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Drug Mergers Hurt in Every Direction (Save One)

So here we have a very high-profile article on mergers in the drug industry. And it says what <s>many</s> <s>most</s> damn near all of us who have lived through them have been saying (loudly) for years: that they are bad for research and bad for productivity. But now that it’s there in black and white in the Harvard Business Review, maybe someone will pay attention:

Our results very clearly show that R&D and patenting within the merged entity decline substantially after a merger, compared to the same activity in both companies beforehand. Then we applied a market analysis, the same one used by the European Union in its models, to analyze how the rivals of the merging firms change their innovation activities afterward. On average, patenting and R&D expenditures of non-merging competitors also fell — by more than 20% — within four years after a merger. Therefore, pharmaceutical mergers seem to substantially reduce innovation activities in the relevant market as a whole.

It’s not just a bunch of us folks in lab coats standing around sour-graping while our betters in the executive suites get on with what has to be done – mergers hurt R&D. But that’s not what you’ll hear from the occupants of most of those offices, not at all. They’re creating world-class powerhouses of research, pretty much every time. Here’s the paper itself (downloadable as a PDF), which is largely concerned with mathematical modeling of these effects, but has the primary data in it as well. The authors point out that most studies of M&A activity in the field concentrate on what happens to the two original firms themselves, but their work is the first to show that there are follow-on effects across the industry.

Inside the merged companies, there’s a great deal of disruption, as many readers here can testify. But across the industry as a whole, things get less competitive the fewer players there are and the fewer the approaches being tried. I think (and have said for a long time) that the biopharma business is best off when there are a lot of players, a lot of people competing and throwing elbows, and a lot of people hearing, at their back, time’s winged chariot hurrying near. It keeps everything moving to know that there are other people trying something you’re trying (or perhaps something even better). If everyone just merged into one gigantic MegaPharmaCo, that would be lost. I’m sure that there would be a lot of talk at MegaPharm about “sense of urgency” and patient focus and all the rest of it, but in reality, things would sort of roll along at their own pace, compared to what we have now.

And what we have now isn’t what it should have been, honestly. A lot of productive R&D organizations have been taken out over the years, and I think that it’s hurt the entire ecosystem of the industry. Others do rise up, of course, which is a very good thing, but I really wish that we had more kinds of flower in this garden. The tough part is that many of these mergers do, for a time at least, increase profitability:

The results for patent counts confirm that within-firm (and within-market) variation in M&A activity is associated with considerable decline in innovation activity on average. In post-merger periods, innovation output by the merged entity and its competitors decreases on average by more than 30% and 7% compared to other firms, respectively. Similarly, the table shows that M&A activity is correlated with declines in R&D spending. Profitability increases in the post-merger period for both acquirers and competitors (possibly due to a reduction of R&D spending and other investments), which may indicate that mergers in our sample are profitable on average. The correlation between M&As and sales are in line with our theoretical model. Non-merging rivals increase their sales after a merger, while the merged entity decreases its scale of operation compared to the combined activities of acquirer and target before the merger.

What we have, then, is probably a perverse incentive – companies can improve their numbers by doing mergers and acquisitions, but that very activity hurts their long-term prospects and those of the entire industry. The only way I can see this changing is for governments themselves to start approving fewer such deals, on the grounds of competitiveness, which indeed is what the authors of this new paper are calling for. But I’m not sure how well that would work, and it would be subject to ferocious lobbying and gaming as well.

73 comments on “Drug Mergers Hurt in Every Direction (Save One)”

  1. Tom says:

    If merging companies decline in productivity after a merger, and non-merging companies also decline in productivity during the same time period, doesn’t that just mean that the whole industry is in decline?

    1. Hap says:

      It means that it kills the industry to merge, but helps individual managers and (short-term) stockholders (the “tragedy of the commons”, again?) As long as none of them need drugs, I guess they don’t need to care.

    2. Barry says:

      the authors compared innovation in therapeutic areas which hadn’t driven/suffered mergers with innovation in therapeutic areas that had, and found the decline in innovation was in those that had, not across the industry as a whole

  2. Hap says:

    It might also help if the payouts for executives and boards of directors depended on the long-term effects of their actions rather than just the short-term ones. If only stock prices in the near term matter, than executives will work to increase short-term stock prices. If at least some (enough) of their payout depended on its consequences in longer time frames, they might at least have to consider the longer-term consequences.

