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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 20, 2010

Honesty, Of A Sort

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Posted by Derek

Chris Viehbacher, CEO of Sanofi-Aventis, gave a speech out at the recent J. P. Morgan healthcare fiesta in San Francisco. He spoke about how nasty the last ten years have been for the industry, calling it a "lost decade", but one particular item really caught my eye (emphasis mine):

". . .for the most part people have zero expectations of Sanofi-Aventis research and development,” he said. “We’ve basically cleared out a lot of bad news, and if anything comes along it should be good news.”

Well, that's one way to do it. I wonder if the performance reviews and yearly goal-setting forms over there read the same way?

Comments (17) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. processchemist on January 20, 2010 10:11 AM writes...

Finally a bit of intellectual honesty?
I guess that other speakers talked about how good the mergers will be and how effective the restructuration of their R&D operations has been...

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2. darwin on January 20, 2010 10:14 AM writes...

What the...Hey Viehbacher, cut'm all loose then you big p#$$. I think the R&D industry is tired of the tough corporate bad ass attitude of elite mgmt. Mgmt is the single biggest influence of company performance though its modulation of workforce productivity and shareholders are not holding them accountable. Pharma R&D is the way it is today because of PharmMgmt has been chasing rainbows for 15 years. Stability of workforce talent has taken a backseat to HR bottom line and outsourcing initiatives and mgmt has been chasing returns for over a decade. Chris Viehabacher rode the GSK wave of the ineptness that has now drained the piggy banks. And since he (they)have been rewarded for their past behaviors, they cannot fully understand the entaglement the industry is in, so they hire consulants to identify and fix their problems. He is not the solution to Sanofis problems no more than he was for GSK. PPPPP-proper planning prevents piss poor performance. All you need to know whether you are a running a family restaraunt or Pfizer.

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3. PharmaHeretic on January 20, 2010 10:19 AM writes...

I am sure that the scientists in R&D appreciate his honesty (sacrcasm intended).

First they were stopped from being innovative and now they are being told that they are useless. Good work!

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4. HelicalZz on January 20, 2010 10:31 AM writes...

Context is important with this quote. He is speaking at an investors conference, where analysts gather to hear presentations and update their valuation models (resulting in upgrades, downgrades, or often nothing). Pharma operations are generally valued using a dual model approach. First is discounted cash flow of the current products i.e. approved drugs and their expected revenues over their functional lifetimes. Second is an option pricing model to value the pipeline.

What Chris Viehbacher is referring to is that Sanofi is currently valued based only on its existing product cash flows, not making any allowance for pipeline potential. If that doesn't make sense, please give a read to investment blogger Vitaliy Katsenelon's recent opinion of Pfizer (as an investment). [Then buy his book, it is quite good].

http://contrarianedge.com/2010/01/18/the-case-for-pfizer/

I know many here would like to see this comment as an example of the attitude 'dumb old management' has toward R&D, but that isn't close to the statement he is making.

Zz

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5. Anon on January 20, 2010 10:43 AM writes...

#2 darwin

"Stability of workforce talent has taken a backseat to HR bottom line and outsourcing initiatives"

you forgot social engineering and "diversity".

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6. MTK on January 20, 2010 11:24 AM writes...

Helicalzz,

That's exactly how I read it. He's saying that we've cleaned out the pipeline of a lot crap that we know is crap, knew was never coming out the end, but tried to tell you wasn't crap.

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7. quintus on January 20, 2010 1:17 PM writes...

I agree with Darwin and Pharmaheretic!
Things are not so different a bit further south-east of Sanofi.
I'm just waiting for the China bubble to burst, another top executive(s) "great idea".

Permalink to Comment

8. startup on January 20, 2010 2:04 PM writes...

Derek, I think you misunderstood him. Clearly, when talking about "clearing bad news" he meant laying off people.

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9. Hap on January 20, 2010 3:24 PM writes...

If you're a pharma company and your pipeline is worth zero, aren't you dead? You still have the money coming in, but it will likely stop (or slow to a drip) as your patents go away. If your R+D is so bad that valuing its output at zero is reasonable, and R+D is the core of what you do, then what would inspire investors to think that what's coming next from it will be any better? (Particularly if the same people are running it as before - if the generals are incompetent, then giving them more cannon fodder is not going help anyone other than bodybag suppliers.) How would you know what would come out of your pipeline that would be successful (because obviously someone has had no clue)? And, in the meantime, your metabolism (R+D, etc.) is burning cash, and if it goes well, will be burning more in the future on trials when your revenue streams will be diminished.

