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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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June 17, 2011

How's All That Cost-Cutting Working Out?

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Posted by Derek

From the Financial Times, here's a look at our industry from a business perspective:

A big justification for the mergers that have consolidated the global pharma industry was that overhead costs would be cut, reducing the impact to profits of the patent-expiration wave. Has consolidation delivered on this promise?

Note that we're already seeing things from a different angle here than we're used to thinking about. From an investor's perspective, all this outsourcing/site closure upheaval is probably a good thing, because it cuts costs that apparently need to be cut. And the question is, has it done what it's supposed to do?

The FT editorial gives a "conditional yes" answer, but they worry that cutting costs is a tactic that's run about as far as it can, and that may not be far enough, financially:

Much overhead has already been removed, and expanding into emerging markets, essential for all the global pharmas, will cost money. Cost of goods and research and development expense ratios have mostly stayed put, and it is hard to see why that would change now. If the savings story is petering out, the industry needs revenue growth more than ever.

That we do, and where we're going to get it is the answer. If there's a bright side to all this, it might be that we're close to the end of the relentless cut-cut-cutting that's characterized this business in recent years. The dark side, though, is that one answer to "what's next?" is more mergers, since that's one way to get back to cutting costs. And let's face it - cutting costs, that's something that managers know how to do. Improving R&D productivity, well, not so much. Stick with what you know, eh?

Comments (58) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. PharmaHeretic on June 17, 2011 10:43 AM writes...

"Cost-cutting" was never meant to make pharma or any other industry profitable. It is, and always was, an excuse to rape and loot an industry for personal gains. Most people believe that businesses are run to benefit shareholders and society. However those who make the decisions have no such delusions.

Did you really expect any better from a system which promotes people based on how sociopathic they are?

Permalink to Comment

2. Hap on June 17, 2011 12:10 PM writes...

Cutting people works only if you don't cut productivity more than cost, and while that's true in the short term (because the revenues now were generated from past productivity), it probably isn't in the long term, and the loss of productivity from layoffs (both because of loss of people and because of loss of personal productivity) will exacerbate that.

Unless the outsourcing/in-licensing (OSIL) model works for pharma in the way that's been proposed, what's being done to cut costs is likely massively counterproductive. Between the lack of responsibility of management for the lack of productivity of their companies and the likelihood of the OSIL model to make dealmakers and management wealthy while having only a moderate to small chance of actually improving pharma's ability to develop drugs and make money, I worry that PH's model of the financial system is the correct one, and the bill that will come due for those acts will be larger than anyone can pay. I guess someone's trying to prove that we don't need God to make an apocalypse?

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3. WhiteElephant on June 17, 2011 12:12 PM writes...

PharmaHeretic's acerbic comments are pretty much spot on!
From a narrow financial perspective this article is hard to argue with, cutting costs plays well in the short-term. However, what about the long-term effects on productivity and morale? The whole-scale trashing of R&D will have long-term detrimental consequences that will only become apparent over time, in fact, they are already manifesting themselves. Apart from the fact that the likes of Pfizer & GSK, etc are sitting on large cash piles, they have little else to offer except more of the same. Is there a Google-like equivalent in Pharma who can re-vitalize the industry or a Steve Jobs type who could bring one of the current pharma dinosaurs back from the brink! Alas, neither Read or Witty come anywhere near fitting that bill!

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4. WhiteElephant on June 17, 2011 12:16 PM writes...

I posted before seeing Hap's comments, they're spot on too. As always, good blogs and reader comments to be found here, pity the people who make the decisions don't read and heed!

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5. Innovorich on June 17, 2011 12:26 PM writes...

Derek - why are you so confident that the cutting is close to the end? I don't see any reasons to conclude this.

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6. Anonymous on June 17, 2011 12:41 PM writes...

#5 - completely agree. All the time companies are 1) employing (in some cases) 100,000+ people and 2) producing next to nothing to replace revenues from fast-disappearing patents, there has to be cuts. No question. It will continue for years sadly.

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7. Hap on June 17, 2011 1:05 PM writes...

But if you can't generate products, then cutting isn't going to get you out of your problems. At that point, unless you know who not to cut (which doesn't seem to be the case), then why shouldn't you just sell your product lines and liquidate? That would seem to be the best chance for shareholders to get their money back, and it wastes as little money as possible in pretending to solve a problem that you can't solve, and puts the resources in the hands of others who might. Instead, the slow death scenario puts the money in the hands of people who can't help pharma, and hoses shareholders and employees (and eventually patients).

(roughly) "If you're not going to get started living, then you'd better get started dying."

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8. bbooooooya on June 17, 2011 1:30 PM writes...

