal*Mart could use a chemist?

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18. MTK on March 9, 2009 3:30 PM writes...

I think I commented on this before, but I examined about eight different pharmas and their stock prices over the last 10 years. (My assumption is that 10 year stock performance is long-term enough to reflect some benefit, or lack thereof, of the merger.) What I found was that there was essentially no correlation between performance and whether they had undergone a merger or not. Merck, Lilly, and Pfizer were at the bottom as I recall and two of those, until today, had not undergone a mega-merger. Sanofi-Aventis and Abbott were at the top and one has gone through a couple of mergers and the other none.

The problem is that we can't turn back the clock and run a control experiment where we see how two companies would have done had they not merged. For example, GSK was sort of middle of the pack, but we really don't have any idea how either GW or SB would have performed without a merger.

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19. Anonymous on March 9, 2009 4:15 PM writes...

Time to revisit your prior post?

March 10, 2008

Fill Out Your Pharma Brackets

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20. milkshake on March 9, 2009 6:19 PM writes...

Cox-2 fiasco was something hard to predict at the time when Pfizer-Pharmacia merger was hyped to the stockholders. But for the rest: I am aware of several kinase projects that were quite far along, projects that Pfizer dealt with sumarilly- by dispersing the people who worked on them and given them to LaJolla/Agouron, where they wanted to work on their own compounds and talked down anything that came from Sugen. We had two very potent unrelated in-house discovered series of c-Met compounds, with very good PK properties, in early 2000. We has also good Src-selective nanomolar compounds, and some CDK inhibitors. All of them were non-oxindole heterocycles, active in cell, MW below 400, with a good PK. We had a Sutent backup with a reduced organ tox liability and more linear dose-response that went to Stage I. Kindler and LaMattina, where have all the compounds gone? mind you, that was just one relatively small research site. Pfizer has actually never been good in oncology and they gave a lukewarm support to their former Agouron site - small wonder that the people there got so dispirited.

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21. S Silverstein on March 9, 2009 6:39 PM writes...

At least Schering will get access to the excellent targeted information delivery tools my library staff and I put together that increased flow of pertinent scientific literature to MRL scientists by an order of magnitude over decade long norms, before I and many of them got laid off to increase efficiency.

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22. Mmmm on March 9, 2009 7:46 PM writes...

I think the news within Merck was utter surprise. We thought this would happen years ago after vioxx and the merger with SP was always a background rumor, but with the current economy this event wasn't on anyone's rumor radar. I just hope that a big talent exodus from SP doesn't occur. Many of us live near SP employees as the sites are close together, so I hope proximity will keep people from fleeing, but how they decide to fold in the SP people into Merck is a mystery to all of us. There certainly will be layoffs, but only time will tell how the new company will look.

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23. Bored on March 9, 2009 8:20 PM writes...

Jose,

Looking at the current policies in Washington we are headed toward Pharma.Gov

Won't that be wonderful.

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24. befuddled on March 9, 2009 11:16 PM writes...

Every time Hassan's name comes up, people use words like "wily" and "cunning". Can anyone supply any facts, factoids, or anecdotes to explain this?

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25. Sir Jimmy Black on March 10, 2009 12:03 AM writes...

With respect to Mr. Hassan, as a former employee, I think of terms like "faker', "crook", "charlatan", "snake oil salesman", "PT Barnam", "cheapskate" and the like.

Fred gets $$ and everyone else goes home. Too bad for all those former SP employees, maybe they could apply for jobs in China doing their own research.

Combi-chem, genomics, proteomics, bullsh*omics, and similar fads RULE DUDES!! Forget about safety and efficacy, that's totally "old school" and only results in the discovery of medicines. Does Zetia come to anyone's mind in this regard??

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26. milkshake on March 10, 2009 12:21 AM writes...

Fred Hassan certainly has a very pleasant, smooth and low-key way about him.

I remember Fred Hassans visit, and him speaking in front of the assembled staff in San Francisco, and explaining in plain language about how he wanted to keep expanding Pharmacia based on the strong in-house research rather than by acquisitions and in-licensing, and how he would fend of any potential merger, and how we were doing fine and sky was the limit. I felt wow, the first big-company CEO with a soul, somoeone whom we can relate to, he understands the scientists and values what they do. Rather short time later I heard Hassan speaking again, explaining that he had absolutely no intention of selling out to Pfizer but the acquisition offer put on the table was so big that he could not fight it in the best interest of the shareholders even if he wanted to. And strangely I did not feel bitter then (for believing his earlier promises). At the time I thought maybe that's life and he could have been completely honest.

There is a joke that the art of diplomacy is about screwing the other party in a way that makes them thankful.

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27. Sir Jimmy Black on March 10, 2009 7:35 AM writes...

