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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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« More on Pharma Stock Buybacks | Main | The Good Ol' Diels-Alder »

August 23, 2012

Pharma: Geniuses or Con Men?

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Posted by Derek

So here's a comment to this morning's post on stock buybacks, referring both to it and my replies to Donald Light et al. last week. I've added links:

Did you not spend two entire posts last week telling readers how only pharma "knows" how to do drug research and that we should "trust" them and their business model. Now you seem to say that they are either incompetent or conmen looking for a quick buck. So what is it? Does pharma (as it exists today) have a good business model or are they conmen/charlatans out for money? Do they "know" what they are doing? Or are they faking competence?

False dichotomy. My posts on the Donald Light business were mostly to demonstrate that his ideas of how the drug industry works are wrong. I was not trying to prove that the industry itself is doing everything right.

That's because it most certainly isn't. But it is the only biopharma industry we have, and before someone comes along with a scheme to completely rework it, one should ask whether that's a good idea. In this very context, the following quote from Chesterton has been brought up, and it's very much worth keeping in mind:

In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, "I don't see the use of this; let us clear it away." To which the more intelligent type of reformer will do well to answer: "If you don't see the use of it, I certainly won't let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it."

This paradox rests on the most elementary common sense. The gate or fence did not grow there. It was not set up by somnambulists who built it in their sleep. It is highly improbable that it was put there by escaped lunatics who were for some reason loose in the street. Some person had some reason for thinking it would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable. It is extremely probable that we have overlooked some whole aspect of the question, if something set up by human beings like ourselves seems to be entirely meaningless and mysterious. There are reformers who get over this difficulty by assuming that all their fathers were fools; but if that be so, we can only say that folly appears to be a hereditary disease. But the truth is that nobody has any business to destroy a social institution until he has really seen it as an historical institution. If he knows how it arose, and what purposes it was supposed to serve, he may really be able to say that they were bad purposes, that they have since become bad purposes, or that they are purposes which are no longer served. But if he simply stares at the thing as a senseless monstrosity that has somehow sprung up in his path, it is he and not the traditionalist who is suffering from an illusion.

The drug industry did not arise out of random processes; it looks the way it does now because of a long, long series of decisions. Because we live in a capitalist system, many of these decisions were made to answer the question "Which way would make more money?" That is not guaranteed to give you the best outcome. But neither is it, as some people seem to think, a guarantee of the worst one. Insofar as the need for new and effective drugs is coupled to the ability to make money by doing so, I think the engine works about as well as anything could. Where these interests decouple (tropical diseases, for one), we need some other means.

My problem with stock buybacks is that I think that executives are looking at that same question ("Which way would make more money?") and answering it incorrectly. But under current market conditions, there are many values of "wrong". In the long run, I think (as does Bruce Booth) that it would be more profitable, both for individual companies and for the industry as a whole, to invest more in research. In fact, I think that's the only thing that's going to get us out of the problems that we're in. We need to have more reliable, less expensive ways to discover and develop drugs, and if we're not going to find those by doing research on how to make them happen, then we must be waiting for aliens to land and tell us.

But that long run is uncertain, and may well be too long for many investors. Telling the shareholders that Eventually Things Will Be Better, We Think, Although We're Not Sure How Just Yet will not reassure them, especially in this market. Buying back shares, on the other hand, will.

Comments (22) + TrackBacks (0) | Category: Business and Markets | Drug Development


1. Vader on August 23, 2012 12:08 PM writes...

"We need to have more reliable, less expensive ways to discover and develop drugs, and if we're not going to find those by doing research on how to make them happen, then we must be waiting for aliens to land and tell us."

Not so much aliens. They're hoping someone else, such as university researchers, will do the work and give them the answer for free.

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2. Anonymous on August 23, 2012 1:09 PM writes...

two comments

1) The stock buyback issue is very simple. If you have extra operating cash and you believe that your company is a lot more valuable than the market does, a stock buyback makes sense. It's a legal insider's play. Why wouldn't you take advantage of it? The problem is that often a company will buyback stock to try to create the illusion that they are undervalued. But that's only a problem for outsiders.

2) I believe that much of the problem with the pharma industry is that the executives have not asked the question "Which way would make more money?" but "Which way would make ME more money?". This line of question has driven the merger mania. These days most, but not all, top executives are looking for an exit strategy with little care for shareholders in the long term and no care for employees.

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3. PharmaHeretic on August 23, 2012 1:22 PM writes...


So what you are saying is that one way of making money (developing useful drugs) is somehow superior to another way (scams and short-sighed behavior). But why?

I mean.. if you measure and quantify everything by "returns" on investments- isn't something that gives a 10% annual return but kills millions of people better than something which helps millions but gives you a 5% annual return?