    Of course, I don’t know how this is going to happen, considering there are a lot of people near retiring who need to fill their 401Ks and a lot of executives who aren’t going to employed in a few years looking to cushion their nests (and maintain their friendships with their BoDs to get a new job somewhere else). It would also start a fight between short- and long-term shareholders, who might want very different things from the company and its stock.

    1. Phil says:

      You used this phrase, long-term shareholder. What is this? Is it like a unicorn?

      1. Hap says:

        Maybe. I don’t know how long people hold stock for. I thought (maybe a unicorn) that people bought stock in a company because they thought it was doing useful stuff and wanted to make money along with the company doing it.

        1. Sebastian says:

          Holding on to stock is the best you can do if the company is sound. So no, I wouldn’t say that’s stupid or nonexistent. Not awarding shares to executives would be a good start.

          1. Barry says:

            I would say rather award stock options rather than shares, and have those options vest only 10yrs down the road. I.e. tie their remuneration to the projects they’re affecting, not to the projects they’ve chanced to inherit.

          2. Phil says:

            My earlier comment was facetious. Employee shareholders tend to have a long-term holding strategy, as do many wise investors (Warren Buffett is all about long term performance). However, “Wall Street” tends to speak for the short-sighted investor looking for a quick buck.

      2. Eric says:

        I wish there was a “like” button.

  3. Derek was kind enough to feature our paper from a few years back on declining compound output . These new stats support the idea that M&A is at least the major cause for the inflection around 2005

  4. Anon says:

    Can someone please clarify: Are they comparing productivity after merger vs before merger? Or after a certain period with merger vs without merger? Clearly only the second case is meaningful if productivity is declining in any case, with or without merger.

    1. Thomas says:

      Does one need a big company to innovate? Or is a startup just as good? What about the big company funding or even starting startups ( I know, it can lead to corruption with management in BigCo also buying stock privately).

      1. Barry says:

        Exactly how small a company can be to contribute to small-molecule Drug Discovery is an open question. You need synthetic chemistry, analytical chemistry, enzymology, cell-biology, pharmacokinetics, assay development, veterinary…prof. Schreiber’s group at Harvard has been called the “world’s smallest drug discovery company” but it enjoys a lot of university assets

  5. Gordon Gekko, CEO MegaPharmaCo says:

    There you have it. Ladies and Gentleman, greed, for lack of a better word, is good.

    1. simpl says:

      Sometimes, not always. Greed is becoming a more common motivator, though. A CNBC round today had a hack at Mylan’s Epipen criticising missing price control, monopolies and slow FDA approval of generics – a specialist batted that one down. The other specialist mentioned the inversion, but that didn’t resonate – but both have greed as an underlying symptom. For me, the saddest is that Mylan was a good solid generics company till 2007, somehow the greediest model and a corresponding CEO rose to the top.
      Another reason for regular mergers is that they make the bookkeeping non-comparable, giving a few years breathing space.

  6. ab says:

    Derek- if I may Make A Connection: it would appear that you’re suggesting that if government ‘took over the pharmaceutical industry’ – the mega-merger to end all mergers – and all drug research was done in government and academic labs, that it might not be all rainbows and unicorns after all. Am I reading you (and the article) correctly? And if yes, How could you?!

    1. Bagger Vance says:

      “If everyone just merged into one gigantic MegaPharmaCo, that would be lost.”

      Ding ding ding! We finally have an answer to the public perception that everything could be solved with a Manhattan / Apollo Project approach!

      (I wish I knew econometrics well enough to study the idea myself; Derek’s statements before suggested that Progress follows a Random Walk function.)

      1. loupgarous says:

        But that’s precisely what Joe Biden called for with his Cancer Moonshot idea – top-down directed research, human waves of oncology researchers… doing what the National Cancer Institute’s been doing for 79 years, two weeks ago.

        It’s scarcely a new idea to piss away billions in tax money by slopping it all over bottlenecks in technology – we did it with nuclear fusion research, rockets themselves (the “wedding cake” approach of successively smaller stages, instead of aerospike or “plug” rocket engines (only now being tried that rocketry is no longer a “government picks the winners” game) and single stage to orbit ships like Douglas’s Ithacus/Hyperion (which had no chance once every influential senator and congressman had a plant to make Saturn rocket engine parts in his district), solar power (is anyone surprised that Solyndra’s been invited back by DoE for another bite at the apple?) and electric cars (GM will never live that part of its bailout fund was spent paying workers at the battery plant for Chevy Volts to play Monopoly™ – that was funny, if grimly so, on so many levels).

        In three of these cases, the entrepreneur Elon Musk, is leading the way out of the wilderness by making rocketry, electric cars and solar power profitable (he’s both funding solar power directly and funding research into nontoxic large-wattage batteries which can store power created by solar arrays).

