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Derek Lowe The 2002 Model

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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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May 2, 2011

Pfizer: Breaking Up Is Hard to Do

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Posted by Derek

Matthew Herper has a good piece over in Forbes on the speculation that Pfizer might devolve. Here's his breakdown of how five (or so) separate Pfizer-derived companies could be worth substantially more than the current entity.

But, as he notes, we're talking about several different things here. Were I a long-suffering Pfizer shareholder (which, outside of index funds, I have tried not to be), I would have one perspective on this, similar to this one. It would all be about the stock price:

“The stock can only go up if they break up the company and cut research and development,” says Jami Rubin, a pharmaceuticals analyst at Goldman Sachs who has been pushing a Pfizer breakup for three years. “When Read was announced as the new chief executive Wall Street was skeptical, but he’s listening and he’s responding to what we have been saying. My sense is he’s already made up his mind.”

As an observer of (and participant in) the drug industry, though, I have other views, and they're more like these:

Not everyone agrees that a breakup is the right fix for Pfizer, which has struggled to invent new blockbusters even as it acquired Warner-Lambert for $114 billion in 2000, Pharmacia for $60 billion in 2003 and Wyeth for $68 billion in 2009. Those big mergers sidetracked its researchers and salespeople and created baroque management structures—at one point there were 17 layers between the chief executive and the lowest employee. Critics say undoing them risks similar distraction. As one fund manager said, a breakup would just mean the investment bankers and lawyers who got rich putting Pfizer together will now get richer taking it apart, without improving its ability to invent and market drugs, already a struggle. “I think it’s financial engineering. I think it makes the stock more valuable,” says Les Funtleyder, a fund manager at Miller Tabak. “From a strategic point of view, would it solve the problem? No.”

That's the problem, all right. I've made this point in various ways over the years, but let me be as blunt as possible: I think that Pfizer's consolidation, both of large companies and of small ones, has been a disaster for drug discovery in general. Just the sheer loss of intellectual diversity is enough to call it that. And the resulting huge, ugly omelet cannot be unscrambled. The disruptions in all those research organizations can never be undone, not without a fleet of fully powered time machines.

It will give many people (I'm one) some cold satisfaction to see the company reverse course, admit that the mega-merger strategy has been a mistake all along, and painfully retrace its steps. But that's not much compensation, is it? Not compared to what's been lost.

Comments (36) + TrackBacks (0) | Category: Business and Markets | Drug Industry History


1. FormerWindPharmer on May 2, 2011 9:57 AM writes...

Hi Derek, alas, all so true. Pfizer were the most active in the mania for M&AS but sadly other companies were also culpable. Think of old names like Beechams and Wellcome, to name just two. These were companies that put a premium on science and innovation but were swallowed up by companies that valued MBAs more than PhDs. Perhaps new and innovative companies are emerging that will wrest the industry away from the giant WindPharms such as Pfizer and GSK, we can only wait and hope.

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2. johnnyboy on May 2, 2011 10:51 AM writes...

As a former PFE employee (who got rid of his stock as fast as he could a few years back), I see the current state of the company with mixed emotion. There is a bit of the same schadenfreude that you're expressing, in that the 'company' as an entity is getting what it deserves, having lost sight of its priorities, gotten unsustainably bloated with massive, wasteful M&A and let a self-sustaining, non-productive middle management class grow uncontrollably. But while the company is failing, none of the brunt is borne by the people who caused these failures; McKinnell, Kindler and the rest of the upper management are not suffering in any way from this disintegration; they can just retire in extreme luxury, or go on to cause more havoc at other companies as if nothing happened. It's the employees and their families who are suffering, be it from job loss, forcible relocation, or just the uncertainty of not knowing if they're the next ones on the chopping block. And many of the people I worked with there were extremely bright, motivated and productive, and seeing these people's talents get wasted in this way is nothing short of heartbreaking.

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3. Hap on May 2, 2011 11:59 AM writes...

2: One might be excused for thinking that the lack of risk and seemingly guaranteed extravagance of their CEO's might have something to do with Pfizer's problems. if you have nothing to lose and everything to gain by merging yourself to wealth, well, what do you think is going to happen?

