Drug Truths

A site devoted to teaching about drug discovery and development.

The Advantage of Size in Pharma R&D

with 9 comments

Nature Reviews Drug Discovery recently ran an opinion piece by me titled: “The impact of mergers on pharmaceutical R&D.”  My interest in publishing this piece was to show that mergers are one of the major factors in the decrease in productivity for the pharmaceutical industry.  My views on this hot-button issue generated a lot of discussion in the press and on the web; not surprisingly, some of the comments were unfavorable.  One in particular used a quote of mine from 2004 to challenge my current views.  The author felt that the opinion I expressed in Nature Reviews Drug Discovery was inconsistent with my previous views as stated in my quote below:

“I’m a big believer in size… When you are a smaller company, as we were 27 years ago when I started, you don’t necessarily have the resources to invest in things outside your immediate expertise.  But as we’ve gotten bigger and become more resource rich, we’ve been able to expand.”

Actually, I am still a believer in size and stand by this quote today.

Twenty years ago, Pfizer’s entire R&D budget amounted to $627 million (in contrast to $9.4 billion in 2010).  In those days, we were limited in what therapeutic areas we could work in as we couldn’t spread ourselves too thinly.  For example, this meant not doing research on statins – an area we entered in 1997 when we did a co-marketing deal for Lipitor with Warner-Lambert – or not putting a big effort in areas like cancer and AIDS.  This all changed as Pfizer’s revenues grew dramatically in the 1990s from $5.8 billion to almost $27 billion and, in parallel, the R&D budget grew to $4 billion.  During this time frame, we were able to add resources to work in key research areas like cancer, immunology, addiction and pain.  We were also able to invest in new equipment and technologies to enhance our research capabilities.  This growth was done in a measured and systematic manner.  All of these investments helped to build the current late stage pipeline now touted by Pfizer CEO, Ian Read.

But in the current business environment, size plays a more crucial factor.  The hurdles in bringing a new medicine to market are higher, and more expensive, than ever.  Many new medicines now need to show not just an efficacy which is superior to existing therapies but also long-term safety in patients.  These studies are expensive.  For example, at the behest of the FDA, Pfizer is funding a study known as “PRECISION,” which is designed to compare the safety and efficacy of Celebrex with ibuprofen and naproxen in arthritis patients with cardiovascular disease.  This one study will end up costing somewhere between $250 – 300 million.  Nothing like this could ever have been contemplated 20 years ago – it would have consumed most of the R&D budget.

Size, therefore, has its advantages.  My concern is, however, how a company grows.  A company needs to be cognizant of the effects sudden growth has on its pipeline and science base.  A company needs to grow at a reasonable pace; in other words, growth needs to be done responsibly and not as an attempt to meet a bottom line.  In the combination of Squibb with Bristol-Myers, the two companies were “fused.”   There weren’t major cuts made.  True, this type of merger causes disruptions as outlined in my opinion piece, but they aren’t necessarily fatal, particularly if it is a onetime event.  However, mergers of “synergies” where research sites are closed, thousands of scientists are fired, and pipelines are pared are devastating to a research organization.  Such mergers eliminate, and perhaps lessen, the value that the new size theoretically brings.

If you want a merger to work, you need to ensure it doesn’t damage the R&D foundation of the company.

 

Written by johnlamattina

August 15, 2011 at 1:14 pm

Posted in Uncategorized

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9 Responses

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  1. Could you elaborate on a “brake-even” point between which a merger is beneficial to R&D as opposed to a hindrance.
    Personally, I believe that all mergers are executed to gain “synergies”, otherwise the company would simply grow organically.

    Jim Krol

    August 15, 2011 at 4:57 pm

    • Jim,
      Early mergers in pharma were designed to gain size by merging companies with complimentary product portfolios. The formation of BMS was driven by that, and my guess is the same can be said for mergers like Astra and Zeneca, or Glaxo and SmithKline. Certainly these mergers were done with an eye toward reducing costs by eliminating duplication, but my distant view is that the prime focus of the merger was to increase size through the new combination. I have been told that some of these mergers were done with little impact on R&D. The more recent mergers have been made to acquire products and then to strip out as much of the company as possible. While my focus has been primarily on R&D, other parts of these companies are also drastically reduced such as the sales force, manufacturing, etc.
      I can’t give you a “break-even” point, but ANY type of merger causes disruptions. The question becomes what is the trade off between the disruption to your R&D organization versus the business gain that you are anticipating? Most leaders will opt for the short-term gains and let their successor worry about the impact that occurred to R&D.

      johnlamattina

      August 15, 2011 at 5:13 pm

      • Thank you for the reply, unfortunately I see too often the situation you outlined in your last sentence. I consistently hear CEO’s of major pharmaceutical company’s refer to their “investment” in the company’s future as they slash the R&D budgets to meet quarterly profit margins.

        My personal opinion is that at the very fundamental level, collaboration between researchers is a hallmark of successful innovation. I can site the J&J collaborative meetings between chemists and engineers which attempted to solve the problem of stent restenosis and led to the discovery of drug coated stents.

        However, after most mergers have been finalized, scientist from the two companies often have to compete for the reduced number of available positions in the combined company. Destroying the collaboration culture and eroding the foundation upon which fruitful research is built.

        Outside of providing funding for new and ambitious R&D projects, can you give another example of how mergers have contributed to R&D success?