        Of course, when SpaceX, Tesla and Solar City wind up dominating their respective markets, his competition will demand that the Federal Trade Commission break those firms up, despite the fact that they’ll have succeeded not by being government-granted monopolies like United Space Alliance (Boeing and Lockheed Martin’s marriage of convenience to make rockets for the Air Force and CIA) or the original AT&T, but by relentlessly innovating. Is there no equivalent to SpaceX or Tesla in the pharma field? Maybe Elon Musk needs to look there, too.

        1. Anon says:

          “The solution to greedy CEOs and a dearth of innovation is to back one particular greedy CEO in each field. Just pick one who is good at marketing.”

        2. Dstar says:

          “In three of these cases, the entrepreneur Elon Musk, is leading the way out of the wilderness by making rocketry, electric cars and solar power profitable (he’s both funding solar power directly and funding research into nontoxic large-wattage batteries which can store power created by solar arrays).

          Of course, when SpaceX, Tesla and Solar City wind up dominating their respective markets, his competition will demand that the Federal Trade Commission break those firms up”

          The interesting thing is, if something I’ve seen suggested is correct (and I strongly suspect it is — it’s one of those things that made me wonder why I’d never thought of it)… he won’t be that upset if they do.

          Because the suggestion I saw was that he wasn’t interested in the slightest in electric cars, or fast train-like-transportation, or solar cells… he’s interested in _going to Mars_. And Tesla, Hyperloop, and Solar City are all about getting the development of the underlying technologies for an electromagnetic catapult that can put something in orbit to pay for themselves. If so, by the time people want the companies broken up, they’ll have achieved what he wanted from them, and he’ll have moved on.

  7. flem says:

    Large unproductive companies buy productive ones or merge with equally unproductive companies. Why else would they merge? Its simple math – if you merge 2 unproductive enterprises is it any wonder things get worst and not better?

    1. loupgarous says:

      It worked so well for Detroit, though… oh, never mind. PfizerWyethLillyMerck, GlaxoSmitKlinePharmacia, and NovoSandozRocheSyntex will become too big to fail and the UN will tax us all to keep them afloat.

      1. Morten G says:

        You can’t merge Novo – it’s foundation owned. It can only acquire other entities or spin out companies (like Novozymes, NNIT, and NNE Pharmaplan).

  8. watcher says:

    The article seemed to focus on patents, but the real metric is drug approvals. We all know of patents being filed that are not worth the time and effort from day one. If you look at the trends of new drug approvals, the decline started well before the recent rash of mergers / purchases. In my opinion, more consolidation is inevitable, and in the process there will be more room for startups to explore new targets, new chemistry, new ideas as long as money still flows (private, corporate, institutional, or government). The structures and dynamics of biotechs tend not carry the same multi-layered overhead as large pharma, and often focuses single mindedly with greater urgency as well for life and death. Throughout history businesses and industries have changed, evolved and even disappeared. Pharma is no exception, but is not at risk of extinction any time soon.

    1. Ed says:

      I agree. The underlying assumption seems to be that patenting strategies are identical among companies whereas in my experience biotechs tend to be much more aggressive. Furthermore, I think that each M&A should be analyzed in the context of their purpose and their therapeutic area. Some, for example small molecule antiinfectives, have been consolidating whereas others, say microbiome-related activities, are emerging. I would imagine that the further decrease in patenting activity would be much stronger in the former than the latter.

  9. TX Raven says:

    Maybe us, humans, are not as smart as we’d like to think.
    We live in ways that hurt us, and take too long to learn things that are obvious.

    Not a good recipe for prosperity in the long run…

  10. Anon says:

    Big unproductive companies acquire smaller productive ones to get the products they created, then proceed to dismantle and integrate their productive R&D organization into their own unproductive R&D organization for the sake of “efficiency”. Is it any wonder this results in lower overall productivity?

  11. dearieme says:

    The Golden Age of drug discovery is long over. The usual response of an industry in decline is mergers, used to suppress competition and reduce costs.

    “But that’s not what you’ll hear from the occupants of most of those offices, not at all.” You know they’re lying, I know they’re lying, they know they’re lying. Why they bother, Lord knows. Who’s fooled? To what end?

