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:
THE PIPELINE PROBLEM
Issue of 2004-02-16 and 23
Merck is one of historyâs most innovative corporations. It devotes three billion dollars a year and ten thousand people to the research and development of new drugs. So hereâs 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 âbig pharmaâ remainsâPfizer made twelve billion dollars last yearâa deep sense of anxiety prevails in the industry. Thatâs because Merck is no exception: most drug companies have whatâs 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 donât have enough new drugs in development. The number of ânew molecular entitiesââdrugs not yet introduced in the United States in any formâapproved annually by the F.D.A. has fallen by sixty per cent since 1996, and new drug applications have dropped nearly forty per cent. Whatâs more, many of the drugs that are being invented are of the âme, tooâ varietyâvariants of existing drugs.
Big pharmaâs solution has been a mania for mergers. As the industry joke has it, you know youâre in the pharmaceuticals business when youâve worked for five companies in the past two years and youâre 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. Itâs 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 âdiseconomiesâ 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. âCompanies 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,â he said last week. âI like to call them âanti-bodies,â because they just sit there being anti-everything. No one ever gets fired for saying no to a new idea.â 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 doesnât scaleâthat bigger may be worse. Thatâs 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 freedomâand the potentially enormous rewardsâof 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 donât is a powerful brand, experience with regulators, and, not least, a legion of salesmen adept at âdetailingâ 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. Thereâs also the industryâs 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 entitiesâAventis is itself an amalgamation of Hoechst, Roussel, Marion Merrill Dow, and othersâhave been tested and have failed. So maybe itâs 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 âstudiosâ marketing, distributing, and perhaps even underwriting the costs of smaller drug âproducers.â The only difference is that the drug studios might actually make money.
â James Surowiecki
This sort of press is symptomatic of bear market bottoms.