"Most people believe that businesses are run to benefit shareholders and society."

Businesses are run to benefit shareholders. Benefit to society is irrelevant, though presumably if there is no benefit to society the business will not succeed. One could argue that cigarette, pornography, and handgun companies don't benefit society, but they still benefit shareholders.

Is anyone aware of a study of stock performance of big pharma COs as a function of time post-deal?

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9. PharmaHeretic on June 17, 2011 1:53 PM writes...

@bbooooooya

have a look at share prices for big pharma over the last decade and find out if shareholders benefited from decisions during that period.

Now excuse me while I lulz over your belief in capitalism.

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10. SteveM on June 17, 2011 2:08 PM writes...

This is a complex issue with many moving parts. Regarding cost cutting, there are two flavors of costs. Those not directly in the revenue stream like Legal, HR and IT and those directly in the revenue stream which include R&D (even R&D overhead).

As others had mentioned, global bottom line cost reduction in non revenue stream activities is bounded pretty tightly because they are a smaller percentage of total costs and a minimum resourcing is required to keep the business functioning. So you can only squeeze so much blood out of those stones.

With direct revenue stream more cost reductions are available through slashing and burning. But right, in the end, a company could eat it's own seed corn.

However, let me quote #2 hap:

"Between the lack of responsibility of management for the lack of productivity of their companies"

Which is telling because it implies that low(er) R&D productivity is pretty universal. Which suggests a broken R&D model generally. Until the R&D model gets fixed by the people running R&D, the cost reductions will continue, probably in broad investigative categories that are novel idea sparse.

I'm not a Pharma guy, but take CNS. I'm guessing that much R&D effort has been mostly me-too related using the same screens and biologic models. Depression for example. Well if that market is saturated and R&D has not updated its models and screens to target the problems from different directions, CNS is going to get whacked. I mean why spend money on an investigative area that's effectively spent? Not because there a few leads, but because the leads are not sufficiently innovative.

I've been out of the lab for a long time. But as a micro-analogy, I was working on Plant Growth Regulators (PGR's) for Ag Chem. And we worked some concepts, ran out of good ideas and PGR's got whacked. And like Pharma CNS R&D, there was also a pretty simultaneous abandonment of PGR research across the industry because nobody had any real good ideas.

It appears that's where Pharm R&D is right now in some of it's investigative domains. The MBA's may be stupid, but not always. So like I said, the issue is complex.

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11. Algirdas on June 17, 2011 2:43 PM writes...

"Until the R&D model gets fixed by the people running R&D, the cost reductions will continue"

The beatings will continue until morale improves.

There, fixed that for ya.

Permalink to Comment

12. bbooooooya on June 17, 2011 2:50 PM writes...

"@bbooooooya

have a look at share prices for big pharma over the last decade and find out if shareholders benefited from decisions during that period"

Honestly, I'm kinda lazy so I was hoping someone else would have these data that they would post....

I did a very quick look at mergers post deal. Please note, I get that this is a hopelessly small dataset (I do have a job to do).

I looked at biggest 3 pharma mergers I could find: Glaxo/smithkline (Jan 18, 2000), PFE/WYE (Jan 26, 2009), and MRK/SGP (March 9, 2009). I took 1 week prior to merger announcement as a baseline (cuts out potential 'leaks' in days prior to announcement). I looked at closing share price at t = 0 (day of announcement), t = 1, 3, 6, 12 mths out. To control for market drift, i.e. to show excess market return, I corrected for changes in Dow (these stocks trade on NYSE so this seemed most sensible, looking at correlations with NASDAQ and S&P there is likely only a small difference) for the corresponding time periods.

Results:

t=0 t+ 1 month t+3 mth t+6 mth t+ 1 yr
pfe/wye jan 26 2009 -8.57 -12.59 -18.16 -11.84 -10.04
MRK/SGP march 9 2009 -5.78 -5.46 -16.42 -0.71 10.35
gsk jan 18 2000 -6.51 -8.86 11.76 3.92 4.40

So from this---admittedly tiny---dataset, after 1 yr, 2 of 3 of these mergers produced better share returns than the market. Really can't ask for more than that.


Permalink to Comment

13. bbooooooya on June 17, 2011 2:54 PM writes...

Hopefully more readable? Values are % excess market return.

t=0 t+ 1 mth t+3 mth t+6 mth t+ 1 yr
pfe/wye jan 26 2009: -8.57 -12.59 -18.16 -11.84 -10.04
MRK/SGP march 9 2009: -5.78 -5.46 -16.42 -0.71 10.35
gsk jan 18 2000: -6.51 -8.86 11.76 3.92 4.40

Permalink to Comment

14. Anonymous on June 17, 2011 3:40 PM writes...

@bbooooooya

Look for returns beyond a year and compare to them what was implicitly promised by the management.