  12. CMCguy says:

    Historically (pre-70s?) I think there was M&A that did help beneficially grow Pharma which effectively combined R&D efforts and other parts to build better overall organization as a true purpose. Along the way approach became more finance and product portfolio sales (and seeking title as the “Biggest”) driven motivations with R&D no longer viewed as an asset except as means to cut expense via reductions with really mostly lawyers, bankers and Execs who reaped rewards. I doubt the message we already knew will impact those groups because do not seem to be able to look long term and as far as government regulators stepping in to inhibit reorgs I do not see that happening even if this study might create a pause in the process.

    The problems with R&D productivity run significantly deeper as often discussed in this blog so while we recognize M&A did have obvious negative results there have been many other aspects and distractions that proved harmful as well. We seem to be good at pointed out the problems and possible causes however lack of viable alternatives to conduct drug R&D remains elusive.

    1. Hap says:

      You can’t really solve the problems with drug discovery if you don’t try, though. If you’re chasing the money or the pubs, then you’re probably not going to find a better way to find drugs. I think pharma management has given up, and that won’t solve anything.

      It won’t cure pharma’s problems to stop merging (drugs are still too expensive to find, companies can’t diversify enough to avoid risk, the high-value targets have biology that is unclear, etc.) but it would help. Mostly it would help to commit to finding drugs and not to financial engineering strategies.

      1. CMCguy says:

        Hap I do agree pharma management appears to have given up on finding drugs toward favoring other money generating schemes. A great portion of this loss of interest falls back on real and perceived R&D lack of productivity even with various new paradigms attempted to improve discovery (CADD, Combichem, etc.) that mostly were over hyped panaceas but turned out to provide a few isolated applications. Most pharma have become dependent on biopharma to take the big discovery risks then strategy to step in in development and marketing roles, which IMO results in even less efficiency and predictability. Frankly the only consistent elements I have seen work involve mixture of serendipity and persistence, tempered by experience and expertise and while I can commit to those concepts philosophically translating to practical reality to obtain necessary funding to execute. If we want new drugs we do indeed need to keep trying, even with lessons in all the past less than successful avenues, I just struggle and have great skepticism in seeing how can achieve effectively in increasingly difficult regulatory environment couple with pressure to accomplish quickly and cheaply.

        1. Hap says:

          I certainly don’t know. I think knowing more stuff early to avoid late stage failures would help, but people don’t know what information to get or how (or if they can afford it), and since they want to get stuff to trial quickly, I don’t know how that could happen. At least in some cases, though, it would be more productive for companies to give up and give the money back to their shareholders so that they can find something else to invest in that is more likely to be productive. Management pretending to care about finding drugs while hocking the silver and dishes seems to distribute money to a few people and leave a lot of others out of luck.

  13. exGlaxoid says:

    Given that before its merger with SKB, Glaxo Wellcome was putting one or more drugs on the market a year, and about 3-5 years later that number started declining rapidly, the data for drug approvals also seems to correlate with mergers. I think that is a good example of merging 2 medium-large companies to make one large one, which is now a medium-large one, not helping in the long term. GW’s stock was in the $50-65 range before the merger, and now is $40-50, a decade later, without any splits or other adjustments, so clearly that merger did not produce any lasting value, and likely kept it from doubling, had they avoided the mess that was SKB. If you want to confirm what I say, just ask any of the employees; oh, there aren’t many of them left, opps. My bad.

    1. diver dude says:

      Its worth saying that Burrroughs Wellcome and Glaxo were both extremely productive and (in BWs case, fun) places to work. After the “merger” to form GW, not so much – “Hell on Earth” would be an accurate descriptor. I watched talented, committed and enthusiastic people lose the will to live before my very eyes. From that moment on, I always took redundancy the instant I could as soon as whichever company I worked for got “merged”. Best lesson of my life,

      1. hn says:

        In all seriousness, what killed the fun at BW? I am curious as to how productive culture is killed and what can be done to support it.

        1. Diver dude says:

          Being taken over by Glaxo. Although I am sure that being taken over by anyone would have had the same effect.

          1. A Nonny Mouse says:

            I have to say that I was offered jobs at both Glaxo and Wellcome in the UK. A friend from the year above who was working at Glaxo told me not to go there as it would destroy me. I went to Wellcome and, yes, it was fun.

            He stayed at Glaxo collecting money and shares until he was in a good enough financial position to take redundancy at the earliest time.

          2. CH says:

            But what exactly? Being taken over by Glaxo isn’t much of an example as to what killed the “fun”. Did they chain you to the hood?

        2. anon says:

          Glaxo had a culture, which became GW and then GSK of talking everything to death, repeatedly. No decision was ever final, it got revisited again and again and again, and yes, you could really lose the will to live. The culture still lives in the oversight boards at GSK, which manage to kill every innovative idea that comes before them. It’s really pretty incredible, you have to see it to believe it.

