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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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« Together At Last | Main | Chemical Supplier Question »

February 9, 2010

More On Pharma's Ugly Finances

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Posted by Derek

Friday's post has brought in a lot of comments, and they're still piling up. I wanted to address a few of the more frequent ones, though, out here on the front page.

First off, the idea that a bunch of stock analysts could have a useful opinion on a pharma company's return on investment doesn't seem to strike many people as plausible. Variations on "What do they know about this business?" and "Aren't these the same geniuses that wiped out the mortgage bond market?" have come up numerous times. My answer to the latter is no, they aren't. The stock and industry analysts are a different bunch entirely. That's not to say that they can't be stupid, or make mistakes (they do!) But these aren't the people who thought that they had all the risks figured for interest-rate swaps and collateralized debt obligations. If you have disagreements with industry analysts, then you should fight in their territory.

There's more substance to the "What do they know" objection, but still (in my view) not enough. What they know is what's been made public, of course, and as we in the industry know, that's not everything. But that doesn't make Wall Street's case any weaker this time, as far as I can tell. Morgan Stanley and their ilk are not missing any of the successful projects from inside big pharma - those all get aired out thoroughly. If they're short on data, it's on how many projects fail, and how much they cost, and those numbers aren't going to make the ROI look any better. Meanwhile, most all the inlicensed compounds actually get announced, since they're material transactions for someone, so far fewer of those escape notice. I don't like the Morgan Stanley point of view, not at all, but dislike is not a refutation.

Another thing to remember is that the people with the best figures on ROI are the upper management of the companies involved, and these are the people who are slashing head count and outsourcing wherever they can. And we have to make a distinction here, between diagnosis and treatment. We can disagree on whether this is the proper response (although I'm kind of stuck for alternatives), but is it still possible to argue that these CEOs and the like are reacting to something that isn't there? Something is precipitating a lot of large, painful, and nasty decisions, and I think that it's probably the very concerns about cost that we've been talking about. We need to separate the argument about whether those figures are real from the argument about what's been done in response.

Comments (76) + TrackBacks (0) | Category: Business and Markets | Drug Industry History


1. azetidine on February 9, 2010 9:20 AM writes...

I've been thinking for a long time about what the real issue here is regarding all the cutbacks, and I think it is this: The pharmaceutical industry has simply run out of blockbuster targets. For example, here are targets that never need be worked on again:

Cholesterol - nothing will beat Lipitor.

Cardiovascular - there are enough blood pressure drugs among the ACE inhibitors, diuretics, and A2 antagonists to control well over 90% of the population.

Acid reflux - the proton pump inhibitors and H2 antagonists are going to do the job essentially forever.

Antimicrobial - OK, there's always room for one more, but nothing will be a blockbuster, and the vast majority of the population does well on the current set.

I could go on, and others feel free to offer their opinions. Certainly cancer and Alzheimer's are areas where new drugs could be found, but general cytotoxics are not going to be blockbusters, kinase inhibitors are so done, and I think you are dreaming if you think there is a small molecule cure for AD.

Pain is the one area where I think blockbusters can still possibly be found, as long as something can be invented that looks like neither aspirin nor morphine (P2X7 antagonists, anyone? That's where I'd look).

So from my viewpoint, the pharmaceutical industry has largely run its course, and we medicinal chemists are going to have to find a way to reinvent ourselves if we want to stay employed.

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2. PJ Hansen on February 9, 2010 9:39 AM writes...

It seems like many projects are successful in terms of finding a drug, but do to the degree of efficacy or side-effects the drug’s utility would be limited to a market that is too small for big pharma commercial groups to be interested going forward. These assets are rarely out-licensed successfully and even more rarely resurrected in-house. The drugs might be extremely helpful for many thousands of patients, just not millions. While the projects obviously have to be able to make money, it does not seem like an all-or-nothing approach is reasonable. Could the love of blockbuster drugs be at the root of this accounting imbalance?

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3. alig on February 9, 2010 9:42 AM writes...

Give it up Derek. This is not about past ROI. This is about cutting costs now. Do you really think Pfizer looked to see which labs had the highest ROI before shutting them? This is about management trying to cut costs to keep the high profit margin now. Management are not incentivised to look at the long term because in the long term they will be gone.

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4. Jose on February 9, 2010 10:03 AM writes...

I am just shocked by the rapidity that this has developed. This would seem to imply a spastic industry response to a single company (who went first?) deciding to make to the massive shift to an "outsource everything" paradigm. It's not as if there has been some big announcement about patent changes, or FDA filings, or what-have-you to precipitate this right now. The patent cliffs have been looming for years, and now maybe some "smart feller" crunched some SPSS sheets and pointed *way* East, and now everyone else's BD unit is scrambling as to not be left behind?

The big mistake I see is that someone somewhere is drawing analogies with other "high tech" research orgs like google or MS. For engineering, essentially all problems are solvable (although not always in elegant ways) if you just throw enough persons-hours or -years at them. The fact that this isn't true for DD is lost in translation to "MBAese."