I have to wonder where the concern for Pfizer's shareholders was before this - apparently that motto of "Shareholders uber alles" only applies when you're whacking your core businesses, and not, for example, in determining how to pay your management to tank your stock.

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4. The Blue Maharajah on May 2, 2011 12:01 PM writes...

From the Forbes article:
"Wall Street is sick of promises that drug companies are going to fix their broken labs".

The question for our era: when and how did the labs 'break'?

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5. Anonymous on May 2, 2011 12:06 PM writes...

Wall street pushed for this mega acquisition's in the first place. All to push up the stock value.

They make money brokering such deals!!!

Analysts have such impunity. They get to sling all the mud they want with no accountability.

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6. Medicamenta Vera on May 2, 2011 1:23 PM writes...

The labs aren't/weren't broken.
At least the labs that I knew were pretty successful in generating clinical candidates that looked like they could go the distance.

Pharma upper echelon has left a trail of broken expectations on Wall Street... and alot of other streets.

Ann Arbor Research Lab workers quipped after the first Pfizer layoff that the site motto was going to be updated from:
"People Who Care"
- To -
"People - Who Cares?"

We were more prescient than we realized.

The "17 layers between the chief executive and the lowest employee" cited above is a little suspect. About half that sounds right at least when I left the company in 2006. That said, I do remembering asking my therapeutic area head one day who sat on the top two levels, and what they did. He hadn't a clue. 17 layers or 7, Pfizer still is a classic M&AS example of going from critical mass to critical mess.

Broken labs indeed, bah!

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7. Hap on May 2, 2011 1:40 PM writes...

Doesn't selling off the consistent consumer health and generics businesses, as someone noted the last time this came up, remove any mitigation for their pharmaceutical productivity? After selling off the pieces, if you don't know how to improve your ability to discover drugs, well, then you're dead, because you would no longer have generics or consumer health to generate consistent revenue, and your own drugs won't. You're dead either way, but without consumer health, you don't have any margin for error (or revenue to hedge your bets on what will improve productivity), and your survival depends on something you haven't been able to do well for twenty years.

If stockholders want to liquidate, why don't they just do it and be done with it? It might make the "kill em all and let the government sort it out" tactic too nakedly obvious, but perhaps liquidation should happen while someone might still be able to fashion something useful from the pieces.

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8. pete on May 2, 2011 2:03 PM writes...

Can't help but wonder how the Pfizer case study will read for tomorrow's crop of MBAs...

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9. srp on May 2, 2011 2:21 PM writes...

I've never taught this case, but Pfizer: Letter From the Chairman (A), written in 2009 and revised in 2010 covers the following:

This case explores maximizing shareholder value as a goal in executive decision making. Over a period of nine years, three different Pfizer CEOs make critical decisions intended to increase shareholder value. But the results are disappointing. To allow students to examine these decisions, the case provides excerpts from four Chairman's letters to shareholders from Pfizer's annual reports, followed by a description of the circumstances behind each letter. In the 2000 annual report, then-CEO Bill Steere discusses Pfizer's rise to industry prominence with the acquisition of Warner-Lambert. In the 2003 report, new CEO Hank McKinnell discusses Pfizer's performance goals and its acquisition of Pharmacia, which gave it control of anti-arthritis drug Celebrex. In the 2005 report, McKinnell discusses his decision to keep Celebrex on the market despite health risks. In the 2006 report, new CEO Jeff Kindler barely mentions McKinnell's (controversial) early retirement and describes efforts to reform the company. The case closes in February 2009, just after Pfizer announces plans to acquire competitor Wyeth. Since 2000, Pfizer's tremendous growth in assets through acquisitions has not translated into significant growth in net income or share price. In closing, students are asked what Kindler should write in the letter to shareholders to open Pfizer's 2008 annual report.

Learning Objective:
Illustrate the outcomes that can ensue when a company's decisions are driven by the goal of maximizing shareholder value.

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10. srp on May 2, 2011 2:28 PM writes...

For you Pfizer pfans, there's also a 2006 case that looks specifically at the comparison between Pfizer's merger-oriented strategy and Merck's allegedly research-oriented strategy, entitled Strategy in the 21st Century Pharmaceutical Industry: Merck & Co. and Pfizer, Inc.