Let me put it this way.. if you invested 100k in a balanced portfolio of big pharma shares in 2001, what would they be worth now?

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15. Hap on June 17, 2011 3:48 PM writes...

1) Get your priorities straight. Jeez.

2) Short term returns are good, but if you don't get long-term ones, well, then you've removed companies that were producing drugs and revenue and replacing them with ones that produce fewer or none. Long-term returns are multifactorial, and thus hard to tie to any one thing, but if mergers don't help in that respect then they weren't really productive. (If returns are worse, then either the companies would have been worse without the mergers and their core businesses are dying, or the mergers helped make returns worse, and if they did no better then the merger disorder wasn't compensated with anything). I'm also assuming that the productivity or lack thereof is going to be reflected in the stock price.

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16. David Formerly Known as a Chemist on June 17, 2011 4:00 PM writes...

Re. bbooooooya #12:

That was a pretty pointless exercise. Do you really think that comparing returns one year post-merger announcement with an index provides any context of the value of the merger whatsoever? Come on. How long after these merger announcements did the mergers actually close? And how long after close would any rational person expect to see any benefits from jamming two gigantic organizations together?

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17. bbooooooya on June 17, 2011 4:17 PM writes...

"That was a pretty pointless exercise."

Yes, quite likely.

"Do you really think that comparing returns one year post-merger announcement with an index provides any context of the value of the merger whatsoever?"

Yes, especially if I made money as a result.

"How long after these merger announcements did the mergers actually close?"

No clue, but it hardly matters. My point was that had you bought right before the mergers and held for a year, 2 of 3 you would have beaten the market. Given that most mutual funds don't beat the market over a year, that's a decent return.

"And how long after close would any rational person expect to see any benefits from jamming two gigantic organizations together?"

On Wall St, 6, maybe 7 minutes.

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18. David Formerly Known as a Chemist on June 17, 2011 4:30 PM writes...

"On Wall St, 6, maybe 7 minutes."

That sums up the intelligence on Wall Street perfectly.

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19. bbooooooya on June 17, 2011 4:58 PM writes...

"On Wall St, 6, maybe 7 minutes."

That sums up the intelligence on Wall Street perfectly."

So you're saying if people on Wall St were smarter they'd have it figured out sooner?

Who do you think is managing YOUR retirement/401k? If you're doing it yourself (i.e. picking actual stocks/bonds), kudos to you. If you're like 90% of Americans, your retirement mutual funds are being run by a bunch of 30 year olds with the attention span of a gnat. Yes there are ups and downs but, for the most part, it works pretty well.

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20. BOB on June 17, 2011 5:19 PM writes...

Since we are on the subject: If you had invested in Vanguard's total stock market index 10 years ago you would have gained 53%. The corresponding bond index is up 72% in the same time frame.

Seems to me that your gnat-like attention span isn't doing you any favors. And the summer correction is just getting started...

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21. Chemjobber on June 17, 2011 6:32 PM writes...

Q: How many folks in pharma have their retirements in index funds versus actively managed funds?

I suspect that it's higher-than-average, but I've seen plenty of coworkers trying to 'beat the market'.

Permalink to Comment

22. Anonymous on June 17, 2011 8:48 PM writes...

What's strikes me about most wall street articles is how little the business world actually grasps Pharma.

Pharma is completely different beast from most other businesses, even technical ones.

People say oh look at google, look at apple. They design great stuff. Notice the word is design.

They use off the shelf technology and put together neat toys. They make small incremental improvements and market the hell out of it. Very few big companies can keep putting out game changers out there or continue to swim in blue oceans.

Now, I'm not trying be the narrow focused scientist who has no clue about business. Because I'm an ex-scientist in the finance world now.

Pharma relies on discovery, not design, optimization, or marketing. Yes sales and marketing are incredible important in pharma, but really blockbusters sell themselves. Lets be honest. When Viagra hit the market, the news itself was it's own advertising.

Trashing pharma R&D was brutal, because these large institutional companies literally threw there most experienced hands under the bus.

A common mistake that wall street also makes is the belief that scientific managers were the brains behind all of the projects. Managers are meant to coordinate and direct the efforts of the the teams/team leaders. Not direct an army of outsourced monkeys. On the same hand, a brilliant med chemist, often makes a shitty manager.