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4. Derek Lowe on August 23, 2012 1:53 PM writes...

Um, the negative externalities on those millions of deaths will cut into your 10% annual return, just a bit. So that's not much of a thought experiment.

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5. cynical1 on August 23, 2012 1:53 PM writes...

Careful Pharma Heretic - you just pointed out the fatal flaw with capitalism. Naughty, naughty. Greed is our species true God and only the rich get into heaven.

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6. cynical1 on August 23, 2012 2:50 PM writes...

And Derek, I'm sorry but have you forgotten about the Defense industry? They make lots and lots of money for their shareholders during wartime (whether a Cold War or a War on Terror) killing people or trying to find ways to do it better, all for the return on the shareholder's investment. Period. And if everybody stopped killing each other suddenly, Haliburton would have to buy back their stock too before they finally went under. The investment community considers the moral, ethical and social implications of their investment??? Let me puke.

And our benevolent industry would never ever do anything knowingly that might wind up hurting people to increase shareholder value. No, that would be wrong. Bad, bad. Is that what you're saying? We'd never hide data from the FDA or something very, very sleazy to secure those billions of revenues coming in (Vioxx, cough, cough). Even when they get caught doing just that and given record fines (GSK, et. al. cough, cough), the shareholders don't pay the piper. Neither does the management who made the decisions. Stock price may slump but dividends keep least for now.

We don't want investing in Wall Street to involve risks like gambling. That would involve accountability and we're definitely not a species that prides itself on that attribute. We want money. We want it now. We want lots of it and we don't want to have to work for it. And we certainly don't give a sh*t who gets hurt in the process. Wall Street makes their money on the backs of millions of displaced employees. Crooks just break into your home and steal it. One is legal. One is not. But they're both immoral.

Give me a break......What rose colored safety glasses are you wearing today?

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7. Doug Steinman on August 23, 2012 3:35 PM writes...

Let's examine the difference between a pharma company and a tobacco company. Both companies want to make money. Both companies are regulated by government agencies. Both companies possess proprietary information that they need to protect. Both companies sell their wares to the public. The pharma companies depend on developing (or buying or stealing) new products (drugs) to sell so that they can continue to make money while the tobacco companies depend on better marketing and advertising to maintain their profits. Thus, the pharma companies have needed to spend a significant amount of their money on drug discovery and development which is (or should be) driven by doing good science. However, most of the time, this is not the case today. The pharma companies want to maximize profits and, at the same time, minimize the amount that they spend on drug discovery and development. This is why the drug discovery field is more moribund today than it has ever been. Furthermore, nothing will change until a new business model is adopted that recognizes that the difference between being a pharma company and being a tobacco company is that a pharma company does provide a benefit to society by providing medical innovations that improve the health of the public. This is the heritage of the pharma industry and current pharma management ignores this by emphasizing profits over doing quality research and serving the public good. If this continues to be the case, the pharma companies may as well be tobacco companies.

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8. Derek Lowe on August 23, 2012 4:19 PM writes...

PharmaHeretic, #6: I find your reply confusing, and the fact that you found it a worthwhile exercise is enough to tell me that we're probably not going to have a meeting of the minds here. But here goes.

I had nothing to say about morals. What I meant by the "negative externalities" of a drug killing millions of people (which hasn't happened, I might add), is the amazing blizzard of lawsuits that would result. If such a thing were to happen, the company involved would surely go under, no matter how much money it had made before the trouble hit.

Compare that with a weapons maker. What they care about is that governments buy their product. To be sure, governments do so in the expectation that these weapons will be fearsome and effective. But note that word. "Effective" for a missile means blowing things up, including people. "Effective" for a can opener means opening cans. And "effective" for a drug, well, we already know about that around here.

In each case, there can be side effects. Killing people, for a drug, is a very severe side effect indeed. Killing people, for a missile, is not, unless it's the people who are trying to launch it, or some random bunch of strangers due to a faulty guidance system. And I've never heard of a can opener killing anyone, but just cutting someone's finger as they tried to use it would be a bad side effect in that business, and would surely lead to trouble - at the very least, trouble in the marketplace versus more effective can openers.

Do drug companies push the law to try to sell more product? Most certainly. Do other companies in other industries? Most certainly. (Halliburton, by the way, is primarily an oil field services company, rather than a weapons manufacturer). I do not expect industries to be benevolent - see Adam Smith on that subject. I expect them to obey the law for fear of getting caught. If the current penalties aren't enough to be effective, then they should be jacked up until they are.

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9. Homer on August 23, 2012 4:25 PM writes...