        Jim Krol

        August 16, 2011 at 11:23 pm

  2. Jim,
    First of all, I agree wholeheartedly with your comments in your first three paragraphs. As for examples how mergers can contibute to success, the best I can give you can be classified as social factors. For me, the best thing about these mergers was sitting down and talking to scientists from another company and discussing in depth their experiences in their R&D programs. In my experience, this is a unique event. When you are merging two portfolios, you can gain interesting insights from scientists who may have taken a different fork in the road when arriving at a key decision point. Sharing data allowed for some mutual learnings. And, in those programs where both companies were active, the mutual learnings could be substantial and help move a program forward more quickly. .
    While this was intellectually stimulating, one can question whether it was worth the $100 billion investment in buying the company.
    – John

    johnlamattina

    August 16, 2011 at 11:54 pm

    • John,
      While I can appreciate how a merger can provide a unique opportunity for thorough program reviews with additional perspectives as suggested the costs and other disruptions would likely outweigh that gain. At the same time would suggest, even without mergers, that a larger organization should have better continuous alternate view project assessments and tangential inputs either by interactions between different internal groups working on other projects or via multiple Consultants. If growth too fast or big problems do arise when people do not know each other or about the projects except in a cursory way. Conversely small organizations engaged in discovery, particular if limited portfolio, even if well focused can readily adopt aligned mind-set unless some one willing to challenge the accepted path or conclusions. Its a tough balance to not only have a critical mass but have the appropriate make-up for objectives.

      In terms of examples of mergers contributing to R&D success I can think of two possible areas that hear have occurred although not sure could cite specific support cases. Again seems limited and may be just reaching for exceptions to the normal negative impacts.

      For the first is complimentary situation where one team had good assays/ability to interpret biodata but their compounds where not viable drug candidates. The other team had good potential compounds but did not know to identify best to progress forward. Therefore the joining filled in the gaps.

      The second circumstance is that in post-merger world discontinued projects where out-licensed and subsequently developed by others (including cases where individuals involved were part of the merger’s dismantling). I am not sure if many are willing to go down this road but probably programs that could have turned out well if not shelved during a reorganization.

      CMCguy

      August 17, 2011 at 8:03 pm

  3. I agree that there are countering forces where scale enables expensive R&D yet that same scale can confound.

    Two challenges emerge – both related to the “cost of complexity”. As organizations grow, there are well-practiced management tools, practices that allow for effective management of scale. However experience and org. theory shows this works only when there is a great deal of similarity in what the business does. Some Development and Mfg. can benefit from these techniques e.g., a set manufacturing process or generic drug production. For all of Pharma R&D, that unfortunately is not the case. That process is exceptionally complex and has to rapidly evolve as new tools and areas emerge. This then is one complexity challenge for multi-therapeutic area management.

    The other challenge is that as organizations grow, chances for (effective, innovative) cross-area interactions diminish. These are hampered by streamlining and time zone offsets or certain (traditional) management practices. Much value that “appears” out of unscheduled discussions or pitching in on problems ad-hoc, is lost in larger organizations. Some firms try to work around this by things like therapeutic area (TA)-specific sites, emulating small firms. However great innovations come from connections that cannot be predicted – perhaps from another TA, or from IT, or from somewhere farther off in the R&D pipeline. Segmentation hampers this and is an imperfect band-aid to this complexity of scale problem.

    I suspect these limits are not an absolute since I see firms experimenting with new tools to connect collaborators, that overcome time and distance – whether measured in miles or in “number of departments away”. So maybe it just will take a while to experiment with decentralized R&D (and not just outsourced “D”), to make scale work. Otherwise we will just see a shift of the pendulum back & forth, as in the past.

    Terry McCormick

    August 20, 2011 at 3:12 am

    • Terry,
      I agree with your comments. You have identified the major issue with size; that is, some knowledge is undoubtedly lost when your R&D organization extends across contnents. You are also correct that various tools are being developed to capture infornation and spread it through R&D. These tools will help somewhat. But nothing is better than the face-to-face interactions that you allude to.
      – John

      johnlamattina

      August 21, 2011 at 1:30 pm

      • John –
        Towards face-to-face “surrogates”, what is your impression of current (not past) collaboration tools, and the opportunity they might provde to that dislocation problem? Over the past several years, I have been asked to “architect” the critical capabilities needed in these areas.

        Clients are prompted by economics, but also by a perception that the connectedness seen in (rampant) social media can be leveraged to the problems we discuss above. They are also bringing on a generation of scientists that are not just virtual collaboraiton-savvy, it is how they have honed their mindset for many aspects of their life. Like it or not, they are more comfortable with “virtual face to face” than past R&D cohorts.

        As I have noted, this will take time to prove out, while we craft “metrics”… But the impressions and gut feelings of experienced hands like yourself are what I see as more usefully predictive. Your thoughts?

        Terry McCormick

        August 22, 2011 at 3:18 pm

      • Terry,
        This is one that I don’t have a lot of experience with as social networking was just emerging when I was leaving Pfizer. I have heard that there are start-ups looking at ways to maximize such types of communications within a company, but I don’t know how much progress they have made. Also, at Pfizer we tried to build our own system for scientists to use, but I suspect that this program was cut when I left.
        – John

        johnlamattina

        August 24, 2011 at 12:58 pm


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