And now? How many team leaders are post-doc's with 2-3 years of industrial experience? How much do they really know? How many old hands are there to guide them, teach them. They learn a little yes, but enough to direct a project? No, many of them just follow the same recipe and as a result produce the same. We've all seen it, and we all know it exists.

Here is a great example:

Ambiguity in structure that needs confirmation.

Fresh PhD . Runs tons of 2D NMR and HRES MS. Enlists analytical service help, spends hours confirming the structure.

Old Hand: Runs a IR.


Anyone who has truly worked in the industry knows that it's the boots on the ground, or rather hands in the hood that make the discoveries. Don't invest in anyone that says different.

By Wuxi-izing the industry, you've destroyed what took you years to build. I say big pharma is dead. I say that small biotech will rise slowly. I say that the brilliant folks at Mckinsey failed to realize that in licensing will get too expensive rather quickly and there will be too many failures (a la siritus) to make up for the ones that are marginally successful.

Not all biotech's/small pharma's are gold though. The vast majority of them are pretty sub standard actually. But a few will make it.

What's sad is that we used to use our resources to make fundamental discovering in HIV and inflammation. No we just jockey for market share.

Pharma's not fun anymore. The passion and drive is lost. A sad time for the industry.

Permalink to Comment

23. Nick on June 18, 2011 12:37 AM writes...

"Ambiguity in structure that needs confirmation.

Fresh PhD . Runs tons of 2D NMR and HRES MS. Enlists analytical service help, spends hours confirming the structure.

Old Hand: Runs a IR."

This just made my day!!!

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24. Jeff Dieckman on June 18, 2011 12:56 AM writes...

Derek- What do you think of Andrea Rossi?

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25. Jeff D on June 18, 2011 12:58 AM writes...

Derek- What do you think of Andrea Rossi?

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26. petros on June 18, 2011 2:19 AM writes...

#22

Love the comment. Of course does a new post-doc know what an IR is, or are they just mouldering in the basement as equipment to be scrapped?

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27. Rick on June 18, 2011 8:16 AM writes...

PharmaHeretic #1
"Cost-cutting" was never meant to make pharma or any other industry profitable." I hope you meant to be provocative rather than factual. Of course cost cutting is meant to increase profitability, and it works over the only time frame so-called investors care about: quarterly. What about the long run, you might ask? No one gives a crap about the long run, or as Keynes said, "Over the long run, we're all dead."

Hap, #2
For similar reasons, cost cutting DOES boost productivity. That's because the financial results (i.e. lower costs, which appear in the denominator of the productivity equation) appear on a quarterly or annual time frame, whereas the product results (i.e. drugs on the market) only appear many years afterward, so the numerator in the productivity equation does not change within the one-year time frame considered to be "long-term" by so-called investors. This used to be derided as "denominator management" in business schools but it's now part of the sacred canon of business school and the sharpest tool in the kit of "turnaround" managers.

So long as business schools and business gurus teach that short term denominator management is the business tool of first resort and Wall Street continues to reward it, we're pissing in the wind to complain about it. (Re)watch "Inside Job" and pay close attention to the parts about the role played by academic economists and business professors in the financial melt-down and you'll get a tiny glipmse of just how prevalent this self-destructive idea is.

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28. Rick on June 18, 2011 10:02 AM writes...

bbooooooya, #19
"...your retirement mutual funds are being run by a bunch of 30 year olds with the attention span of a gnat. Yes there are ups and downs but, for the most part, it works pretty well."

And you're happy with that??? How about we step up to fruit flies? Or imagine what we could do with a bunch of monkeys or the Quilting Qlub of Qenosha calling the shots instead. Oh wait, that experiment has already been done: the monkeys and little old ladies beat the crap out of the 30-somethings.

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29. BOB on June 18, 2011 10:33 AM writes...

@Chemjobber

The stock funds in my 401k are not actively managed. That said, I'm pretty quick to get out of stocks and into bonds when things look bad. I would much rather miss the end of a bull market than suffer the beginning of a bear market. Calling the top is hard, calling the bottom is a lot easier.

The bond funds in my portfolio have consistently returned 6-7% over the past 10 years. Doubling your money in that time is nothing to sneeze at.

You are supposed to get a better return on a risky investment, not the other way around. If the average investor actually paid attention wall street would be out of business. Most of the money is being siphoned off to executive compensation and hedge funds (insider trading mills). It's unbelievable how poorly the stock market has done considering how much money companies bring in. Do you think corporate/hedge fund/executive profits are up by 53% in the last 10 years?

And these companies are supposed to be public, but the investing public gets nothing but chump change. At least the bond market has some teeth when investors are cheated out of their money: I'm looking at you Greece.

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30. bbooooooya on June 18, 2011 10:52 AM writes...