Alternatively, it would seem stupid to invest in pharma if you have no idea how to value potential products or decide to ignore potential products and hope they'll grow up (like mushrooms) into cash cows.

I don't really see why the context should give me any more comfort in the competence of S-A's management (or its investors) than the contextless quote.

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10. Barnum on January 20, 2010 4:12 PM writes...

Hap writes:

Alternatively, it would seem stupid to invest in pharma if you have no idea how to value potential products or decide to ignore potential products and hope they'll grow up (like mushrooms) into cash cows.

There is an old adage that applies:

There's one born every minute.

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11. milkshake on January 20, 2010 6:21 PM writes...

Sanofi is actully not even the worst offender in terms of acquiring compenies for IP and then closing them down. But my friends at Sanofi tell me that it is a bureaucratic slow giant, and the corporate policy on publishing is atrocious. Basically once you go there you won't be able to publish your chemistry much - not even methodology that is unrelated to your active series.

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12. Evorich on January 21, 2010 6:40 AM writes...

To re-iterate the point made by HelicalZz, mostly this has been taken out of context. What he is saying is that based on the current market value of Sanofi, investors must be giving zero value (expectations) to their pipeline (R&D) - which obviously he believes is wrong.

I think the "bad news, good news" line is so out of context that I'm not sure what he's refering to, but in the same context, he means that they have a pieline, investor expectations are zero based on valuation, therefore bad news about pipeline drugs, which he beleives is mostly behind them (he can't really know that!), will be no surprise but good news will be very positive.

Permalink to Comment

13. darwin on January 21, 2010 8:59 AM writes...

Evorich-then it appears Vierebach could be called to the mat as a CEO whose carefully crafted words are specifically engineered with full knowledge that the market and his company's price can be affected/manipulated by his words. Either they have been falsely pumping the anaylsts with pipeline hype for the last decade or he is woefully portraying its current position. Anything less than accurate communication from a CEO for a publically traded company should prompt a SEC hailstorm.

Permalink to Comment

14. MTK on January 21, 2010 9:41 AM writes...

Evorich and Helical are, IMO, correct here.

Here's the actual line from the story that contains the quote:

He added that the company’s R&D holds the greatest possibility for upside surprises in the next few years — because “for the most part people have zero expectations of Sanofi-Aventis research and development.

He's not saying management has zero expectations, he's saying the outside does.

darwin, you're right also, however, but I would say that managing investor expectations is one of the primary jobs of the CEO. For example, I think Microsoft routinely beats their stated estimates every quarter. How is that possible? They must be intentionally being conservative/lying/managing expectations (to-may-to, to-mah-to).

Permalink to Comment

15. Hap on January 21, 2010 10:03 AM writes...

How does anyone manage to invest in pharma then? If I thought the company whose stock I own (theoretically) had essentially no pipeline, then it has already written its suicide note and I probably shouldn't be owning the stock or listening to its CEO. Since (I assume) that's not the case, then investors have to figure what the pipeline is actually worth - what drugs might come out of it (the probability of success, and which ones will be successful), what their markets might be, what potential competitors are, all of which people on the inside have difficulty determining.

The CEO has a large incentive to (within his knowledge, and not being untruthful) hype the potential successes in his company's pipeline, so I don't know how much credence I could give to his statements - they don't relieve the uncertainty in his company's value. The relevant question would be whether the pipeline is valued so low because they've had more than the usual level of failure, because it isn't very big and so may not even have one success at expected probability, or just because its investors are depressed or not thinking.

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16. cliffintokyo on January 21, 2010 8:29 PM writes...

#14 MTK: Thanks for the elucidation.
I sort of get the impression that Sanofi execs also have low (realistic?) expectations of their own pipeline. I think that CEO Viehbacher is probably saying (and/or hoping) "we might suprise you".

#3 PharmaHeretic
'Scientists in R & D....were stopped from being innovative, and now they are being told that they are useless.'
Agree; big pharma execs cannot admit they have made complete guacamole of steering *research* (i.e. managing scientists), in contrast to their success with *development* (i.e. managing tecchies), probably because of widespread *control-freak* type dysfunctionality among MBAs; and certainly agree with your hint at the solution.

Permalink to Comment

17. Morten G on January 24, 2010 10:54 AM writes...

So he's saying that Sanofi-Avensis is a fair to good investment even if we discount their pipeline? Which he apparently thinks the market already does? Why doesn't he just say that then?

Is he buying or selling his stock btw?

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