The global pharmaceutical industry has gone through substantial changes in the last few decade and pharmaceutical firms face major challenges, including headline-grabbing litigation, imminent patent expirations, new technologies, rising drug development costs, generic drug substitution, international competitors, and complex public policy issues. Describes the pharmaceutical industry in 2006, including: the drug development process; threats from biotech and generics competitors; pharmaceutical manufacturing, selling, and marketing; and pharmaceutical consumption in Europe, the third world, and the U.S. Merck and Pfizer are analyzed in-depth and a contrast between Merck, as a research-based firm opposed to mergers, and Pfizer, as a marketing powerhouse growing through acquisitions, is developed. Thirteen exhibits give concrete focus to the issues of the case.

Learning Objective:
To explore strategic choices in an uncertain and changing industry.

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11. Rick on May 2, 2011 3:40 PM writes...

I posted this on Matt's blog, but it seems to resonate with, and perhaps amplify, some of the comments here, so I'm reposting:

This seems like one more chapter in the long, sad tale of what has become of a company and an industry that used to derive its monetary value from its ability to meet societal needs, specifically unmet medical needs, but now values only the maximal profit over the shortest time frame by whatever means necessary. Over the past few decades, the industry lost its ability to meet medical needs, which in a rational world would lead to either corrective change or death, yet it continues to generate immense returns for Wall Street like a male praying mantis continuing to mindlessly copulate long after being beheaded by the female.

Pfizer’s legacy of buying companies and obliterating their R&D staff and programs while earning Roman Coliseum-like cheers from Wall Street is arguably the most vivid illustration of the industry’s reaping huge financial returns, while steadily producing less and less of their actual product (in case anyone’s wondering, that’s safe and effective drugs). Does anyone besides me struggle to comprehend how a slightly larger short term gain for shareholders is somehow more valuable than the man-centuries of wasted drug discovery research progress (in the form of laid off scientists and aborted projects sitting uselessly in millions of pages of research notebooks that will never be shared with the scientific community) obliterated in Pfizer’s Sherman-esque march through the pharmaceutical R&D landscape?

Pfizer’s latest announcement reminds me of the proverbial rearranging of the deck chairs on the Titanic – or maybe just throwing the chairs overboard (either way, the ship’s going down and they’re fooling with the damn chairs) – and the praise from pharma “investment” analysts seems like the shouts and cries of children having a grand old time shoving chairs around for no important reason. What is new here? What about this should make us optimistic that there will be a better long term outcome than prior rounds of industry autophagy?

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12. DrSnowboard on May 2, 2011 4:09 PM writes...

The other Pfizer legacy is i) their diaspora who believe that is the way to do drug discovery ii) the 'other company' voyeurs who use the 'pfizer are doing it' as a means to excuse their lack independent critical thought. Yes, AZ careerists, I mean you.

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13. mother nature on May 2, 2011 4:28 PM writes...

Who is valuating Pfizer divestiture? It is like valuating the pile of seed hulls below my bird feeder. Damn squirrels came in, ate the delectables, dropped a turd and left the seed shells. Anyone out there like to buy some hulls and squirrel scat?

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14. Rick on May 2, 2011 4:38 PM writes...

Dear Mother (#13),
No less awesome an authority than Goldman Sachs values this. Matt has another post on his blog about GS's role in this stroke of genius. If Goldman Sachs thinks seed husks and squirrel poop are valuable, who the hell are we to argue?

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15. OldLabRat on May 2, 2011 5:02 PM writes...

Agree with all the posts. One wonders where the Pfizer board of directors has been during the long slow sinking of the corporate ship? Seems to me that they as culpable as the CEOs and the rest of the "managers" .

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16. Canuck Chemist on May 2, 2011 7:19 PM writes...

@Rick: I enjoyed your terrific comment. But what Pfizer management has done/is doing is beyond rearranging the deck chairs-- they are tearing up the hull and selling it as scrap metal! I had the pleasure of listening to a talk from Simon Campbell last year (ex-VP of med. chem. at Pfizer, and inventor of amlodipine, Viagra, etc.). He didn't mince words by saying that PEOPLE invent drugs-- usually a small number of scientists make the key insights and inventive steps required for success. This process is not easily measured by bean-counters. lawyers, and MBAs who have damaged the industry irreparably through M&A over solid science. Pfizer management continues to be the most egregious example.

