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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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May 28, 2013

Valeant Versus Genentech: Two Different Worlds

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Posted by Derek

Readers may recall the bracing worldview of Valeant CEO Mike Pearson. Here's another dose of it, courtesy of the Globe and Mail. Pearson, when he was brought in from McKinsey, knew just what he wanted to do:

Pearson’s next suggestion was even more daring: Cut research and development spending, the heart of most drug firms, to the bone. “We had a premise that most R&D didn’t give good return to shareholders,” says Pearson. Instead, the company should favour M&A over R&D, buying established treatments that made enough money to matter, but not enough to attract the interest of Big Pharma or generic drug makers. A drug that sold between $10 million and $200 million a year was ideal, and there were a lot of companies working in that range that Valeant could buy, slashing costs with every purchase. As for those promising drugs it had in development, Pearson said, Valeant should strike partnerships with major drug companies that would take them to market, paying Valeant royalties and fees.

It's not a bad strategy for a company that size, and it sure has worked out well for Valeant. But what if everyone tried to do the same thing? Who would actually discover those drugs for inlicensing? That's what David Shayvitz is wondering at Forbes. He contrasts the Valeant approach with what Art Levinson cultivated at Genentech:

While the industry has moved in this direction, it’s generally been slower and less dramatic than some had expected. In part, many companies may harbor unrealistic faith in their internal R&D programs. At the same time, I’ve heard some consultants cynically suggest that to the extent Big Pharma has any good will left, it’s due to its positioning as a science-driven enterprise. If research was slashed as dramatically as at Valeant, the industry’s optics would look even worse. (There’s also the non-trivial concern that if Valeant’s acquisition strategy were widely adopted, who would build the companies everyone intends to acquire?)

The contrasts between Levinson’s research nirvana and Pearson’s consultant nirvana (and scientific dystopia) could hardly be more striking, and frame two very different routes the industry could take. . .

I can't imagine the industry going all one way or all the other. There will always be people who hope that their great new ideas will make them (and their investors) rich. And as I mentioned in that link in the first paragraph, there's been talk for years about bigger companies going "virtual", and just handling the sales and regulatory parts, while licensing in all the rest. I've never been able to quite see that, either, because if one or more big outfits tried it, the cost of such deals would go straight up - wouldn't they? And as they did, the number would stop adding up. If everyone knows that you have to make deals or die, well, the price of deals has to increase.

But the case of Valeant is an interesting and disturbing one. Just think over that phrase, ". . .most R&D didn't give good return to the shareholders". You know, it probably hasn't. Some years ago, the Wall Street Journal estimated that the entire biotech industry, taken top to bottom across its history, had yet to show an actual profit. The Genentechs and Amgens were cancelled out, and more, by all the money that had flowed in never to be seen again. I would not be surprised if that were still the case.

So, to steal a line from Oscar Wilde (who was no stranger to that technique), is an R&D-driven startup the triumph of hope over experience? Small startups are the very definition of trying to live off returns of R&D, and most startups fail. The problem is, of course, that any Valeants out there need someone to do the risky research for there to be something for them to buy. An industry full of Mike Pearsons would be a room full of people all staring at each other in mounting perplexity and dismay.

Comments (32) + TrackBacks (0) | Category: Business and Markets | Drug Industry History


COMMENTS

1. PPedroso on May 28, 2013 11:00 AM writes...

And I hate that kind of people that just capitalizes on the hard work and risks of others.

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2. simpl on May 28, 2013 11:07 AM writes...

Yes, there are enough products to fill the niche. Consultants regularly recommend offloading low-margin drugs to raise margins, though I find it is a flawed strategy, as it makes producers more vulnerable to the unexpected - better to maximise flexibility and robustness rather than margin imho.
Equally, a solid, lower margin product can stabilise a company on the launch roller coaster, and protect against a launch delay.

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3. Wile E. Coyote, Genius on May 28, 2013 11:25 AM writes...

I thought I saw in the news over the weekend that Valeant is buying Bausch & Lomb. I think you can say goodbye to the thought of any new or improved products coming from B&L.

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4. opsomath on May 28, 2013 11:31 AM writes...

"Optics?" God help us all, I loathe this kind of lingo. What a silly way to say "This may make us money, but it'll just make us look even worse."

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5. MTK on May 28, 2013 11:45 AM writes...

I'm not sure I understand what the issue is here.

The whole process would be self-correcting due to supply and demand.

As companies dump R&D it will drive up the price of the output of the R&D that remains to the point where it will once again make sense to have internal R&D.

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6. MDA Students on May 28, 2013 11:52 AM writes...