"And you're happy with that?"

Sure, if you're good there's a lot of $ to be made. Don't get me wrong, most of them are bad at investing but, given the choice, I'd rather play poker with a table full of morons.....

The argument about old hands using IR while them young whippersnappers "waste" all that time on fancy schmantzy NMR stuff is appealing, but I don't believe accurate (and, please note, I used to love finding just the right test or tlc spray in Fritz Feigl's book).

Let's assume you just made a new molecule by adding a fucose to a tetra-saccharide, and you'd like to check if you have the alpha or beta anomer. Good luck figuring that out based on IR. Maybe polarimetry?

Permalink to Comment

31. skatesailor on June 18, 2011 10:55 AM writes...

@ nos. 22 & 23:

If you applaud the Old Hand's reliance on IR, then you might enjoy reading Chem. Commun. 1383 (1984). That paper shows IR defeating NMR and MS.

Permalink to Comment

32. BOB on June 18, 2011 11:19 AM writes...

@ bboooooya

How do you define good? Anyone can make money in a bull market. Throw 5 darts at the wall street journal one year ago, invest in those stocks and you would have gotten a 30% return. Same as the market, same as your gnat attention span 30 yr olds or your quilting little old ladies.

That doesn't mean you are good, it means you are lucky. You are lucky that you invested at the right time. If the US government debases it's currency enough it's inevitable that large multinational corporations will generate profits, as long as we measure the profits in dollars. I could have beaten the market by exchanging my dollars for Swiss Francs one year ago and stuffing them under my mattress (+37% Y-Y by the way).

There is almost nothing that has underperformed the dollar's swoon in the last year. Again, you're not good, you're just lucky and if you're smart you would realize that and get out before your luck runs out...

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33. Casual Observer on June 18, 2011 3:39 PM writes...

Part of the problem is that it's a self-fulfilling prophecy. Investors and executives think that cutting costs is a good idea, so when big cuts are announced, investors get excited, they bid the stock price up, and managers say "see? cost cutting works."

The other part of the problem is that cost cutting is easy, and improving productivity is hard. Improving productivity in pharma R&D is so hard that almost nobody can tell for sure when it's happening. So, if you're an insecure CEO and don't know what to do, cutting costs gives you a better bottom line right now, gives you a story to tell investors about what a decisive leader you are, and nobody will ever really know how much damage was done in the process.

There are people out there who can manage pharma R&D well. But not many. And they generally don't look or sound much like Fortune 500 CEOs.

Permalink to Comment

34. Lacerta Bio on June 18, 2011 5:27 PM writes...

We also don't see cost-cutting coming to an end anytime soon, simply because internal product development and in-licensing are not going to replace lost revenue in the near-term. Companies will continue to become smaller in order to support their smaller revenue bases (cf., Pfizer)

But is this really such a bad thing? Perhaps not. If the cost-cutting is in redundant administration, then many of those jobs can be shifted to other companies and even other industries. But, if those cuts come from R&D, then we have a real problem. Where will the innovation come from?

In our view, the long-term growth of our industry will come from companies spinning out and/or divesting good assets that do not meet their revenue targets. If companies are sitting on assets that will not achieve their peak year sales targets, then those assets are best left to smaller companies for development. These smaller companies will need people to develop these assets, either as internal hires or external hires at CROs/CDMOs. Ideally, this will expand the overall industry pipeline, resulting in more drug approvals, and correspondingly, continued employment and value creation.

Now the obvious question is "Where will the investment come from for these smaller companies and their assets?" To me that is the true crux of the problem. As long as the financial markets are tight, investors will not look to pharma, and instead invest in IT, social media, etc. If we had a frothy market with lots of early-stage VCs looking for these types of investment opportunities, then I think we'd see even more asset spin outs and company formation. Anecdotally, we've seen a decline in the overall number of VCs since the biotech bubble 10+ years ago. That's the real problem we have.

There is another problem, which is that many pharma companies do not want to spin-out their assets which do not hit their revenue targets. In several cases that we know of, business development groups do not have anyone incentivized or charged with the taks of spinning-out assets. The reasons for this are complex (i.e., IP protection, desire not to create competitors, etc.). Hopefully, this will change over time.

Permalink to Comment

35. Lacerta Bio on June 18, 2011 5:28 PM writes...

We also don't see cost-cutting coming to an end anytime soon, simply because internal product development and in-licensing are not going to replace lost revenue in the near-term. Companies will continue to become smaller in order to support their smaller revenue bases (cf., Pfizer)

But is this really such a bad thing? Perhaps not. If the cost-cutting is in redundant administration, then many of those jobs can be shifted to other companies and even other industries. But, if those cuts come from R&D, then we have a real problem. Where will the innovation come from?