Milkshake,

That's the PT Barnam in him...

I misspelled combi-chem in my previous post, I meant to type zombi-chem...

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28. hubub on March 10, 2009 8:07 AM writes...

Milkshake:

Diplomacy is a verbal version of sex without marriage. Hopefully, the consequences aren't going to be long-term, though frequently, they are.

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29. CMC Guy on March 10, 2009 1:42 PM writes...

Addendum: According to FiercePharma anticipate about 15K lay-offs post Merger (or reverse take over as now being labeled). Of course Hassan's and other SP Exec Pt/Au parachutes are probably logs of what most workers will get.

http://www.fiercepharma.com/story/60m-goodbye-scherings-hassan/2009-03-10

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30. Anonymous on March 10, 2009 3:27 PM writes...

With reference to post no.26

Interesting that you should mention that Milkshake because I just saw a rerun of the very same movie today.

Sickening!

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31. MTK on March 10, 2009 4:40 PM writes...

In Hassan's defense, he does answer to his shareholders. Merck's offer represents a 34% premium over SGP's current price. That's a post-Vytorin high. How the hell does he turn down that offer in this market without the shareholders coming after him with torches and pitchforks?

Forget for a moment it's a pharma company, if I owned stock in company X and I found out that they turned down that offer, I'd be mighty PO'ed.

The only way he could turn that down is if he could credibly argue that the shareholders will get better returns staying independent. In a bull market, maybe you could make that argument. In this market, no way.

Seriously, what would you have him do with that offer on the table?

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32. milkshake on March 10, 2009 5:44 PM writes...

I am in a complete agreement with the previous commenter that Hassan probably had to go along with that offer from Pfizer - but now I think at that time of his first visit while he was giving the re-assuring pep talk he must have known what was coming. Because shortly after Hassans visit our very bright and motivated site director Laura suddenly run away, and she went into a much smaller company without giving any good reasons for her departure... I think we were the very last people to find out about the Pfizer deal. (And it then took additional half year of inertia and prevarication from our new masters to learn that we were axed).

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33. CMC Guy on March 10, 2009 6:29 PM writes...

MTK if one takes a myopic view that share price is everything then perhaps Hassan did make the best choice for the shareholders. At the same time by that perspective he would be primarily responsible for the stock price being low because of "handling" of issues the past couple years so could argue was reason was even open to the deal. On the other hand as a shareholder I would question his $60 package plus the salary etc. he was making (2007 was $30M). Did he turn down/reduce those payments to give increased value back to the shareholders?

I do not know if a combined Merek-SP will be a "better" in the future than if continues alone. There seems to be some suggested synergistic elements that make it look good on paper (as all M&As apparently do). I do worry about the direct costs to many good employees that have devoted themselves to SP or Merck.

Inspite of your analysis I think the track record for mega-mergers is not largely positive. I do not judge Pharma companies much by stock performance as you seem to. Are they effectively discovering and developing new drugs is high on my expectations and do they operative ethically is another factor. Mergers impact have been unfavorable for these from what I have seen. May be I am glamorizing but pre-90s Pharma was able to do these things at highest levels and be highly profitable (Merck especially) whereas now many seem to be missing these elements.

J&J and Abbott seem to top your list of "winners" however IMO believe both have relied heavily on acquisitions of companies or products to fill their scant pipelines because internal program outputs have been weaker than others in Pharma (which is as we lament overall poor). Both these have strengths in diversity (Diagnostics, Consumer Products) so probably represents a good business model yet do not make the comparisons to other more strictly Pharma as meaningful (in stock and also in R&D).

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34. MTK on March 10, 2009 8:48 PM writes...

CMC,

I have no idea what you mean by myopic. My use of stock price to judge merger outcome was 10 year performance. Hardly myopic. That's pretty long term. A company discovering and delivering drugs is going to rewarded in the stock price over the long haul and one that is not is going to punished in the stock price in the long haul. And BTW, my conclusion was not that mergers were good, but rather that they were neutral.

As for Hassan, contrary to your contention that he is responsible for a "low" stock price, SGP has handily outperformed the S&P 500 (and every other Big Pharma excepting ABT) over the last 5 and 10 years. So Hassan has not only been better than the market as a whole but got his shareholders 34% on top of that.

While we may not like it as scientists, that is doing the job for your shareholders by any measure. A CEO of a publicly owned company answers to his shareholders, not his employees.

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35. CMC Guy on March 11, 2009 2:34 PM writes...

MTK you continually offer the same picture of stock price/performance as the measure of Pharma mergers/Companies whereas I see there are more ways to judge and define a company/industry. Perhaps they involve less concrete assessments but the R&D activity/outputs, products and people are worthy criteria IMO and from those angles most the major mergers have not been neutral but had generally negative impacts from what I have observed. Although I do not follow stocks closely in some cases the primary reason for a M&A did seem to be a short term effort to boost the stock without longer term means to address the companies future. I also do not see the reward/punishment as highly correlated when comes to drug R&D as you anticipate.

