Pharma

This isn't exactly macroeconomics, but it is an article arguing for a long term shakeup of one of the biggest sectors in our economy: big name pharmaceuticals. This is sobering because I have quite a few friends that work indirectly for the pharms in a large PBM - I'm glad I got out when I did.

The following article argues that in the medium term, many of these companies are in deep trouble and will have to reinvent themselves or worse:

http://www.newyorker.com/talk/content/?040216ta_talk_surowiecki

THE PIPELINE PROBLEM
Issue of 2004-02-16 and 23
Posted 2004-02-09
Merck is one of history’s most innovative corporations. It devotes three billion dollars a year and ten thousand people to the research and development of new drugs. So here’s a question: How many drugs for diabetes do you think all these men and women, this army of scientists, managed to come up with in the past four years? None. How many anti-cancer drugs? Zero. How many drugs that fight infectious diseases? Zero. Since 2000, in fact, Merck has introduced just three new drugs. Drug development is hard, but, by any measure, eking out less than one product a year is no way to make a living in the major leagues.

Profitable as “big pharma” remains—Pfizer made twelve billion dollars last year—a deep sense of anxiety prevails in the industry. That’s because Merck is no exception: most drug companies have what’s known as a pipeline problem. That is, the patents on the drugs that are now making money for them are about to expire, and they don’t have enough new drugs in development. The number of “new molecular entities”—drugs not yet introduced in the United States in any form—approved annually by the F.D.A. has fallen by sixty per cent since 1996, and new drug applications have dropped nearly forty per cent. What’s more, many of the drugs that are being invented are of the “me, too” variety—variants of existing drugs.

Big pharma’s solution has been a mania for mergers. As the industry joke has it, you know you’re in the pharmaceuticals business when you’ve worked for five companies in the past two years and you’re still sitting at the same old desk. If your own pipeline is low, the thinking goes, buy another one. And so Pfizer bought Warner-Lambert and Pharmacia, Glaxo merged with SmithKline Beecham, and Astra merged with Zeneca. Last month, the French drugmaker Sanofi launched a hostile bid for Aventis. When the going gets tough, the tough go shopping.

The traditional pharmaceutical research model harks back to processes developed by German and Swiss chemical firms in the late nineteenth century, when chemists synthesized and screened thousands of compounds in search of a few potential new drug candidates. Although the methodology is more sophisticated now, success is still in many ways thought to be a matter of brute force: throw hundreds of scientists at a problem and hope for the best. It’s crapshoot economics; a few great successes can pay for myriad failures. So bigger has always been seen as better.

Today, though, the advantages of size are trumped by what are called “diseconomies” of scale: inertia, bureaucracy, risk aversion, clock-watching, office politics. Joseph Kim saw a lot of this firsthand, as a scientist at Merck for nine years, and now he likes to compare Merck to the Titanic. “Companies like Merck have fantastic scientists working for them, but they also have these middle and upper layers of managers who are just taking up space,” he said last week. “I like to call them ‘anti-bodies,’ because they just sit there being anti-everything. No one ever gets fired for saying no to a new idea.” Now, as the founder and the C.E.O. of a little biotech called VGX Pharmaceuticals, Kim has a novel type of aids drug in clinical trials and a promising drug for cancer in development.

It turns out that research and development doesn’t scale—that bigger may be worse. That’s why the engines of pharmaceutical innovation have for some time now been smaller biotech firms like VGX, which can concentrate on a few promising avenues of research and can offer enterprising scientists the freedom—and the potentially enormous rewards—of working as entrepreneurs. Just as, in the seventies, the locus of innovation in the tech business shifted from Goliaths like Digital and I.B.M. toward the smaller, more narrowly focussed start-ups of Silicon Valley, so it is shifting now from big to little pharma.

Where does this leave the Mercks and Pfizers of the world? What they have that companies like VGX typically don’t is a powerful brand, experience with regulators, and, not least, a legion of salesmen adept at “detailing” doctors about the virtues of new drugs. They need to rethink, radically, the way they do R. & D., or else get out of R. & D. entirely and focus on what they do best: marketing and distribution.

All the big drug companies are already licensing products from or taking equity stakes in biotechs. Bayer has a fifteen-year deal with a firm called Curagen; Novartis has signed up Vertex; and Lilly has partnered with the biotech icos to sell Cialis in the United States. But none of them have shown any interest in tossing out the test tubes and becoming pure distributors.

They have their reasons. Drug companies take a lot of flak for spending as much as they do on marketing and advertising. A company that made no pretense of inventing its own drugs would probably come under even more pressure to cut prices. There’s also the industry’s romantic self-image: the drugmakers like to think of themselves as fundamentally scientific organizations, powered by geniuses in white coats. But, when it comes to innovation, these recombinant corporate entities—Aventis is itself an amalgamation of Hoechst, Roussel, Marion Merrill Dow, and others—have been tested and have failed. So maybe it’s time to move on. Peering into the future, one can see the faint outlines of a pharmaceutical industry that looks a bit like the movie business, with big pharmaceutical “studios” marketing, distributing, and perhaps even underwriting the costs of smaller drug “producers.” The only difference is that the drug studios might actually make money.

— James Surowiecki

 

This sort of press is symptomatic of bear market bottoms.