Longtime readers of this blog know that Big Pharma is in big trouble. This sector has been shedding jobs at a phenomenal rate. In part, it’s due to the “patent cliff” that’s just about to commence. The patent cliff is a period of time when many blockbuster drugs are supposed to go off patent. Now, some of you may be cheering about that and in some respects, that cheering is about as sensible as a Tea Partier whooping it up for blocking an increase to the debt ceiling. You don’t want what’s going to happen to happen. Trust me on this.
The truth is that drugs have been getting less expensive. Yup, that’s right. So many drugs have gone to the generic market that the price overall *has* gone down. And if you’re satisfied with your current drug regimen and the generic substitutions, then you should be happy about that. But there won’t be any new drugs to take the place of the ones that went off patent. That is, there are very, very few new drug entities that are being approved by the FDA these days. That means there won’t be any breakthrough drugs for awhile and if you don’t like the side effects of the older generation drugs that are now generic, that’s too bad for you.
The finance industry has made a fortune telling everyone that it’s the scientists’ fault. If only we didn’t have so many money sucking R&D workers around, there’d be a lot more money to pass around to shareholders (and take a nice bonus for ourselves). Those damn chemists are just not producing. Hey, let’s hire Chinese chemists to do the work at a fraction of the cost! Oh sure, it will take longer to get the compounds back into the lab for testing and contract negotiations, quality control and oversight are going to take up a lot of the time scientists should be using to solve problems but think of the money we’ll save!
In the event that the CEO’s of big pharma can’t reduce costs enough to make a profit and still get a new drug approved, the merger is the next logical option. And big pharma has been merging like there’s no tomorrow. I have personally lived through about 5 of these suckers. The last one happened after I had been in a new job a whole week. Out of the frying pan into the fire. The average labrat will tell you that mergers have pretty much destroyed the pharmaceutical industry. But who listens to labrats?
Fortunately, a corporate insider and former President of Pfizer Global R&D, John LaMattina, tells the awful truth about the effect of mergers on research in the latest edition of Nature Reviews- Drug Discovery. In The Impact of Mergers on Pharmaceutical R&D, LaMattina writes:
After a major merger, the rate of progress of compounds in the development pipeline seems to decrease. For example, comparing data from Pfizer’s pipeline updates (which are posted on its website every 6 months) before the Wyeth merger in February 2008, and in February 2011, reveals that 40% of the compounds (not including those from Wyeth) have been in Phase II development for more than 3 years, which is below the industry average (J. Arrowsmith, personal communication).
Indeed, R&D seems to be especially vulnerable to the negative impact of mergers and acquisitions. Having a sense of how mergers occur in R&D organizations is helpful for understanding this impact. R&D organizations will be the last part of the companies to begin merger discussions before regulatory approval because of the commercial sensitivity of the pipeline and the intellectual property of the company. And when the discussions about integrating the R&D organizations finally occur, the initial focus is on Phase III programmes, followed by mid-stage candidates, with the early-stage discovery programmes handled last. These reviews are extensive and time-consuming, as they require careful consideration of scientific issues such as efficacy and safety data for each programme, as well as commercial issues such as potential duplication and strategic directions of the merged company. In addition, research organizations often differ procedurally in some fundamental processes such as IT platforms, data handling or adverse event monitoring. Establishing which system to use or creating a hybrid takes substantial time for decision-making as well as implementation.
It is easy to see how early-stage R&D will be slowed in such situations, as during this period — which can take at least 9 months — generally no new programmes are started and hiring will be frozen. Undergoing one merger will have a substantial negative impact on the momentum of research programmes, but enduring this multiple times can be crippling.
Pretty much. This has been my observation and that of my colleagues. During mergers, research grinds to a halt. You don’t know who your new boss is going to be. There are a lot of internal power struggles while the projects are on hold and once the merger is approved, the corporate offices act like nothing has happened, while the labrats are only *beginning* to negotiate with the other side and share information. Layoffs almost always follow these days. In the early days of mergermania, it was the sales staff that took the biggest hits because back then, executives who had grown up in the company realized that you can’t sell anything if your research staff isn’t discovering things to sell. These days, research is not spared, the chainsaw cuts in unpredictable ways and once the decisions are made, they are hard to unmake. There are constant reorganizations, dozens of new layers of hierarchies and more acronyms than the US Navy to memorize. Increasingly, there is a sense that cuts are being made that are insensitive to the needs of the business unit. You can use your $250,000 piece of equipment that is crucial to getting your work done but if it hiccups and needs maintenance, you can’t get it fixed by the vendor. You have to get a third party contractor to fix it who may or may not know what he’s doing and leaves promptly at 5pm, whether he’s done or not. It’s a mess and getting messier.