As far as the 34% premium I was attempting to point out that (based on what I read recently) that one reason SP was "in play" was the current suppression of the price (down 30-50% range this year from 1-2 year levels). You don't have to tell me Markets and Pharma in particular have gone through serious upheaval (and take your word that SP has outperformed) so attributing devaluation to Hassan is ridiculous oversimplification (which is what I was trying to echo about the whole issue of looking at stock price only). Maybe tangential but as shareholder I would have concerns about his buy out/salary which are huge payouts.

Its a whole other post topic but your last line expresses part of the problem we have in that companies largely are only interested in promoting shareholder value however products and employees seem to take a 2nd (3rd or 4th) seat to those considerations.

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36. Anonymous on March 11, 2009 5:31 PM writes...

MTK,

your comment should really read....."A company making money through marketing strategy (e.g. remarketing older drugs) is going to rewarded in the stock price over the long haul and one that is not is going to punished in the stock price in the long haul."

I think the point that CMC is making is that while big pharma has been making money, they have not really been delivering novel and effective treatments for many diseases where there is a huge medical need. I judge companies involved in making medicines by how good they make medicines not how much money they make due to strategic business and marketing decisions.....Sadly I know the world doesn't work this way.

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37. Anonymous BMS Researcher on March 12, 2009 6:12 AM writes...


> CMC Guy on March 10, 2009 1:42 PM wrote...

> ...Hassan's and other SP Exec Pt/Au parachutes
> are probably logs of what most workers will get.

I would imagine the rank and file will get Pb/Sn parachutes.

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38. MTK on March 12, 2009 6:48 AM writes...

Anon #36

Name me a company that is making "novel and effective treatments for many diseases" that hasn't been rewarded through it's stock price over the long-term.

For any company that did that, let's say Merck in the 80's, it was amply reflected in the stock price. In fact, how could it not be?

Conversely, name a Big Pharma that has done little but market and whose stock has performed well in the long-term?

Not that it matters, my initial point was that from a business perspective Hassan really couldn't turn down MRK's offer. I made no judgments regarding SGP's value to society, but somehow you and others believe I did.

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39. srp on March 12, 2009 10:17 PM writes...

It should shock me that people who regularly criticize unethical managers would advocate that managers violate their fiduciary duties to company owners by not maximizing the value of the equity. Unfortunately, I've become inured to the double standard that says legal duties to stockholders should be optional but nebulous "social duties" to employees should be mandatory.

Beyond this basic ethical point, there are two other flaws in the discussion. Except for some small short-term momentum effects and medium-term return-to-trend effects, the best predictor of tomorrow's stock price is today's stock price. So the idea of "long-term" vs. "short-term" stock price is basically meaningless. Second, we know that stock prices are forward-looking--how else do you think that all those biotechs with nothing but hopes and dreams get such high valuations?

Bitterness is understandable, but obfuscation of the basics is not helpful.

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40. CMC Guy on March 13, 2009 2:54 PM writes...

srp you confuse me here too. Seem to argue that (looking only at stock price) every time a offer comes in to buy a company for a premium then there is a legal duty to sell it (Wouldn't this ultimately lead to Monopolies?). I never argued that mergers should not happen only that other factors should be taken into account (even if nebulous) and in past Pharma most have not been positive overall. From my perspective there is currently no double standard but only "obligation" is to benefit shareholders regardless of consequences or any thing else. Do your business ethics include no considerations for the consumers (in terms of products) or the workers (who invested much more than most stockholders) or life of the company or (even more undefined) possible contributions to Science?

MTK I never indicated you made judgments re SP value to society as in fact is the opposite is true where only value you see was in stock price.

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41. srp on March 13, 2009 8:26 PM writes...

CMC guy:

The fiduciary responsibility of managers to shareholders is THE LAW. They can't do illegal or unethical things to enrich the shareholders anymore than a private owner could, and there may be complex governance systems with multiple tiers of shares where some can vote and some can't, but you can't just sell stock and then not make a best effort to maximize long-term value.

The courts have ruled that incumbent management and the board of directors must "consider" any offer above the current stock price, but they allow the board and management to fight such offers on the basis of "business judgment." (Hence the Microsoft-Yahoo dance of the last year or two.) So the courts have not accepted the view that today's stock price is inevitably the best predictor of tomorrow's stock price--they assume some inside wisdom is possible.

But from an ethical point of view, I find it amazing that people want to take other people's money given to them for one purpose and use it for some other purpose that they find more "worthy." Lock up the silverware when people like that come over to visit.

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