This debate is plain silly, in all forums. Everyone is trying to distinguish the black from the white when it is all a sea of gray. NPR had a story a few days ago about the amazing new life-saving Hepatitis medications; interviewed patients who said their lifes were forever changed and enrichened because of access to the new meds. Where did they come from? Trees? Aliens? NIH? Nope. They came from the same evil Big Tobacco Wannabes who decided Direct-to-consumer would be a good idea. Throw out the baby with the bathwater if you want, but for me, I'll take the Glivec should I ever need it and praise the chemists and biologists who invented it from white powders in their labs.

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10. Anonymous on August 23, 2012 4:27 PM writes...

Derek - I'm still going to disagree with you.

When the amount of money spent on R&D went up rapidly during the 90's, the number of drugs discovered stayed flat. I don't think pouring in more money will change that now. The costs of the successful drug projects haven't gone up that much. We just spend a heck of a lot more on things that don't work - 'bad ideas'. Until we deal with and fix that issue then I'm in the share buyback camp.

There have been major advances in the last 20 years - I salute my chemistry, DMPK and safety colleagues globally on learning and refining their disciplines. It's tough and expensive but it can be done. The molecules we produce are safer and more effective than ever - this is especially true for first generation molecules - less room for me-betters to come along later.

However, my biology colleagues (Pharma/biotech/start-up/NIH etc) and I have let the team down badly. Since the sequencing of the human genome, hypothesis generation has never been easier and we have pumped hundreds of targets into the pharma machine. However, almost all of these hypotheses have proved to be wrong and going to PhII to find this out is very expensive - this is where the money has gone - and you want more??? Not until the 'intelligent type of reformer' appears and is put in charge.

Current management across the board are still fixated on quickly getting something into late stage development and biologists are still providing the hypotheses to facilitate this - 'well you can't say it defintely won't work'. The absence of negative data is all it takes to justify moving something forward and to spend $10-50MM on it. Spending the time to get the high quality positive solid data to truly provide evidence based confidence of success is just not happening.

Let's see some reform first of the way R&D is being done with the current multi-$BB budget before we ask for more.

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11. John Wayne on August 23, 2012 5:21 PM writes...

"Since the sequencing of the human genome, hypothesis generation has never been easier and we have pumped hundreds of targets into the pharma machine. However, almost all of these hypotheses have proved to be wrong and going to PhII to find this out is very expensive - this is where the money has gone - and you want more???"

Huh ... I have always kind of been aware that the contemporary issues we have been having addressing new diseases was a failure of understanding biology, but this quote pushed it to the front of my brain.

Too bad there weren't more strong Mendelian associations with single targets and disease; instead, we just learned how much we don't know. Still, progress is progress. I wonder if the NIH is going to support all of the "let's target two of these at the same time! See this graph? It will work!"

The longer I work in this business the more convinced I become that we somehow need to facilitate the intentional discovery of 'dirty' compounds that work.

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12. cynical1 on August 23, 2012 9:45 PM writes...

Derek - First of all, I am not Pharma Heretic who was #3. You assumed that Pharma Heretic was talking about the drug industry. I did not. Nor does his post make that inference. You made an assumption. I think his/her point was that the only thing that mattered (to the investor) was return on investment, not how it was made. If a higher return was garnered by killing people, then it was fine regardless of how it was obtained or the consequences for society. But I won't put words in his/her mouth either.

You may not have a moral compass but I do. And a moral compass should dictate and govern what we do as a society and how we behave in our business practices. A free market is a corrupt market and all the evidence is out there for you and everyone else to see. With regard to this post: 'Hey, let's buy back shares and all get a little richer. For now. It will all work out in the long run. Not!' Am I wrong?

You wrote, "I do not expect industries to be benevolent - see Adam Smith on that subject. I expect them to obey the law for fear of getting caught. If the current penalties aren't enough to be effective, then they should be jacked up until they are." Seriously, keep drinking the Kool-Aid dude. Wall Street owns your government and your company. No one is going to jail if they break the law. No one is even going to get fired when the law is broken. It's just a slap on the wrist to these people. Do you think Wall Street/your government is going to really punish them if Wall Street/rich people made money off that corruption when it was going on? Seriously? Is that what you're going with? You can't be that naive. It's just part of doing business in the U.S. of A. which is all about increasing shareholder value, regardless of how it's done. And it's mostly about rich people getting richer.

And finally, you are completely wrong. We do have a meeting of the minds. I completely agree with you (and disagree with #11, anonymous) that investment in research is the best/only way to save this industry both for society, the companies (and the worthless shareholders). I couldn't agree more. But you're smart enough to see that that isn't going to happen, it's not happening and it's already too late. Your blog is just the epitaph to what's going on. But it is a very articulate and well-written epitaph and the science parts are just great. I just called bullish*t on this particular point because it cost an awful lot of us our jobs to appease the almighty "Shareholder". Sorry.

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13. Kevin on August 23, 2012 10:17 PM writes...