    2. Marcus Aurelius says:

      The idea of granting options that can only be exercised ten years down the road by senior executives and the Boards of Directors orchestrating mega mergers would be worth pursuing by the shareholders in pharma and other industries as well. What was “Sir” Richard Sykes and the GW Board smoking when they agreed to merge GW with SKB? SKB had and has zero track record in drug discovery. Look at the poor innovation that followed with Tachi and Monself. All of the successes post-merger came from GW. SKB brought Avandia (lawsuits), Paxil (lawsuits), and the brilliant scientific mind of Monself that pursued the billion dollar failures of darapladib and Sirtris.

  14. pharmgirl says:

    Maryann Feldman of UNC studied the downstream effects of the BW/Glaxo merger on the overall biotech ecosystem of the RTP area. Her conclusion, if I remember it correctly, was that there was a very large, positive effect on the region through new firm openings, entrepreneurial activity, and economic output as a consequence of the merger. Although it may not have been particularly beneficial to the merged company itself, the downstream economic positives of the merger for the region were substantial. Here is a link to her publications in case you are interested in this type of research:

    As a survivor of 2 mega-mergers and multiple downstream re-organizations, layoffs, etc., I can attest to the lack of productivity, the churning, the uncertainty, and the sheer waste of equipment, reagents, etc. that occurred inside of the merged company for years after the fact. At the same time, as anecdotal support to Dr. Feldman’s work, I am aware of many colleagues who left the parent company to start new companies of their own or joined nascent organizations and energized them with their experience, knowledge, and motivation. Others took their severance pay and started yoga studios, photography businesses, restaurants, and other small businesses which fulfilled their dreams and simultaneously added non-tech growth to the local economy. A third group joined the local academic community, and brought their business experience to academic colleagues in a way that has jump started new companies and patenting activity out of the academic world.

    Does the net gain exceed the loss of productivity in a BigPharmaCo? I can’t do the math on that, though perhaps Dr. Feldman has done it. I do think that out of the detritus of badly managed mergers new ideas take hold and new ways of doing things emerge, though these can be largely invisible to those left behind to shift the detritus into new piles. It is a shame that entropy causes so much loss of productivity in the short term, but like the arc of justice, the arc of discovery tends to bend slowly in a positive direction. I just wish GSK would eat a few of the good companies (as opposed to the digestion of the Sirtris-type companies) so that my GSK stock would bend a little more in that direction.

    1. toxchick says:

      I think you raise an interesting point–that the merger “seeds” ideas and people in other companies as they leave/are forced out. Much in the same way that a wildfire clears growth for new seedlings. There was an interesting article in the Boston Globe talking about how many of the executives from Genzyme left after the Sanofi merger and had key roles in other companies. I think this is a common story as a company grows and then merges, and people flee the new corporate culture and bureaucracy.

    2. Phil says:

      I saw the same thing at Rohm & Haas with the Dow acquisition – people who probably would have been R&H lifers had the merger not happened were dispersed to many smaller companies.

      In hindsight, I’m glad they laid me off – it led to opportunities for advancement in my level of responsibility that I never would have had without a PhD at RH or Dow.

  15. anon says:

    The whole idea of having a startup is eventually to sell the company to someone bigger, not to discover new drugs. Everyone knows this. I wish people spoke the truth.

    1. eyesoars says:

      True enough, but so many mergers are mergers and not acquisitions. The little ones are just acquired. Some of the big ones are too, nominally, but in practice are just mergers or takeovers. When two companies both have large and somewhat or significantly overlapping product lines, it’s not a “real” acquisition, and it’s probably not going to be doing anyone or anything a lot of good (though there’s usually a lot of “good will” in the accounting ledgers). I’m sure there are exceptions.

      When elephants mate, the grass gets trampled. [To paraphrase a saying.]

    2. Anon says:

      So true. Investors come first, and they need their exit.

      If the goal of small biotech was just to develop and sell drugs, then biotech would license them to Big Pharma and continue to develop more, rather than allowing themselves to be acquired and dismantled!

  16. loupgarous says:

    Aw, gee, look at all the good mergers have done for the automotive industry… oh, never mind.

  17. M says:

    Read the article but didn’t click through to the original research.

    A few questions:

    1) How do they distinguish between industry wide innovation decline caused by a merger and industry wide innovation decline caused by anything else? The time frame is 4 years post-merger so attribution across the entire industry seems like it’d be a tough signal to tease out–I’m not sure I’ve spent any of my 20 year career more than 4 years from a merger.