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5. Kent G. Budge on February 9, 2010 10:05 AM writes...

My personal interest is in Type 2 diabetes. If lifestyle changes are made but are still not sufficient for tight control of plasma glucose, it's hard to beat metformin all around, the sufonylureas make a nice backup, and the glitazones seem to come as close to directly attacking the underlying insulin resistance as one could hope for. It's fine-tuning from here, and I'm guessing that fine-tuning does not a blockbuster drug make.

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6. anchor on February 9, 2010 10:12 AM writes...

#1- right on the money. Even if you come out with blockbuster drugs (assuming that FDA approves it in this climate), you will have run in with the insurance companies. So, why bother making or better outsource it (back burner). I am still looking for the light at the end of the tunnel, for the current business model for pharma.

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7. chemist on February 9, 2010 10:25 AM writes...

Nice to see so many chemists here.

Any idea whether total synthesis of FOSMIDOMYCIN (natural antibiotic) is reported. I could only find the synthesis of various analogues but not this drug.


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8. Londonlad on February 9, 2010 10:37 AM writes...

#1 you are, unfortunately, correct.

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9. Hap on February 9, 2010 10:46 AM writes...

It's possible though that Morgan Stanley's incentives are different than what is in the best long-term interests of pharma companies (just like Icahn's interests and those of the companies he takes over are not well-aligned). I don't think the people running companies and setting the financial incentives for themselves are stupid, but they are likely to act for their interests (and those the boards of directors designed for them) over what might be (since the future is uncertain) in the long-term interests of their companies.

It's hard for me to see how outsourcing helps anything other than the short term - if your problems are 1) you (or perhaps God, or a deity of your choice) can't deliver what people want at a price they can pay, 2) you can't come up with enough products, and 3) the products you do come up with fail expensively because you don't know enough about them without spending oodles of money, outsourcing only helps with 1) and doesn't touch 2) and 3) (and even with outsourcing, it still isn't clear that pharma would compete on price, anyway, and that even if they did, that they could make their product cheap enough to satisfy everyone). Outsourcing isn't going to help you make products (and since the same people are leading the outsourcing workers that were leading the internal efforts, it's hard to see why anyone would think that it could), and it doesn't help you to make trials cheaper or find knowledge you don't have but need to reduce trial costs (since you'll have to do trials in the US, anyway), so it doesn't seem to attack the roots of pharma problems.

No one makes enough money, and the job of a company is mainly to make money. It just seems that the cures that financial people advocate to increase profits do so now but at the cost of guaranteeing failure later.

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10. RB Woodweird on February 9, 2010 10:48 AM writes...

Pharma industry analysts who work for the big money houses are generally chemists with industry experience, aren't they? Some of them must read this blog. How about one of them unlurk, either anonymously or not, and answer some of these questions?

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11. CMCguy on February 9, 2010 10:48 AM writes...

As similarly suggested by #2 the over focus on blockbusters has lead to the current decline in productivity as many potential drugs did not pass the "marketing" test, so is partly why in-house looks relatively poor when compared to broader targets elsewhere. Again it may appear to be simplistic math with the costs of development being so high there is going better return on the larger market. Unfortunately most of the marketing analysis is flawed and the wide variation of individual development costs and the ultimate unpredictability of what will be a success adds up to an overly complex situation. I agree mostly short-term thinking involved and as likewise pointed out the current execs probably will have cashed out before the impacts of R&D cuts are realized.

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12. MTK on February 9, 2010 10:56 AM writes...

This isn't just some knee-jerk response to one or two companies doing. The trend toward more and more external research or at least access/acquisition to the results of external research have been going on for a long time. Pfizer basically got to #1 on the backs of drugs that were not discovered within their labs. If you look at the top 100 drugs, you'll find over a third of these are marketed by companies that did not discover them. Couple that with the fact that 6 of the forecasted top selling drugs in 2014 are biotech in origin, and as Derek notes, management has all the data they need.

The real turmoil and stress this causes to individuals notwithstanding, in some ways, we should welcome this. Everyone believes that these Big Pharma guys can't manage scientific research anyway, so why are we bemoaning it when they realize it too and want to get out? It's basically a tacit admission that they're incompetent at this part of it and are better off letting others do it. No one is saying the work isn't important or shouldn't get done. It'll just get done elsewhere and by people who can manage it better.

As long as there's a need, people will pay for it. And as long as people will pay for it, there will be a business model that comes out, so the financing bit of it doesn't worry me either. In the long run, at least. Now if there isn't a need, well...nothing management is doing now or in the future will make one bit of difference.

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13. okemist on February 9, 2010 10:58 AM writes...

a former director of mine and a collegue of Derek's went to Wall street as an analyst. So no these prognosticators are not the same that gave you Enron and sub prime mortgage, but after 15 yrs of mediocre med chem is he now a Super-Analyst? I have my doubts.
I agree with Derek that this is a viable model that gives execs an out. This is a tough bussiness It is easier to dump piles of money on another company, because with that investment you can get someone else to blame for science failure. It is much harder to take resposibility for your own project that is going to have a >90% overall failure rate.