It sounds like he found a hole in the market and is using his company to fill it. The problem is others are aware of this and are also likely hedging their acquisition activity in that same market. [As an outsider without professional qualifications and experience] I would predict this strategy for Valeant will wear off over the next year or two, will be back to square one, and then a year or two after that they will be suffering that affects of their R&D divestments. Not too long after that they will likely either spin off portions of the company or be acquired themselves.

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7. SoCalChemist on May 28, 2013 12:00 PM writes...

It seems like the whole system could strike a balance between two types of firms: ones that market and distribute drugs obtained from M&A as well as run the larger more expensive clinical trials; and high-risk start-ups funded by VCs (and perhaps the previously mentioned firms trying to get a foot in the door) that do the translational work and due diligence testing on academic discoveries. Even if big pharma completely devolved into marketing, sales, and clinical trial I don't think that would generate an apocalyptic end of R&D since they plunge that money into backing start-ups and academic partnerships.

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8. GNEchemist on May 28, 2013 12:09 PM writes...

I'm a long time Genentech chemist, and have wondered if one of the key elements to success here was that there was a skeptical, high-quality research environment which was able to separate the wheat from the chaff in bringing in programs. I always enjoyed watching colleagues in the old days (>10 years ago) who made much of the fact that their research would never benefit the company going into meetings with business development where they were able to evaluate in-licensing opportunities using the skills they developed on their internal research. We bought some very good programs over the years, and that raw material eventually contributed to the bottom line significantly.

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9. Hap on May 28, 2013 12:11 PM writes...

5: That assumes, though, that the people who can make R+D and the information and explicit or tacit knowledge that makes it either occur or be more efficient can be readily recreated or stored. There might be enough future students to believe that there will be jobs for them in developing drugs, though whether they will actually have salaries to justify their insecurity and fixed costs is decreasing in likelihood. The tacit knowledge, however, will probably be gone, and so the cost of R+D in such an environment will be even higher than it was when outsourcing R+D started sounding like such a good idea.

6: Valeant's been doing this for a while, so while I'd like to hope their gravy train will stop shortly, I'm not going to put money on it.

As a cynical aside, I still wonder exactly what America intends to make to sell. Rancid and dishonest financial instruments? iPad/Phone apps? We seem to have decided that making anything (either manufacturing or other things) and R+D are for chumps - so then where do we get things that people will pay for (since the lack of desire for people like me to pay for domestic manufacturing of ordinary things and the increasing costs and decreasing sizes of such things is much of the problem)? Or perhaps the ones we don't want to pay (much) for now?

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10. DCRogers on May 28, 2013 12:15 PM writes...

I weep for the city of Rochester, a lovely place with more its fair share of deindustrialization's burdens. I'm assuming some of the 1,500 employees at B&L's Rochester HQ may be sharing the fate of their neighbors at Kodak...

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11. mad on May 28, 2013 12:17 PM writes...

"taken top to bottom across its history, had yet to show an actual profit. The Genentechs and Amgens were cancelled out, and more, by all the money that had flowed in never to be seen again. I would not be surprised if that were still the case."

Except for the lives saved

Also bussiness is not science

Biotch often have one possible chance that they will force forward even if the data would otherwise say its time to stop

Plus there will alwasy be snake oil hucksters trying to make a quick buck they are technically not doing "real" R&D

If you could factor these out wih good due dillignace you would see the returns on real R&D and they would be better

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12. oldnuke on May 28, 2013 12:19 PM writes...

It kind of reminds me of some MBA-types drawing flowcharts on the board with no idea of what goes on inside the boxes.

Those boxes that say "and then a miracle occurs"...

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13. Hap on May 28, 2013 12:20 PM writes...

"The most dangerous man is the one who has only one idea, because then he'll fight and die for it." Francis Crick

Startups fail at least in part because they have only one idea, and mostly have to stick to it come what may. They don't have enough money to be sufficiently diversified to avoid the risk of an idea failing, and they are likely to oversell what they do have to others because that's the only way to mitigate their risk. Their failure might not be just because they are R+D and not much else, but because they are one (good) idea and not much else. If Bernard Munoz is right, though, there may not be enough money to support enough ideas to mitigate that risk effectively, in which case the reasoning is apt.

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14. Lyle Langley on May 28, 2013 12:44 PM writes...

Can someone clue me in on how many small molecule drugs Genentech has gotten approved from their internal R&D (not including the drugs from Roche)? I know R&D is R&D and biologics can be more desired (patents, etc.), but how successful has Genentech been in small molecules. I can only think of one - Hedgehog inhibitor. I say this, because articles such as this that state how awesome Dr. Levinson's vision is/was and how many Genentech medicinal chemists glom onto this awesomeness, when, in fact, they are no more successful than anyone else.