    2) Is there a size limit to the mergers (ie, are they including straight out acquisitions of smaller companies?) Certainly a lot of money that flows into smaller companies is in the hopes that they are eventually acquired.

  18. Druid says:

    No-one has mentioned the customers. I reckon a family car compared to salary is 1/5th today of what is was 40 years ago. Meanwhile, on-patent drug prices have if anything gone the other way, to the point where pricing now endangers the business model. Car manufacturers merged because there were too many brands for the market; still being in competition meant prices were forced down and standards up. A vicious spiral for factory workers but a beneficial spiral for customers. In our business, the patent laws distort the market so that we race all the time without improving efficiency, productivity or quality. Our mergers are not driven by the drive for improvement but by covering failure (as said); greed (as said; some share options become immediately exercisable on merger – saves having to wait 3 years); the asset-stripping “slash and burn” policy of Pfizer; or occasionally because acquisition is faster than organic growth – doesn’t make anything better or worse, just a change of ownership, and sometimes more investment.

  19. Me says:


    Random thoughts in no particular order:

    – Having been made redundant by various large pharmas, I hate the M&A cycle and any corporate meddling in R&D and hence I want the conclusions of this paper to be true.

    -One of the biggest things I hated about working in R&D was the passive-aggressive repressed-psychopath school of management that tended to prevail in R&D which basically dictated that since 1 in 10000 molecules might make it to market, if they said ‘that won’t work’ to every idea they were ever fronted with, they would appear prescient and/or clever. I see a lot of this attitude in the comments to this post. Yes I hate the stuff (see above) but I’m not sure how to fix it, but I think this may be a contributor to R&D tanking in big pharma.

    – Another thing I hated about big pharma R&D was the sclerotic environment created by underworked, over-entitled baby-boomers who only cared about their share portfolios and their summer houses in Spain/Florida and were just hanging around until their kids graduated so they could retire to said summer house. Turning up at 9:30, leaving at 4:30 and just wanting to be left alone to potter about the lab and make a few analogues. Some of them could earn as much as 2 fresh PhDs, and these were hit hardest in all M&A cycles I got caught up in. How much of ther blame lies with these guys who were all recruited in the boom years of 80’s/early 90’s when the ‘low-hanging fruit’ was picked?

    – Without this M&A culture, would we have the vibrant startup/VC environment that we currently see? Companies are loosening up their capitalisation of R&D

    – Further to the above, what about spinout companies? For example when GSK shut Harlow, there were several spinouts. Of which, Convergence has done quite well. Falls out of the scope of the article

    – This leaves us with three species of @$$hole of the following toxonomical terms: MBAus sharpsuiticus; Midmanagus aggressivus, and midlifuscrisisus layaboutus. This article appears to pillory the first one, while placing the other 2 as victims. I see the problems at all levels here. It simultaneously fails to look at things like spinoffs, virtualisation of R&D etc. At the end of the day I haven’t seen a researcher that wanted another job who ended up unemployed after redundancy from a big pharma, so the model cannot be that broken. As much as I wish it were all true, I think this post and it’s comments are indicative of some of the other malaises prevalent in R&D that are lesser spoken of.

    1. Hap says:

      The problem with loosening the capitalization of R+D is that it doesn’t seem like its potential to make drugs is relevant. Bad money drives out good – if all the money is chasing hype, then you’re going to get lots of it, and not drugs, and you’ve replaced internal research (which might or might not have produced drugs) with external research selected for the ability to produce money, not drugs. If you want people to work hard to find drugs rather than simply cash paychecks, then you need to make environments where making drugs (and thus making money) is the purpose, not the pretense.

      Mergers and acquisitions thus lead to at least two of the problems you cited – if companies are driven to make money not drugs, then people who care about drugs aren’t going to be around, either in big or in small companies. I guess if big companies go away, you won’t have to worry about middle managers, but I suspect the financial engineers will need someone to insulate them from the hoi polloi, and so they will have to preserve them as bullet sinks to protect them from the consequences of their designs.

      1. Me says:

        Yep true – but not all startups are bad, whereas the premise of this article is that all merged pharmas are bad. The odd good apple comes from this surely.

        1. Hap says:

          If you’re selecting the bad apples for being bad, then getting a good apple only occurs by accident. The M+A process drives money to bad apples, which likely decreases the fraction of good apples in the population (at least if the management is competent). It also pillages the places where serendipity or intent is likely to generate good apples and disables them from making more. That doesn’t seem like the best way to select good apples.