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17. Canuck Chemist on May 2, 2011 7:27 PM writes...

I certainly don't think that everything would be rosy in the pharma industry if these mergers didn't happen. But I am certain that things wouldn't be quite so dire. Early stage discovery research IS NOT a commodity-- Genentech seems like it could be a successful long-term example of this.

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18. AR on May 2, 2011 7:58 PM writes...

We're just preaching to the choir here. Simple axioms like this are running the industry:

"We do not bet on science, but on management" J. Michael Pearson, Valeant CEO, 2011

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19. srp on May 2, 2011 9:55 PM writes...

Greed or stupidity cannot be sufficient causes of the merge & purge strategy followed by Pfizer. Greed and stupidity are always around. (Same thing as the financial crisis.) It's like blaming an uptick in sexual assaults on the male libido--if the inflow is constant, you can't explain a change in the outflow by that inflow. (You could try a cumulative-stresses-followed-by-collapse argument, but that doesn't make sense with respect to greed here.)

I suspect that the root historical cause is that pharmaceuticals was a phenomenally profitable, growing industry for a number of decades, with that growth primarily taking place by the expansion of incumbent firms rather than the entry of new firms. Unfortunately, this era of supernormal growth and returns could not go on forever, and in fact was hitting natural limits as a) state-of-the-art drugs got better, b) the "easier" conditions were treated, c) percentage growth rates got harder to maintain on a larger base, and c) the FDA ratcheted up the regulatory bar as society grew wealthier and more risk-averse. But managers and investors (and many scientists) did not want to accept these realities.

Instead, managers kept trying to come up with magic formulas that would restore the financial vigor of old. Silver bullets, to put it in terms that should resonate here. Some of those argent projectiles were methods that were supposed to improve R&D productivity with new science and technology--this blog has had lots of fun with combinatorial chemistry, etc. Some of them were organizational schemes. Some were big increases in R&D spending. And as desperation about finding new drugs set in, the owners of big distribution pipelines started questing for already-approved drugs to funnel through them.

Hence, mergers and acquisitions. And while they were at it, they started cutting down on the many "duplicative" R&D operations that had turned out not to be trees growing to the sky. By all accounts, those cuts were performed ineptly and wastefully, which is a serious indictment of the managers involved. But if the labs had continued to spit out successful wonder drugs at the revenue growth rate of old, if the magical years had continued, no surgery would have been contemplated.

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20. Sysiphus on May 2, 2011 9:58 PM writes...

I agree with The Blue Maharajah:

The question for our era: when and how did the labs 'break'?

The answer requires soul searching by those without souls (i.e. MBA's & middle managers)

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21. London Chemist on May 3, 2011 4:26 AM writes...

A comment on the 17 layers: a few years ago they decide to have a "delayering" to reduce this number. Which layer did they get rid of? Team Leaders: the ones who had 2-4 reports (all lab chemists) and also did some lab work and ran parts of projects (developed a series or two). The ones who looked after the lab chemists and motivated them--came up with most of the targets and got them made. All of a sudden, their bosses (the ones who ran multiple projects) had 10+ reports and still needed to deliver on project goals. Not surprisingly, they could not cope and lab chemists (and former team leaders) never saw their bosses. What a disaster... Not surprisingly, a few years later they re-organised again...

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22. anonymous on May 3, 2011 5:58 AM writes...

Hey, wait a minute...that sounds just like Merck! Could it be both companies got the same advice??? No, probably not...

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23. SadAndCynical on May 3, 2011 7:08 AM writes...

Cannot disagree with anything written here but we're beginning to sound like a broken record! Pfizer = GSK = Merck, etc. The sad part is that those who make the decisions don't listen to the likes of us. Time to hide that PhD and get an MBA instead so we can all spout the sort of verbiage that they like to hear.

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24. Anonymous on May 3, 2011 7:16 AM writes...