In our view, the long-term growth of our industry will come from companies spinning out and/or divesting good assets that do not meet their revenue targets. If companies are sitting on assets that will not achieve their peak year sales targets, then those assets are best left to smaller companies for development. These smaller companies will need people to develop these assets, either as internal hires or external hires at CROs/CDMOs. Ideally, this will expand the overall industry pipeline, resulting in more drug approvals, and correspondingly, continued employment and value creation.

Now the obvious question is "Where will the investment come from for these smaller companies and their assets?" To me that is the true crux of the problem. As long as the financial markets are tight, investors will not look to pharma, and instead invest in IT, social media, etc. If we had a frothy market with lots of early-stage VCs looking for these types of investment opportunities, then I think we'd see even more asset spin outs and company formation. Anecdotally, we've seen a decline in the overall number of VCs since the biotech bubble 10+ years ago. That's the real problem we have.

There is another problem, which is that many pharma companies do not want to spin-out their assets which do not hit their revenue targets. In several cases that we know of, business development groups do not have anyone incentivized or charged with the taks of spinning-out assets. The reasons for this are complex (i.e., IP protection, desire not to create competitors, etc.). Hopefully, this will change over time.

Permalink to Comment

36. bbooooooya on June 18, 2011 5:37 PM writes...

"Anyone can make money in a bull market. Throw 5 darts at the wall street journal one year ago, invest in those stocks and you would have gotten a 30% return"

Wow, sounds like investing is really easy!

Permalink to Comment

37. watcher on June 18, 2011 7:34 PM writes...

Throwing and almost unlimited amounts of fundings, inside or outside of Pharma, has seldom found success. While financial support is needed, there's a limit to what added money thrown at a problem at given times can provide in terms of positive progress; sometimes, too much turns actually into negative progress. Instead, real progress on solving problems, new or old, require innovation, imagination, dedication,, commitment, and some amount of time. Mediocrity, demands for fast "Wall-Street" financial return, guarantee of success, 8 weeks vacation....need not apply.

The philosophy from the last 30 years of Pharma growth & spending is in reversal and retreat with today's increased public, regulatory, safety, health cost containment pressures. The breadth of this past largess (which so many of us have been well rewarded recipients) will continue to come under pressure, particularly hitting the techincal staff, new potential scientists, and many well-qualified mid-career participnts. The reversal is not going to stop until some new "steady state" model for the public & private R$D enterprise to support personal, national and global interests comes into being. And with the current dysfuntional discussions within the US on these topics, this will take many, many decades to resolve, if even then.

In the meantime to get there, there must be increased and ongoing pressures for overall containment to individual and national health care costs. Admit it or not, Pharma is a very visible and easy targeted variable in this equation.

Bottom line: spending will continue to decline in real and/or inflationary terms. There just is no practical or justifiable alternative.

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38. Anonymous on June 18, 2011 8:02 PM writes...

Cost cutting is OK if you cut the crap. Cutting good people is the kiss of death. Just look at the recent Roche layoffs....they kept a alot of crap (non-talent, "the boys" who can't think outside the box,"the favorites" based on non-sensical metrics, favoritism, bias etc). That's Roche....let's see what happens over there in 2011-2012!!!

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39. What "R" ??? on June 18, 2011 10:13 PM writes...

What "R" activity are we really talking about here? Sure big pharma is good at "D" productivity, but they're notoriously lacking on the "R".

It's funny how this point is rarely emphasized. The worst part about what's happening to the industry is that VC's have lost faith, and they aren't funding small startups, where the real "R" productivity has always come from. Pharma has primarily done nothing more than bought intellectual property from these small, fast moving, innovative entities.

The reason for this? even the little guys don't seem to be able to come up with any more valuable "R" these days, or is it just the fact that the FDA doesn't dare approve today what it used to in the past.

And.....

In the end, if low cost generic drugs meet the needs of the majority of the population relying upon bankrupt health care systems, then do we really need any more expensive "R" ?

Has anyone tried to explain these facts to their friends and family with respect to why pharma research has collapsed, why you are out of work and your profession has all but disappeared.

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40. BOB on June 19, 2011 6:15 AM writes...

@bboooyaaaa

I think I was trying to emphasize how investing is not easy. If a professional stock picker can barely beat grandma, then investing must be very difficult.

I think we haven't dealt with any of the long term problems in this country, in much the same way as pharma hasn't addressed any of its real problems. All we have are easy solutions, i.e. tax breaks, printing money and government spending vs. layoffs in the industry.