          It’s possible that a good apple could occur to make up for all of this (power law distributions in drugs are possible or even likely). If you design a process to try to exclude good apples (I think the presumption for M+A), though, then your chances of finding one aren’t improved.

  20. SedatedFMS says:

    A message from Mike B

    August 1, 2016 at 10:40 pm
    Scientists need to ditch the hubris and stop underestimating the importance of the business aspects of running a company, especially in biotech. Believe it or not, the vast majority of scientists don’t have any skills that are in short supply or are special. There’s a new crop graduating every year with enough expertise for companies to skate by. Why pay triple the price then for a senior scientist?”

    1. Hap says:

      Except if you can’t develop products, what exactly are you going to sell? If finding drugs were commoditized (if anyone could do it), we wouldn’t be having this discussion, You want to commoditize drug discovery knowledge without knowing what is important, without having a commodity.

      I guess, actually we know what’s important, but it has little to do with the replaceability of scientific talent and more the money that management intends to steal from their investors before they figure it all out. I guess that’ll work for someone.

      1. SedatedFMS says:

        The comment /thought above is not mine. It was me attempting (and failing obviously) to be facetious by C&P an asinine comment from a few weeks back about folks losing their jobs…..from a re-org brought on by an M&A.

        1. Hap says:

          No, I understood the comment wasn’t yours (although again, I didn’t get the facetiousness). Based on what people are doing, though, I don’t know how far that is from what management thinks. It doesn’t sound that far from Viehebacher’s comments before he left, for example.

  21. Pfizer Joe says:

    Look how well Pfizer has done after all its mergers. They reduced their headcount by over 10000 employees at least saving several BILLIONS of dollars along the way. If your over 50 and a chemist and a merger happens, you may have seen your last paycheck.

    1. Anon2 says:

      And Pfizer’s market cap now is so much higher than when they started…Oh, never mind.

      1. Pfizer Joe says:

        Yes their market cap is terrific- and that’s why they get rid of employees. The turn over rate in Pfizer is also very high especially at the biology and chemistry level. This company has a motto OWNIT meant for employees to feel empowered, but what it really means is Pfizer OWNSIT all. Every aspect of your life, ask anyone who has worked there! They have a coin that allows them to be upfront with each other – except when you want to criticize your boss or anyone in authority. Then you can take your coin and leave! or worse they take your coin and let you go.

        1. Anon2 says:

          You might want to look more closely at the real numbers. Pfizer Market Cap was $148B in 1999 (a good year, but before the mergers started). In 2014, after swallowing a good bit of the rest of the industry, it was $136B in constant 1999 dollars ($193B in inflated 2014 dollars).

  22. Kent G. Budge says:

    I don’t suppose companies merge because their CEOs and boards like losing money. But I don’t understand why they think this will make money. Does the stock market reward mergers? If so, why?

    I’ve found that when businesses or their investors appear to behave irrationally, there is often an underlying, surprising reason why it is actually rational. But I have no idea what that reason would be here.

    1. The “change of control clause” is a huge cause of M&A activity,

      Executives often have a contract that includes a huge payout in the event of a “change of control”, ostensibly to protect them in the event of some unexpected merger or acquisition. The argument is that you cannot get this Kind Of Talent without such protections built in.

      The payouts specified in the clauses are often so large that the executive views is as his job to actually cause the “unexpected” M&A event to occur. After all, that’s what he’s paid the most for, right?

      It’s a pretty closed club, everyone knows the score, but they pretend otherwise. Fundamentally, the game is now a arbitrary, they’ve decoupled payouts from anything like meaningful performance, and tied it instead to M&A activity, for reasons that may be purely accidental at this point.

      Then the job becomes to sell the merger, acquisition, spinoff, whatever it was, as a Good Thing so the stock goes up, making the major shareholders and thence the Board of DIrectors happy with this lousy idea. And that’s just a sales job, again decoupled neatly from anything real.

      Somewhere in the background, from time to time, some naive young executive actually does a little managing, which is how things actually get done now and then. Nobody minds much as long as you don’s screw up the next deal.

      1. Kent G. Budge says:

        The problem with this explanation is that the board of directors are not naive and their money is at stake. If the mergers hurt the company, it’s hard to imagine they’ll put up with it.

        All I can figure — and there does seem to be some evidence for this — is that the long-term damage is balanced by a transient gain, and the board of directors are trying to cash in on the transient gain. Which raises yet another question: What are the incentives for not looking too far ahead?

        And the answer, I fear, is a pervasive pessimism about the future.