Interesting, sir, especially in the Chesterton quote. I find the comments especially depressing in the apparent general assumptions on politics, money, and why companies do what they do. It appears only your commentators have morality.

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14. drug_hunter on August 24, 2012 12:39 AM writes...

If the fence was built 200 years ago to keep all the sheep in the common, and there are no more sheep, then perhaps it is OK to take the fence down because it blocks access to the common, which can now be used for other purposes.

I contend that if you have $5M/year to spend on research, you will spend it a lot more carefully than if you have $500M.

Fence = Pharma
Sheep = Drugs
Common = Talent pool, knowledge, IP, etc.
$5M/year = single-target startups
$500M/yr = big pharma with 50 research projects

Yes, I know that all analogies are flawed...

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15. sepisp on August 24, 2012 4:52 AM writes...

Pharma costs are mostly about this: regular corporate overhead, marketing and late-phase (II-III) clinical studies. Clinical studies are regulatory requirements, they can't just be not paid. Marketing and overhead are dictated by market conditions, but I doubt that these megacorporations can easily out-compete each other on this point, so necessary evil again.

While I don't contradict that discovery and development can be potentially limiting steps in the process, we're comparing apples and apple orchards if we set against each other funding of discovery and pharma corporate income.

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16. idiotraptor on August 24, 2012 7:41 AM writes...


You predicate your response to Derek in part on on your assertion that he has no morals. That is not what he wrote in #8.

Read and comprehend before you post.

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17. Anonymous on August 24, 2012 9:16 AM writes...

The underlying problem in this industry is that CEO's and executives lead the company for a period of 5-7 years. There is no real value for them to invest in finding and developing new drugs that will get to market 12-15 years later. Therefore, the focus will almost always be on the shorter term (acquisitions, in-licensing), rather than a long term payout they will never see. Since I am in one of the largest pharmaceutical organizations, most of the executives here and at our competitors are business people first and have little to no scientific backgrounds.

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18. Todd Knarr on August 24, 2012 11:55 AM writes...

I run into similar things in software development, so I don't think it's unique to pharma. A good first rule is "Never try to "fix" code until you understand what it does now and why it does it that way.". I spend half my time fixing problems caused by developers who ignored that rule.

As for research, again it's something I see elsewhere: a lack of investment in the infrastructure needed to generate future revenue. Personally I put it down to the shift in business management from owners to managers. Take a small store for example. When the owner ran it, he was aware that this business was his paycheck. If he was looking at doing something today that made money now but would kill his business down the road, he'd tend to say "No." to it because he didn't want his only source of income killed off. But when a professional manager comes in, he doesn't care. If he kills the business off next year, he can just move on to another manager's job somewhere else. Over time management's shifted the same way software development and other jobs have: from a long-term job where your paycheck depended on the health of the business to a short-term contract gig where you've moved on to something else in a year or two. The long-term impact of your decisions won't affect your paycheck, so there's no reason to worry about it. I don't see any way of fixing this short of moving management decisions into the hands of people whose livelihood's tied to the company for 10-20 years.

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19. cynical1 on August 24, 2012 12:39 PM writes...


I in no way was suggesting that Derek has no morals. If I believed that I would not read his blog and if you or anyone else took it that way, I apologize. I did question his moral compass (which may have been a poor choice of words) when he asserted that "negative externalities" are keeping companies from killing people (yeah, millions was an exaggeration made by Pharma Heretic to make his point) and/or participating in corrupt, unethical and illegal activities. I just simply don't believe that the threat of lawsuits and/or huge fines has made any impact on companies (any company) increasing shareholder value at any and all costs. There is simply too much evidence to prove otherwise (IMO) and Pharma is certainly no exception.

Inexplicable stock buybacks are simply a tiny tip of the iceberg of what is happening in Corporate America. I'm not a member of the Occupy Wall Street movement but I think it was, at least in part, a response to the pervasive corruption in corporate culture in this country. However, I will also admit that some people call me a cynic.

However, I did read and comprehend exactly what he said. I just didn't agree and did a lousy job of articulating it, I guess. I'll try to keep my mouth shut though in the future.

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20. DrSnowboard on August 24, 2012 3:19 PM writes...

I think Haliburton is the only company with a worse international reputation than most pharma. I say most.

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21. seenit on August 26, 2012 7:32 PM writes...

Having worked in the industry for 20 years, I've been part of many blatant frauds and misrepresentations. It saddens me that my efforts, and the risks to my health as a chemist, were all to often used by con artists in corner offices, for personel gain.

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22. seenit on August 26, 2012 7:33 PM writes...

Having worked in the industry for 20 years, I've been part of many blatant frauds and misrepresentations. It saddens me that my efforts, and the risks to my health as a chemist, were all to often used by con artists in corner offices, for personel gain.

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