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    • What Negative Interest Rates Mean And What We Should Do
      Alright, so Germany has now introduced a zero interest bond. That means, given inflation, people will get back less effective money than they started with. At this point, outside the US, the average interest rate is negative. As Stoller pointed out, that means that people with money can’t figure out anything productive to do with […]
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Hey, Hillary Episode 1: Your biggest donors are hurting us

Google Pittsburgh in Bakery Square, East Liberty.

This is the first in a series as I try to catch Hillary up to what has happened in the last 7 years.

Back when she suspended her campaign in 2008, I thought her presidential hopes were finished. 2008 was her best year in terms of what she might have accomplished. After the financial collapse, there was an opportunity for a disciplined and knowledgeable president to force rehab on the malefactors of great wealth. Well, that didn’t happen. Instead, the malefactors recruited someone more pliable and easily dismissed. I’ll never forget the passages in Ron Suskind’s book, Confidence Men,  where he recounts the meetings Obama had with Tim Geithner, Larry Summers and Christy Romer. Obama would make an executive decision and Geithner would essentially blow him off and nothing would get done.

Anyway, what I could see happening after Obama won is that the bad deals on the financial clean-up and healthcare reform would get concretized. The changes to the workforce brought on by the massive layoffs and restructurings would lead to a different kind, but by no means better, kind of work environment for working people. And that’s pretty much what’s happened. Now, you could say that she’s working with what she’s got and I agree. In these circumstances, given what she’s got to work with, her policies are going to have to be more modest than the opportunities that might have presented themselves in 2008 would have created.

But if all you’re planning to do as president is tweak what is a sucky situation and slightly improve the status quo, then what’s the point of running? No, seriously. Wouldn’t that just make you Babysitter in Charge instead of a president? Oh, sure, Hillary would be a great babysitter, one of the best. No one is going to complain about her protecting us. By the way, that doesn’t mean she is a “hawk”, whatever that means. There are shades of gray. You don’t have to be one thing or the other. And she’ll probably be really good on infrastructure projects, especially broadband. That right there would be a not insignificant legacy. However, for working people who have been so busy trying to keep their heads above water that they are only now realizing how far out to see they have been dragged in terms of work security and income stability, that’s not going to be enough.

Hillary, you need to talk to your donors. Because right now, they can do whatever stupid shareholder value, McKinsey generated idea that pops into their heads and it’s going to hurt them. It is time that someone sat them down and told them that just because they are hiring people in India, or bugging out of NJ and we all need to adjust, doesn’t mean they’re going to save money in the end. In fact, they could be making their problems much, much worse.

Let’s take the latest examples of really stupid ideas in big pharma. It’s now more like, little disconnected, distributed pharma in a  very expensive part of the country. One of the latest Nature Alerts featured an article about the shortage of space in the Boston biotech belt and that the price of land in Cambridge Massachusetts is too expensive for new startups. In short, there’s very little land but big companies keep firing their R&D staff in Connecticut and New Jersey to relocate there. Now, the little start up companies to which we are all told we will find our pot of gold can no longer afford the cost of business there.

And we haven’t heard yet from the hapless souls who manage to get an invitation to work in Cambridge. Go read Derek Lowe’s comment sections on the latest relocation scheme to Cambridge of the virology division of BMS from Wallingford, CT. First, it should be noted that the business people are mostly keeping their jobs and relocating to a different site in CT. But by our calculations, the R&D staff is facing almost a 50% cut in personnel and the “lucky” ones will be relocated to… you guessed it. Cambridge. There’s a lot of anger and bitterness there. Housing prices are astronomical unless you live far from the city. If you live far from the city, your commute is long. Then there is the uprooting of families and finding new schools. Then, when they get there, there’s no guarantee that the job will be available for long. They will be expected to be ready to jump to a new job every couple of years.

And for what? What in God’s green earth would make all these companies decide that it HAS to be Cambridge or they aren’t truly living??

We have no f^&*ing idea.