Unfortunately none of these so called solutions deal with fixing the productivity problems that have caused our current state of disrepair. When the problems of the past haven't been fixed how are we to expect better results in the future?

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41. Rubidium on June 19, 2011 6:21 AM writes...

#39 is correct about the "R" in R&D, but its also the kind of R that is important. Once a 'target' is chosen, then discovery organizations where ever are located in the world can come up with compounds for that target- but its identifying MEDICALLY relevant targets, a task with no easy solutions, one that can't be pegged to a quarterly goal that requires a business model that is currently unavailable in the industry.

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42. BOB on June 19, 2011 7:02 AM writes...

@bboooyaaaa

Oh and one other thing I forgot to mention.

I work at a large company and having been there several years I can't begin to predict where its stock price will go one day to the next or even one year to the next.

When I can't figure this out for my own company how can I possibly do it for a company I don't know as well (or for the entire market)?

So again I didn't say investing is easy, I said that it is hard. Most people are equally good at investing, just like most people are equally good at biking to the moon. Predicting the future** is so far beyond your ability that just about everyone gets the same result.

Given the current run up in the market, do you think it's more or less likely to under perform? I can't predict the future, but none of our problems have been fixed, so I think the near future will be more like the recent past.

**Actually you're predicting the investing public's perception of the future. If you had told me 2 years ago that unemployment would be stuck at 9.1% and the S&P 500 would double in two years I wouldn't have believed you.

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43. Rick on June 19, 2011 7:04 AM writes...

I largely agree with the reasoning of Where is the "R" (#39) and Rubidium (#41). However, I suggest that the strict division of labor you imply is too black and white to work as well as you want it to. In the past, the greatest "R" productivity occurred when academic and not-for-profit basic researchers worked much more closely with industrial resaearchers. In retrospect, the Bayh-Dole and Hatch-Waxman acts unintentionally created new hurdles that stem the flow of knowledge betwween academic and industry research more than most anticipated. The original idea that introducing a revenue motivation into academic research would incent more applied research may have arguably worked, but it has come at the cost of creating financial and IP policies that have introduced complexities, costs and delays into the relationship between academia and industry that didn't exist 30 years ago. Today, a relationship like the one between Selman Waksman and Merck that led to aminoglycoside antibiotics or Salk and the industry that gave us the polio vaccine could not occur because IP lawyers and tech transfer departments would introduce stifling costs and procedures that deter, not enable, the process.

I'm not saying we should necessarily reverse Bayh-Dole (though I, for one, wouldn't shed a tear) or that we need to dissolve all tech transfer departments, but we do need to change something fundamental about the process so that academia and industry can work more seemlessly. In my opinion, drawing brighter lines between academic and industry research only makes the situation worse. Before anyone asks, I do NOT think initiatives like Pfizer's expansion into the Boston academic community are the same thing. Ironically, I think that under the present circumstances, placing the two sides in closer proximity will actually serve only to highlight the barriers by raising them more frequently.

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44. Bbooooooya on June 19, 2011 9:26 AM writes...

No, I can say with certainty not everyone is equal at investing.

Not really surprised that having knowledge of your specific company does not correlate to knowing what the stock will do: it's not about companies in isolation.

Maybe we just need more innovation to improve productivity? There! Fixed it.

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45. Anonymous on June 20, 2011 8:51 AM writes...

#1 PharmaHeretic

Nice to see you've jumped on the "Capitalism is evil" bandwagon.

We should evenly distribute all the world's resources, by force if necessary. If only all the smart people could run things, the world would be so much better.

The problem with Capitalism is capitalists. The problem with Marxism is Marxism.

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46. You're Pfizered on June 20, 2011 9:08 AM writes...

Slightly off-topic, but here is a pretty interesting commentary on Lilly.

http://www.bnet.com/blog/drug-business/patent-cliff-losses-mean-eli-lilly-must-acquire-or-be-acquired/8778

I read an analysis earlier in the year about Lilly being ripe as a takeover target in the next few years. Interestingly, they had Abbott as one of the best matches for them.

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47. Hap on June 20, 2011 9:19 AM writes...

If you can have an economy without people, than that should mean that capitalism wins, right? An economy that runs well if human behavior is neglected is no less fundamentally flawed than one whose theory doesn't work at all - their probabilities of failure are both 100%.

Marxism at least in part because people are selfish, or rather not selfless all the time, and because eventually (or quickly) the leaders decide that that the people work for them, and so their selfishness is a blessing for them and a curse for others. Hypocrisy's pretty corrosive. Of course, the same holds true for capitalism - when one set of rules ("you are responsible for your failures and must pay a stiff price for them") holds for peons and another ("Yes, you screwed your employees, customers, and shareholders. Here's $50M.") holds for the bosses, well, it's not all that hard to see why people might come to PH's point of view.