So, who are the movers and shakers behind this mess? Fortune recently published a hair raising profile of Jeffrey Kindler’s downfall at Pfizer that shows what has been happening in big pharma these days. It would be hard to excerpt it here because it is a lengthy piece. It’s well worth the time to read the whole thing. But if I had to single anything out, it would have to be the brief description of the struggle between top executives for the top spot that would make the Borgias proud. Here’s a little taste:
The CEO horserace divided Pfizer into camps. Each contender huddled regularly with a circle of advisers, plotting strategy. Kindler conducted his campaign the way he did everything: methodically and aggressively. About 100 pages of campaign strategy notes — everything from how he planned to woo various directors to his view that he should acknowledge his lack of operating experience — were later found in Kindler’s files.
By July 2006, the Pfizer board was ready to give McKinnell the boot, though he didn’t realize it. But in the days before it met to decide who would succeed him later that month, the board received an anonymous letter castigating Kindler from someone who identified himself as a senior Pfizer employee. A second anonymous letter, claiming to be from “responsible, long and loyal Legal Division employees,” arrived on the very day of the board meeting. It complained of “micromanagement,” “constant” internal reorganization, and a “chaotic” decision-making process. “A decision is made, then reconsidered and changed. Decisions, even minor … are picked apart and often directed to be undone. Then re-studied. Then the decision-making group expands. Paranoia results. Autonomy is sapped.” These were some of the very complaints that would become the subject of board alarm in late 2010.
The board dismissed any warnings. “You almost always get these kinds of letters,” says University of Illinois president emeritus Stanley Ikenberry, then Pfizer’s lead director. “We did a careful analysis of that, and did not see any reason to abort the course.” Kindler got the job, and McKinnell left the board seven months later. “It was a very tough choice,” recalls Ikenberry. “It was the desire of the board to chart a new direction.”
Kindler’s selection came as a shock. One of his direct reports had a particularly dramatic reaction. George Evans was a low-key, respected lawyer who had worked at Pfizer 26 years. He’d been a candidate for the top legal job when Kindler was hired, and was general counsel for the pharmaceutical division. On Saturday, Evans read of his boss’s elevation in the New York Times. On Monday he resigned. “At the end of the day, you have to have some level of respect for the person you are working for,” Evans tells Fortune. “Having watched Jeff in action over a number of years, I just couldn’t work for a company that had him as its CEO.”
The fondue summit: As jockeying intensified in the 2006 race to become CEO, rivals Shedlarz , Katen, and Kindler met to spear bread.
In an attempt to defuse growing tensions, McKinnell’s chief of staff took the three contenders to Maria’s Mont Blanc, a Manhattan restaurant, for a fondue dinner. There, they sat around a bubbling pot, making awkward small talk while stabbing their forks into chunks of meat and bread.
To curb campaigning, the board and McKinnell decreed that none of the contenders could have discussions about the succession with any Pfizer director. But Kindler and Steere blithely ignored the rule, meeting for dinner at Oceana, a seafood restaurant in Midtown. The secret summit came to light only after a company driver tattled. Katen and Shedlarz were livid. But the board brushed the matter aside.
The labrats were unaware that this was happening. It wasn’t long before Jeff Kindler bought Wyeth and then fired just about all of my former colleagues. There’s a Cruella DeVille style Head of HR who makes an appearance who thought that “touchy feely” treatment of affected employees wasn’t tough enough. She did enough damage before she was dismissed. And then there’s this:
But the process of overhauling R&D was a messy one. Kindler shuffled through three research chiefs during his 4 1/2 years as CEO. He closed six R&D sites, then halted research in 10 disease areas even while setting a new goal of launching four new internally developed drugs a year by 2010. He split the research operation in two — setting up a separate unit for biologic drugs (and launching an expensive new facility in San Francisco) — only to reverse the decision 30 months later after taking on Wyeth’s big biotech operation.
Among the shuttered Pfizer sites was one at Ann Arbor, the birthplace of Lipitor. Says Bruce Roth, the scientist known as “the father of Lipitor,” who lost his job when the Ann Arbor site closed and now works for Genentech: “When every 18 months you throw the organization up in the air and are shifting therapeutic areas or closing sites, you have this period of turmoil when everybody in the organization is paralyzed. You need some continuity to do science.”
Yes, you read that right. The guy who discovered LIPITOR, a gigantic behemoth of a blockbuster drug that made a lot of people very rich, was laid off when the Ann Arbor, Michigan site was shuttered. It got hairier when Kindler decided to slash the R&D budget because after having acquired all the things he thought he needed to make a lot of lucrative products, he found the whole operation to be too expensive. Antibiotics and Central Nervous System therapeutic areas were dismantled. In short, Kindler didn’t know what to do with a pharmaceutical company. He and his loyal companions were only interested in short term satisfaction of the shareholders and the personal satisfaction of commuting to work via helicopter.