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15. rcyran on May 28, 2013 1:15 PM writes...

Lyle-

Isn't that mostly beside the point given Genentech's success in antibodies?

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16. Legolas on May 28, 2013 2:21 PM writes...

I think at the end of the day we will see a mix of all these different models. I have seen many of the big companies falling behind and not increasing revenues and/or the number of marketed drugs. It seems to me that the only one that it's not that desperate is Roche. Any idea what Roche does differently? I know its vertical integration is unique, but it does explain why there seem to be better at picking up programs

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17. Helical_Investor on May 28, 2013 2:50 PM writes...

Room for both models. Yes, innovation requires R&D, and yes, M&A is this industry is often just the capitalization of R&D. But what got you there isn't always the best model moving forward. Valeant couldn't survive if 'everyone did it', but it can when companies that made modest niche products cling to an R&D infrastructure that isn't serving them well (at all?). The Valeant model doesn't scale, but can still work in places.

Some years ago, the Wall Street Journal estimated that the entire biotech industry, taken top to bottom across its history, had yet to show an actual profit.

As I recall, Pisano's 2006 book 'The Science Business' handled this well (use Derek's Amazon search).

Zz

Permalink to Comment

18. Big Fish on May 28, 2013 4:01 PM writes...

We are still a market-drive economy. So let market decide which one (a hybrid of the two) is the wining strategy. When there are not enough products for in-licensing or in-licensing gets too expensive, internal R&D will make a comeback. But so far, Valeant's strategy seems to make some sense - farm out/cut riskiest part of drug R&D and go for the sure thing.

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19. Hap on May 28, 2013 4:21 PM writes...

Do markets work well in the long term, though? If you've purged all your experience and institutional knowledge, when you decide that having those capacities in-house makes more sense than renting them, how do you get them back? How do you get people to be in your field after massive purges (and when much of the reason for the purges was getting cheaper labor)? (I don't think Charlie Brown is walking through the door.) It takes time to train people, and a willingness to do so, and lots of businesses haven't had either for a long time.

I suspect that companies will mix internal and external discovery to try to save as much money while keeping enough internal capacity to vet purchases and to keep acquisition prices lower. I don't think it will work, though - if you can't choose good projects with lots of information, choosing them well with little information seems unlikely.

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20. dearieme on May 28, 2013 5:01 PM writes...

"Some years ago, the Wall Street Journal estimated that the entire biotech industry, taken top to bottom across its history, had yet to show an actual profit."

Isn't the same thing true of the airline industry? Anyway, that's market capitalism for you - profits get competed away and the benefits accrue to the customers not the owners. If that doesn't happen, that's the time to worry.

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21. BeenThere on May 28, 2013 6:13 PM writes...

Been there, done that. Look up Marion Labs, which seems to have existed to in-license drugs from outside the US and profit thereof. Worked great until bigger players decided they could play too.

Somebody has to think up what to sell, as we can't all sell things to each other and make money on the transactions.

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22. Insilicoconsulting on May 28, 2013 10:02 PM writes...

Apparently Sun Pharmaceuticals, an Indian company was the highest bidder for B&L, but their management was not "comnfortable" with a Sun takeover and went with Valeant.

Wonder what the "not comfortable" euphemism stands for?

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23. Brett on May 28, 2013 11:58 PM writes...

@Hap

Don't blame US business too much, because financial products are where the profits are at - and not just in the US. The New York Times had a good article yesterday about how 63% of Sony Corporation's profits come from its financial arm. Heck, take out the financial sector profits, and the business profits of the US economy look very unimpressive.

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24. Brett on May 28, 2013 11:58 PM writes...

@Hap

Don't blame US business too much, because financial products are where the profits are at - and not just in the US. The New York Times had a good article yesterday about how 63% of Sony Corporation's profits come from its financial arm. Hell, take out the financial sector profits, and the business profits of the US economy look very unimpressive.

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25. Brett on May 28, 2013 11:59 PM writes...

Crap, double post.

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26. Joshua on May 29, 2013 3:31 AM writes...

I think Pearson should have read my Dilbert desktop calendar today.

First Panel:
Wally says to PHB "I'm doing basic research to test my theory that donuts make other people stupid."

Second Panel:
PHB says to Wally "I expect you to do basic research that will increase our profits this quarter."

Third Panel:
Wally says to PHB "Wow. It works on the first bite."