        1. The BoD club is a largely closed club. Most directors are executives at other companies, suffering under the lash of change of control clauses themselves. It’s glib to dismiss it as “hey, approve my deal, and I’ll approve yours” but it’s likewise naive to assume that this isn’t a factor.

          The people who actually care are fund managers, who are a (small) step removed from the club. There’s overlap, but there’s a lot of non-overlap as well.

          These guys, though, just want the stock to go up. Make that happen, and it always does, and they’re happy. When the company’s fundamentals start to slip, later, and the stock reverts more or less, you can have a story ready about market conditions or whatever, and a plan for a new merger that will fix that.

          Why the fund managers are buying this particular pack of lies is a legitimate question, and one I do not have the answer to. They are busy guys without a great deal of time to devote to picking through the details of this corporate deal or that, but surely the pattern as a whole is obvious to them?

  23. Argon says:

    Ironic. Weren’t many of the Harvard MBAs responsible for driving many of these mergers (aka. “vehicles for the destruction of wealth”)?

  24. anono says:

    Mergers or nor, Pharma is simply ripping off patients. That is what Nature says at least.!/menu/main/topColumns/topLeftColumn/pdf/536388a.pdf

  25. exGlaxoid says:

    The reason that executives like mergers is that they provide several years of confused accounting, “one time” expenses, and excuses for poor performance which allow them to hide their incompetence for a few more years while they stuff their pockets full of cash. That seems to be the main reason for them I can see.

    I was on the Glaxo side of the BW merger. I thought both companies were actually pretty productive beforehand also, but Glaxo was much more driven by profit, and BW had a very academic atmosphere, lower salaries, but was “fun” but they were in danger of going broke, which is why the foundation sold BW. They made some great drugs, did good research, but were coming close to not making any money for funding other research. The foundation sold BW, which was only producing millions in “profits” a year to fund outside research, and got billions to invest, which now produce several billion dollars a year for medical research.

    The BW management was good at letting scientists do their work, maybe even too slow to kill projects that lingers for years without results. But that made it a great place to work. I thought that the BW people brought a great desire for actually improving human health, while the Glaxo management brought more resources, higher salaries, and better commercialization and development groups. I was very happy at GW, and would have been happy to keep working in that environment forever.

    I understand it was harder on many of the BW people, but many of them ended up pretty well off as well. Many retired with higher earnings than they made while working, so the older ones got a great deal. (4 weeks severance/year of service, pensions up to 80% of salary, stock options that went up 1000% in a few years, free health care in retirement, and much more.) So while I feel bad for the some of the BW people, most did OK or just as well as the Glaxo people, and almost all are unemployeed now. Only small fraction of the BW or Glaxo people lost jobs during the GW merger, compared to the GSK one. So I think that the GW merger was not nearly as destructive as the GSK one. It seems to have done nothing good for GW, and not much more for the SKB people, almost all of whom are now gone. But the managers all are doing pretty well.

    As for Morten G in reply to loupgarous August 25, 2016 at 2:12 am :
    “You can’t merge Novo – it’s foundation owned. It can only acquire other entities or spin out companies (like Novozymes, NNIT, and NNE Pharmaplan).” – That did not work for BW, it was owned by a foundation, and BW was sold to Glaxo. So being a “non-profit” or owned by a trust or charity will not protect you from all things.

    1. Diver dude says:

      A very accurate summary of the whole sorry affair. But at least I got to personally work with 3 Nobel laureates (and a wannabee who spent 5 years using the BW labs as his personal vehicle to try to get one).

    2. Me says:

      “As for Morten G in reply to loupgarous August 25, 2016 at 2:12 am :
      “You can’t merge Novo – it’s foundation owned. It can only acquire other entities or spin out companies (like Novozymes, NNIT, and NNE Pharmaplan).” – That did not work for BW, it was owned by a foundation, and BW was sold to Glaxo. So being a “non-profit” or owned by a trust or charity will not protect you from all things.”

      Thought that was the case.

    3. Hap says:

      I don’t assume it will protect you from all things, but if you’re sold from a non-profit to a for-profit, won’t your profits be taxed? If you’re making enough money that the added money is worth paying the taxes, that’s not an issue (or if your assets and not the cash flow are important) , but I assumed that in some cases, the change in tax status would be important.

      1. Baldrick says:

        I have no idea what taxes does the fundation pay on the dividends it receives from NovoNordisk, but why would NovoNordisk’s taxes change if the foundation decided to sell its stake (which is less that 30% of the capital, by the way)?

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