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.