#SadAndCynical: or become a project manager or a Six/Lean Sigma ninja! These roles don't tend to be off-shored and "verbiage" is their stock-in-trade.

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25. Carl Bussjaeger on May 3, 2011 8:19 AM writes...

Pfizer being a regular topic on your blog, I thought you'd get a kick out of this (if you haven't already seen it).

Pfizer Breaks Psychological Need To Always Seek FDA's Approval,20298/
"Martin added that if the FDA knows so much maybe they should just start manufacturing their own drugs."

(Before anyone starts, yes, I know it's satire.)

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26. Rick on May 3, 2011 10:02 AM writes...

srp (#19),
Very well said, but I think we need to acknowledge the "chicken-an-egg" nature of the problem (which came first: the greed or the inept, wasteful management tactics you described). For example, who decided that the labs had not "continued to spit out successful wonder drugs at the revenue growth rate of old... the magical years had [not] continued" and why did they decide that. My own career spans the period during which many of those decisions were being made and I can remember the discussions as if they were yesterday (partly because I did just hear them yesterday!), and it inclines me to believe that the single biggest motivator was dissatisfaction with financial growth RATES, not the financial returns themselves. Why the dissatisfaction? Now that I reflect on the reasoning, it seems shallow and inaccurate from a scientific or historical perspective. The easiest answer to those questions that I can come up with is that impatience, greed and foolish economic theories caused us to make bad decisions.

If I look just at the rate of the discovery of new drugs (not the rate of profit or revenue growth) over time since the 1950s, it seems to me that the steep decline in discovery productivity that began (not coincidentally IMHO) at the time we also got impatient is far worse than the level or less-severe decline we would have experienced had we NOT run wholesale into new, unproven technical and financial approaches. To put it more bluntly, we might have discovered more new, safe, effective drugs had we done nothing to change the way we manage and finance drug discovery and therefore would not be facing a revenue outlook as dire as the one we have.

Like fear, love or excitement, greed can make you do stupid things. Sometimes the best you can do is hope that the level of stupidness doesn't end up hurting too many people.

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27. Biff on May 3, 2011 10:32 AM writes...

@London Chemist - re. comment 21: interesting observation! Can you imagine an army getting rid of its sergeants while filling up with more colonels and generals? I suspect the result would be closely analogous.

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28. Anonymous on May 3, 2011 11:55 AM writes...

The NEW PFIZER business model: an investment bank

Bloomberg -- Shanghai Pharmaceuticals Holding Co., China’s second-largest drug distributor, will sell new shares to Temasek Holdings Pte and Pfizer Inc. (PFE) in an offering in Hong Kong of as much as $2.2 billion of stock to fund acquisitions.

Temasek, a Singapore state investment company, Pfizer, Guoco Group and Bank of China Group Investment will buy a total of $550 million shares for HK$21.80 to HK$26 apiece, according to a marketing document sent to investors today.

The funds will enable Shanghai Pharma to buy manufacturing assets in China, where demand for medicines is forecast by IMS Health Inc. to expand at least 25 percent this year. A soon-to- be-released government plan may push for the nation’s three biggest drug companies to increase their share of the market to 30 percent to 35 percent by 2015 from 21 percent in 2009, the 21st Century Business Herald reported last week.

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29. Rob on May 3, 2011 12:12 PM writes...

@28 said-
"The NEW PFIZER business model: an investment bank"

It's the financialization of everything because of an esteemed body called the federal reserve.

Most scientists don't realize that large 'US' companies have access to the Federal Reserve discount window. This allows them to borrow at near zero rates and use the proceeds to finance various speculative bets (CDS, derivatives, stock swaps, buyouts, etc).

By the way- that's taxpayer money they're using.

Drug development is hard. Placing a few traders in a room to trade is cheap. No reason to innovate or create jobs. Most large banks now have perfect trading records(95% of the time they make money on trades). It's a license to print money.

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30. srp on May 3, 2011 12:19 PM writes...

Rick (#26):

I agree. That was exactly my point. The natural percentage growth rates in profit and revenue had to slow down, but owners, managers, and even some scientists were unwilling to accept this and took a variety of drastic actions that turned out to make things worse.