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48. bbooooooya on June 20, 2011 10:07 AM writes...

under capitalism it's man exploits man. under communism it's the opposite.

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49. Nick K on June 20, 2011 11:06 AM writes...

@47 Hap: Astute comment about the asymmetry of rewards in modern turbo-capitalism. As recently as 1986 the highest-paid CEO in the US was John Gutfreund of Goldman Sachs, who was heavily criticised for his renumeration of $3M per annum. Today, that's loose change for such people. The corporate aristocracy have their hands in the till.

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50. get real on June 20, 2011 11:56 AM writes...

One of our former CEO's had said that when there had to be large cost savings imposed through organizational downsizing, that he did not have the luxury of total strategic selection of all staff, but rather had to resort to "high level bombing." Certainly a crude, but effectively gut-wrenching (for company employees) description of a "visionary" view from the top. And more real, more often, than people want to have to acknowledge.

Cost savings is about....COST SAVINGS. It will, must, is impressed upon the industry, to drag on for many more years.

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51. Hap on June 20, 2011 1:40 PM writes...

"I need to lose weight, and I don't have the luxury of selectively cutting the weight I don't need, so I'll just lop off limbs until I've reached the appropriate weight."

Why does anyone sane think that that is an appropriate business strategy, let alone pay lots of money for someone to actually do it?

Most of the things that generate costs in the short term also generate revenues, usually in the long term. If something doesn't generate any revenue and costs money, well then there's not much choice in what to cut. If, however, processes generate both costs and revenues, then you have to think about what to cut. Thinking about what and who to cut and what and who not to cut is supposed to be a job for CEOs and management - if they don't have the luxury of thinking about what they're doing, then the choice of what costs should be cut ought to be pretty easy.

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52. Velociraptor on June 20, 2011 2:44 PM writes...

Let's just face it. Times suck.

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53. got real on June 21, 2011 3:50 AM writes...

Well Hap, too literal, again, always. If a CEO, you'd be like Carter as President, needing to watch over every detail, every decision, every dime & nickel spend. And taking the company no where, fast, except down a drain since you'd miss seeing the future cannot be the past.

Keep writing checks on the depleting bank account, Hap, even when they tell you there are no more funds avail. Oh, yeah, you could then borrow to cover extra spends at the promise of new big blockbusters coming 'round the corner when they come.... Oh, yeah, and then sell yourself to the next bidder to get yourself a nice CEO bonus after failing at all what came before (if you have any assets that anyone wants, and resources they can gut for cost savings).

Yeah, great plan Hap. OH, MY. But I foget. That's today's connundrum. My BAD.

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54. Hap on June 21, 2011 9:10 AM writes...

You sound like a crack adduct explaining that selling the TV for $10 for another hit is a good idea. Why should anyone not otherwise addicted or sane think that's a good idea?

Perhaps you shouldn't play with anything dangerous, like electricity or the financial system.

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55. Hap on June 21, 2011 9:12 AM writes...

You sound like a crack adduct explaining that selling the TV for $10 for another hit is a good idea. Why should anyone not otherwise addicted or sane think that's a good idea?

Perhaps you shouldn't play with anything dangerous, like electricity or the financial system.

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56. got real on June 21, 2011 2:45 PM writes...

Wow. How profound. How insightful. How able to see the world around in such a clear, concise picture. A TRUE VISIONARY. Thanks so much Hap.

But, let's make sure there IS credit to Pharm, and well deserved it should be. Recent successes that really do need to recognized, advertised, known, taught as TRUE success stories. Not the negative press where Vitorin may not be any advantage, or Avandia may carry cardia risk, or the lack of outcome data for Tricor. Let's look at treatments for HIV & now the new protease inhibitors for HCV. Examples that have and will continue to provide advances to treat new diseases....coming from the industry, not government, not academia. And such successes will continue, BUT not under the same, inefficient, antiquated "throw as much money at it as one can" kitchen sink model. That's done, dusted, over.

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57. Hap on June 21, 2011 4:13 PM writes...

If the "make more with less" model has worked anywhere, please tell.

Hoping for magic or miracles doesn't count as a business model.

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58. Cellbio on June 21, 2011 7:07 PM writes...

@#21 who wrote, "...I've seen plenty of coworkers trying to 'beat the market'."

Are you in the House or Senate? Did you see the report that our congressional "leaders" investments beat the market by 6%. And they won't enact legislation that limits their trading based on non-public, but technically non-insider info. Nice!

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