Harvard is there and so is MIT. Ok, fine. But it’s not like there’s going to be a smorgasbord of people trading industry shattering techniques. Hell no. We all have secrecy agreements. You can’t just talk about what you’re doing over sushi with people from other companies or academic groups. Even 15 years ago the ACS meetings were becoming less and less useful and informative because presentations contained almost no relevant information, structures or data. It’s all protected by lawyers. So, the idea that Cambridge is some kind of hot bed of new open source learnings is just stupid. Do not let them tell you otherwise.

It’s not even like you even have to BE in Cambridge if by some weird chance you can actually share information. The internet makes location irrelevant. In fact, some of these companies farm out so much of their work to other companies that there’s no need for them to be in the same place geographically. Hey, if they want to break up their infinitely configurable corporate lab space and inefficiently run their research by having lab rats negotiate contracts with outside companies, complete with secrecy agreements so that they can become lightweight organizations free from the constraints of employees to whom they are obligated, let them do it and waste their money and talent. But in that case, they’d be saving a lot of money by relocating to Detroit.

And while we’re at it, why is it that the R&D people are the ones that have to make all the sacrifices? Why can’t an MBA who is after all just a bean counter live in a rust belt city? Aren’t they costing valuable office space for the shareholders if they’re located in Cambridge? I mean, if the almighty dollar is the reason why we are reconfiguring pharma, shouldn’t we eliminate the costs of things that don’t actually contribute to the discovery of drugs? If I were a shareholder, I’d want to know why the cubes have to be in an expensive high rise facing the Charles River. It’s not like an accountant or marketing person will have any reason to hob nob with the PhD superstars at Harvard so why are they there? Can’t we find plenty of English speaking MBAs in Hyderabad?

Speaking of rust belt cities, Pittsburgh, for example, offers a lot of culture and plenty of affordable housing for working people. We are not located in East Jabip, most people have all their teeth and this city has one of the most literate populations in the country thanks to Andrew Carnegie’s magnificent libraries. This is a great place to live and work with public transportation, a thriving university center with Carnegie Mellon and the University of Pittsburgh at the center. There’s plenty to do here from an outdoor perspective and free jazz every Tuesday in Katz Plaza downtown. And we have internet. We even have our own Google headquarters. Why Cambridge? Or why not Cincinnati? I only ask.

But nooooo. They’re all going to squeeze themselves into a shoebox or run themselves off a cliff like lemmings. In the process, they’re uprooting a lot of scientists or just plain ruining their careers, and setting back drug discovery by decades. Somewhere on Derek’s comments section a commenter noted that drug discovery requires Leonardos not Mozarts. That’s because it takes a very long time to learn to be a drug hunter. There are software moguls who think they can speed it up by applying something like Agile principles and maybe they can have a minor effect on the middle layer of research. That is, the layer between routine analysis and project team level collaboration. There is a sweet spot consisting of protein groups and crystallography groups that might be amenable to that kind of intervention. But, in most cases, they’re already there. They’ve figured it out and work as a team and they don’t need no stinking software guy telling them how to do it.

The rest of the time, research just needs to grind through it, one cell assay at a time. It’s aggravating to the shareholders who have the attention span of a newt. Ok fine, Ditch the shareholders. No, seriously, they don’t seem to have any appreciation for this stuff. Outsourcing doesn’t make the process go faster, in fact it can cost money and time in the end. What looks like a sure fire way to cut costs and put money in the shareholders’ pockets just doesn’t in the end.

So, Hillary, the next time you meet with these guys, and they are almost always guys, ask them why they are doing what they’re doing. Does it really make sense from a business perspective? Is cutting R&D really the only thing these toadstools can think of doing to increase shareholder value? Aren’t there better ways to cut costs? Or is there a hierarchy of costs to cut that have nothing to do with actual productivity? Are these titans of industry deliberately overlooking the obvious in order to appeal to their MBA culture of smartness? What is the long term strategy or is there even a long term strategy? Is all this pain on the R&D side really necessary? And how does that result in new drugs? Is relocation to certain areas of the country really about costs and collaboration, or is it really about egos and classism? And ask to see the numbers. Tell them you’ll wait until they find them.