I am convinced that Scott Adams works where I do.

Permalink to Comment

27. Lyle Langley on May 29, 2013 7:18 AM writes...

@#15, rcryan...

Actually, no, I don't think it's beside the point because most of this "getting rid of R&D and just buy products" deals with small molecules (not all, but quite a few). So, if one looks at the success of company A as the "way to do things", yet they haven't been terribly successful in a particular area, then the argument isn't as strong.

Permalink to Comment

28. newnickname on May 29, 2013 8:30 AM writes...

@20: "Dose of Reality -- Biotech's Dismal Bottom Line: More Than $40 Billion in Losses; As Scientists Search for Cures, They Gobble Investor Cash; A Handful Hit the Jackpot; 'The Ultimate Roulette Game'" by David P. Hamilton, Wall Street Journal, Eastern edition [New York, N.Y] 20 May 2004: A.1.

Copying therefrom:
How $1 invested in biotechnology shares in 1981 would stack up to other investments by the end of 2003:
Amgen................................ $164.77
Dow Jones Industrial Average ........ $20.78
20-year Treasury bonds .............. $11.94
Biotechnology sector ................ $7.92

Wasn't there a recent report analyzing the effect of Amgen's Epo on health outcomes since it was introduced? As I recall, although it effectively raised red blood cell counts (as it was designed to do), net outcomes (long term survival; quality of life) for cancer patients and others receiving epo were WORSE than the cohort receiving less expensive treatments and no Epo. That was about $80 billion worth of Epo (and big profits for Amgen and shareholders) that caused more harm than good to the patients (cf, more good than harm to the bottom line).

I'm not sure how Hamilton / WSJ calculated profit and loss, but many VCs and wealthy investors are able to cash out with big profits by foisting high priced IPOs onto the markets and then unloading as the reality of clinical trials and the difficulty of making real drugs tanked the values. It was the secondary investors, I think, who bore the brunt of the overall losses. I am right now recalling how insiders unloaded high-flying Centocor stock just before it was announced that their sepsis drug had failed (back in the early 1990s).

I think that biotech can still be profitable for VCs and others who get in early and cash out while values are still high; the overall net losses are borne by smaller investors in the post-IPO phase.

Whatever the exit (IPO, merger, buy-out, sue the competition, etc.), the VCs and Big Boys seem to be able to make it work.

@26: Scott Adams is a genius.

Permalink to Comment

29. kemist on May 29, 2013 12:55 PM writes...

"Who would actually discover those drugs for inlicensing"

ummm, who has !?

Isn't that why they fired all the scientists in the first place?

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30. CMCguy on May 29, 2013 2:20 PM writes...

As per #8 GNEchemist I think the best evaluators for due diligence are those engaged in internal projects who have own experiences to draw from for comparisons and contrasts of potential in-licensing, at least from science/technical sides. As long as people can divorce themselves form NIMH thinking and provide objective assessments one trust that most viable projects get advanced. I worry that as everything get virtualized there are less and less people trained to adequately judge quality or status of efforts. And of course always have the problem of R&D sides not always being listened too if they view lacks strong substance behind a "good presentation" that overly impresses management.

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31. DensityDuck on May 29, 2013 5:10 PM writes...

"...many VCs and wealthy investors are able to cash out with big profits by foisting high priced IPOs onto the markets and then unloading as the reality of clinical trials and the difficulty of making real drugs tanked the values. It was the secondary investors, I think, who bore the brunt of the overall losses."

In other words, just like subprime real-estate lending; it's a game of hot potato.

**********

There's also the elephant in the room--the reason pharma research costs so much is often due as much to regulatory requirements as anything else. Not that the FDA isn't doing useful work, but there's a sense that they never saw a study that wouldn't be improved by doubling the enrollment.

Permalink to Comment

32. exGlaxoid on May 30, 2013 4:25 PM writes...

"But the case of Valeant is an interesting and disturbing one. Just think over that phrase, ". . .most R&D didn't give good return to the shareholders". You know, it probably hasn't. Some years ago, the Wall Street Journal estimated that the entire biotech industry, taken top to bottom across its history, had yet to show an actual profit. The Genentechs and Amgens were cancelled out, and more, by all the money that had flowed in never to be seen again. I would not be surprised if that were still the case."

Given that the Powerball and Megamillions lottery only pay out about 35% of what they take in, you would expect rational people not to play them. But people are not all rational, as any simple test will show you. That may explain why people play the lottery and fund biotechs. They all think that they will be the lucky winners. Plus, what else are billionaires going to do with all that money, they can't really spend it all on yachts.

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