In fairness, hindsight is 20-20. It's pretty hard, IN ADVANCE, to say when a particular business's supernormal growth period is over. Wal-Mart got really big at a really high growth rate but by the 1990s was slowing down. Lots of people thought that was it, they were now a mature company that should cut back on investment and optimally manage their successful model. Instead, they started selling groceries, and their supercenters kicked them up to another astonishing surge of growth on top of their existing giant size.

Their next trick to continue supernormal domestic growth was to reposition a bit more upmarket to cut into the Target customer base. That has failed; the managers responsible have left the company and they're now going back to basics. The point is that these types of initiatives, which look like stupid thrashing when they fail, sometimes pay off hugely.

The scientists here, who well understand the uncertainty of experimental research, are ironically unaware of the similar uncertainty that besets business strategy. Saying that you could have told them in advance that the experiment would fail is satisfying (and that would have been my estimate as well), and may even be true, but how many successful changes in strategy faced the same objections? Gerstner wrenched IBM out of its hardware orientation to save it--you can bet that lots of people thought he was nuts to make those huge investments in services. It's hard to tell in advance.

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31. Rick on May 3, 2011 6:12 PM writes...

srp (#30),
"In fairness, hindsight is 20-20. It's pretty hard, IN ADVANCE, to say when a particular business's supernormal growth period is over."

I think we're in violent agreement. The thing that really bugs me is that, somewhere between 30 years ago (when it would've required a crystal ball) and today, I'd have hoped someone in a position of authority would've stopped to ponder how it was going and decided it was time to do something different, or even resurrect things that used to work. The un-self-conscious recycling of ideas in the Pfizer case (as described in Matt Herper's piece and the Forbes article it describes in Derek's opening remarks) suggests that hasn't happened yet.

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32. MDACC Student on May 3, 2011 10:19 PM writes...

It sounds like they are reaching for all of their options. For many companies with simple products it is most profitable to generate a useable product and sell it. Leaving much of the emphasis on salesmen/marketing folk and to some extent bean counters trying to push the cheapest product they can make the most money on. Pharma has gone in a different direction. Their products do not have linear successors (such as a faster car, lighter tennis racquet, bigger/clearer tv, etc.). Because of this it seems like a lot of money can be made on speculation as products/drug candidates make progress. Traders can make money betting on these and more recently it seems like pharma has been doing this more than in the past. Instead of purchasing stocks they are purchasing companies...We all know they aren't trying to buy talented scientists, they mostly care about those drug candidates. CEOs can buy a company, see their stock increase in the short term, if the products turn out to be good long term investments they stick around. If not, they jump ship before their gains are lost. If I was a small investor I'd be watching Read and a couple of other guys.

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33. Rick on May 4, 2011 8:33 AM writes...

MDACC (#32),
I don't disagree with your summary, but I would make one grammatical tweak. Instead of saying "Pharma has gone in a different direction", it's more accurate to say "Pharma GOES in a different direction". Pharmaceutical products ARE fundamentally different from semiconductors, cars etc. - partly for reasons you mentioned - and there is apparently nothing that can be done to change that. The fundamental differences between the two types of products and the implications thereof still do not seem to be understood by investors or top level management. Early on, they may have thought, in all good faith, that the development of pharmaceutical products might be managed more like those other products, but decades of evidence suggest it doesn't work. Unfortunately, investors and management have not adapted accordingly, which reflects badly on them, to say the least.

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34. Perry on May 4, 2011 10:24 AM writes...

Pfizer is a bank with a subsidiary law form. They also have a small division that makes drugs.

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35. Anonymous on May 4, 2011 5:37 PM writes...


Good observation! Maybe Pfizer should sell-off its troubled small drug division and focus on what management thinks they do best: M&A, investment banking and litigation.

News is that their litigation group will have much more work in the future and will need the all the money they can save from axing even more chemists' jobs:

The Federal Trade Commission has found an "unprecedented" 60% jump in drug industry "pay for delay" deals that stall consumers' access to cheaper generic drugs, hurting consumers' and taxpayers' wallets.

The report could lay the groundwork for even more antitrust, anti-monopoly actions the government has increasingly been bringing against the Big Pharma.

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36. MCC on May 8, 2011 9:38 PM writes...


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