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14. D. on February 9, 2010 11:00 AM writes...

Drug development is a clearly cyclical enterprise.
If you have a lucrative business line with high fixed costs and unpredictable year-on-year earnings there are only two choices to cover the shortfall: bank profits or diversify into non-cyclical business lines.

The problem with banking profits is it needs much higher R&D investment (eg. 25% of revenue at Servier) to get the same level of risk mitigation, and doesn't scale well.

Large drug companies thus managed this risk just like large financial firms, using a strong brand name to add value to low-risk, undifferentiated consumer products.

Any other strategy can probably be blamed on artificially low cost-of-capital and short-term planning. Executives should probably be getting a modest salary and dividends delayed 5-10 years, rather than bonuses vesting every year.
This is how the large family-controlled companies are run in Japan and Korea.

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15. RB Woodweird on February 9, 2010 11:02 AM writes...

@chemist: Fosmidomycin is 3-[Formyl(hydroxy)amino]propoylphosphonic acid, C4H10NO5P.

The Merck says to look at Synthesis 1995(5): 539-543

Regioselective Palladium(0) Catalyzed Amination of Carbonates of Allylic α-Hydroxyphosphonates with Hydroxylamine Derivatives: A Convenient Route to Phosphonic Acids Related to the Antibiotic Fosmidomycin

Elisabeth Öhler*, Silvia Kanzler

The abstract claims that precursors to Fosmidomycin are prepared therein. And if they are not, well, syntheses of compounds with only four carbons are left as an exercise for the reader.

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16. RB Woodweird on February 9, 2010 11:06 AM writes...

@chemist: Fosmidomycin is 3-[Formyl(hydroxy)amino]propoylphosphonic acid, C4H10NO5P.

The Merck says to look at Synthesis 1995(5): 539-543

Regioselective Palladium(0) Catalyzed Amination of Carbonates of Allylic α-Hydroxyphosphonates with Hydroxylamine Derivatives: A Convenient Route to Phosphonic Acids Related to the Antibiotic Fosmidomycin

Elisabeth Öhler*, Silvia Kanzler

The abstract claims that precursors to Fosmidomycin are prepared therein. And if they are not, well, syntheses of compounds with only four carbons are left as an exercise for the reader.

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17. Wavefunction on February 9, 2010 11:10 AM writes...

I think #1 has hit it. The traditional "small-molecule-inhibits-protein" paradigm may be on the wane because of very few remaining targets. The shift, as is already apparent, may be to areas like systems biology and protein-protein interactions including biologics and antibodies. It's hard to see how medicinal chemists could be as successful in these areas, and will have to reinvent themselves to see how they can be of use.

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18. RB Woodweird on February 9, 2010 11:17 AM writes...

The claim that the blockbusters have all been harvested got me thinking. What is the total post-preparation cost of bringing a drug to the pharmacy counter? This is the nut that has to be recouped. Given a blockbuster, yeah, one doesn't even have to worry about that, but where is the line? What is the minimum return a drug would have to have to get a green light, given perfect foresight?

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19. Hap on February 9, 2010 11:19 AM writes...

#12: Probably because the way they're doing it seems like Richard Speck taking care of his bird in prison: when the guards told him he couldn't keep it, he threw it into a fan, saying "If I can't have it, no one can." (from one of the John Douglas books).

Other management was able to do drug discovery (though maybe not? - Munoz), just not the ones you have now. The assumption that current managers can't manage drug discovery, therefore it can't be done seems illogical. While I think my reasons for disliking this method are rather too linked to my self-interest, I don't that makes this methodology make any more sense. Eventually wages will equilibrate (because small companies will have to get paid for their risk, and people will shift careers away if the pay is too low, but how much of a drug industry will be left when it does is unknown.

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20. David P on February 9, 2010 11:32 AM writes...

Did folks read the Independent piece linked to in the other thread? A link here:

The point of that article is that moving to "all in-licensing" will have unexpected consequences that upset the MS analysis. In other words, if BP suddenly want to mostly buy their products from smaller entities, they may find the prices go up and the ROI goes rapidly down. And end up wishing they still had that in-house talent.

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21. Ed on February 9, 2010 12:09 PM writes...

To what extent does everyone think that reducing regulatory issues would help? I find it odd that although North American and europeans are similar in many ways, we insist on having two entirely separate drug regulatory authorities.

"Niche" indications in the combined populace might become a lot more commercially attractive if there was only one "Is it safe? Is it effective?" hoop to jump through, given that all things being equal the patient population would double. Add in Russia, Israel (and anyone else that wanted to join) to the New World Order, and things might not seem so bad.

I think the world (governments, payors, citizens) need to approach these issues or we risk stagnation.

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22. chemist on February 9, 2010 12:13 PM writes...

@ RB Woodweird

Thanks alot

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23. MTK on February 9, 2010 12:26 PM writes...


I would agree with you if some of the current BP managers were really successful and others were not. That's not what we're seeing, however. We're seeing an industry-wide malaise, which points to an outdated model, IMO.

As for the future state of the drug industry, if