One interesting thing that keeps popping up in out-of-control corporations and the pharmaceutical industry in the past decade or so was is that so many executives have a slavish dedication to Jack Welch style management. Maybe that should come as no surprise. Pharmaceutical executives seem to be proteges or fans of GE’s gung-ho, take-no-prisoners, management and reward system that was created for the sales staff. But R&D isn’t anything like a sales division and good scientists make poor salesmen. Jeffrey Kindler got his business acumen from his time at GE. The Enron executives were enamored by GE. Even Wyeth, before it was swallowed whole, faithfully implemented the “rank and yank” strategy for their R&D staff. But it’s deadly for R&D because it encourages scientists to sequester resources for their own benefit instead of collaborating, and there’s a lot more time wasting politicking so an employee whose job is on the line can “sell” him or herself. These days, labrats are consumed with making it through the next layoff and keeping their foothold in the middle class. There is no mental activity left for any other purpose. What is it about GE and Jack Welch’s method that is so compelling to the business class and why are they so blind to the deleterious effects on their industries? Maybe we should ask former GE CEO Jeffrey Immelt who Barack Obama has recently appointed as chairman of a new jobs panel. Under Immelt, we can probably expect trickle down of the GE value system to even more unsuspecting industries.
In the end, Kindler met his makers, the board of directors. But he’s hardly the only pharma CEO to screw up. In fact, most of them have been steering their companies over the cliff. They pursue reorg after reorg, hire consultants who only seem to make the matters worse and have a bad habit of treating their R&D staff like migrant workers. Many of my former friends and colleagues are working as contractors now. They pay for their own benefits, sometimes have to live in one state while their families live in another and have become physically or intellectually disconnected from the science they spent so much time and energy learning. Although the unravelling has been happening over the past 20 years, the acceleration of the process in the past three is breathtaking in its scope and devastation to the scientific infrastructure and the reduction of so many highly talented and well-educated people to subsistence wages. None of the downsizing has done much for the bottom lines and neither did the deal that big pharma made with the Obama administration in exchange for supporting the health care reform act. That’s because it doesn’t matter what kind of arrangement you have to stop the importation of drugs from other countries or prevent negotiation of prices for Medicare recipients. If the patent cliff is looming and your blockbusters are going generic, you’re going to lose money anyway. No wheeling and dealing, no number of mergers, no amount of downsizing is going replace the missing drugs in the pipeline or change the fact that this generation of CEOs screwed the industry they were supposed to be overseeing through aggressive, selfish ambition and ignorance of how life science and scientists work. In No Party for Health Care Investors One Year Later, the thrill of victory has worn off:
Indeed, investors are well aware of the downsides of reform. The pharmaceutical industry, which moved swiftly to negotiate a role in the process, agreed to contribute some $90 billion over the next decade to help fund the bill. Medical device makers will also pay fees. Last April, the biotech sector began reporting the impact of new rules on pricing and rebates.
There were also some benefits. Biotechs, for example, won big when the law decreed that their drugs would be protected from generic competition for 12 years. Some 32 million Americans are expected to gain insurance coverage, generating a new customer base for pharmaceutical companies and device makers.
But when the dust finally settled on the new rules, the other, more significant uncertainties plaguing health care companies became clear. The pharmaceutical sector, down 3% over the last year, faces a tidal wave of patent expirations on their bestselling drugs in 2012 and 2013, which will cost them tens of billions of dollars in lost sales. Though investors have known about the patent cliff for years, it’s still unclear when — or if — drug makers will resume growth.
Next to that, the threat of health care reform seems almost mild. “This is not something that is short term — it’s a once in a generation effect,” says Richard Purkiss, an analyst at Atlantic Equities, of the patent cliff. “There’s a lack of confidence amongst investors that you’ll get a re-emergence of growth.”
The problems are still there. The FDA takes too long to approve drugs. Patents hung up at the FDA can’t recoup research costs. Litigation is affecting research. And mergers are sucking the life out of the drug discovery process. No healthcare reform act was ever going to solve those problems because they are hard problems and require patience, long term planning and learning how to value the researchers who make it all possible. Who’s got time for that when you’re busily knifing your competition for the corner office?
Barack Obama can relate, I’m sure.
Jobs program, Barry. Get on it.
Update: I saw this video clip at FDL this morning. It’s from Tweety at MSNBC. I don’t watch Hardball anymore and while pretty much everything he is saying is true, I have a problem reconciling this with the fact that Tweety helped put Obama in charge. And he works for MSNBC, which is partially owned by GE. So, what’s the angle here? Now that GE helped install Obama, it’s time to get on his case for allowing big business to ruin the middle class and do it in an election year? Hey, I want Obama gone as much as any recovering Obot but what would Tweety do if the Democrats substituted a New Deal Democrat for Obama in 2012? We already know the answer to this question.