Someone needs to start asking these uncomfortable questions and getting straight answers. Because if you want to be the next president and champion for us, you’ve got to start getting the executive class to explain how their McKinsey generated restructurings actually work in the shareholders’ favor. I’m not seeing how it provides value over what we had when the industry was working through new technology but still producing blockbusters. Call me extremely skeptical.

Someone needs to start holding these people accountable for the havoc they are creating. If you’re not going to do it, don’t be surprised if the country doesn’t get all excited about your campaign. Do you really want to be another British Labour party politician?

Next week, does contracting everything out really work?

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More Whineter, STEM and being a dick with peppers

It’s March already. Why is it still snowing? Why is it 15º outside?? The other day, it rained and melted some of the snow. The sump pump was going off every 90 seconds. I timed it. I started to see the ground. This morning, I woke up and there’s another layer of snow out there. WTF?? I have about a cup of rock salt left and there’s none to be had for miles. It’s too much. Make it stooooop.

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In other news, PA Governor Tom Wolf visited a school in Chester yesterday to find out about its STEM programs.

Ok, I know Wolf didn’t ask for my opinion but when has that ever stopped me from giving it? (There’s a proposal at the end of this little rant so stay with me.) Here it goes:

There’s no living wage in STEM jobs. Even the people who have good jobs are constantly worried about losing them. They’re forced to move to very expensive parts of the country and can never relax. The fear of losing a job just after they might have already lost one is not a good way to live. This happened recently to people I used to work with who were transferred to Massachusetts after the layoff, and then lost their jobs- again.

Jumping from job to job after a short period of time means people in pharma and biotech R&D will not achieve the degree of experience that they need to be really good at their jobs. It takes a long time for R&D professionals to gain enough experience to be really useful to their company. That means starting and staying with a project over a long period of time, like, 5-6 years. At that point in time, they will have just about enough seasoning to be useful to the company and laying them off is a tragic waste of talent. There is no cheap substitute, as this country will begin to realize (and may already realize, judging from the ads I’m seeing for computational chemists with at least 5 years of industrial experience).

Unfortunately, this is not what the finance industry had in mind. It thinks we can all work under their crazy employment rules like they do on Wall Street. That means flexibility at all costs. That’s a losing game for the R&D professional in terms of living standards, skills and passion for research.

If the R&D professional doesn’t get a good paying job in Cambridge or San Francisco, the alternatives can be grim. Academic research associates with PhDs and industrial experience make between $37-$54K/year. I know because I have the job postings to prove it. You can live on this in the midwest but academic research is subject to grant availability. If the grants don’t materialize, the jobs don’t either.

A potential place where a governor can productively intervene is at the small start up level. Pennsylvania would be a good place for startups, especially in the Pittsburgh area, which has a university/medical culture and a renaissance in the east end. There’s good mass transit, affordable real estate, and an educated population. BUT what every state of the country lacks at this point is access to affordable R&D resources. That is, there are some things that any start up is going to need access to but probably can’t afford. In my case, as a consultant, I can’t get access to a lot of scientific literature. I don’t have a license to Elsevier, ACS publications, etc, which can cost millions of dollars to a large university. I also can’t afford the vendor licenses to do my modeling work. I can ask vendors to give me demo licenses, for which I must sign an agreement to not use them for research. They’re only for evaluation purposes and to keep myself current. If I want a license so I can make money, well, I can’t afford the license.

So, verily I say unto Tom Wolf, if you want to attract STEM startups to Pennsylvania, (and why not? It’s a heck of a lot more affordable than Cambridge) you need to fund a license bank. Ok, I don’t know what else to call it. Make it more affordable for startups and consultants to access the licenses they need to get their work done. At this point in time, the only entities that can afford licenses for literature and proprietary software are large multinational companies and universities, leaving the rest of us to smuggle papers and cobble together software solutions from publicly available sources. That leaves us at a disadvantage in the beginning phases of research where the start up costs are already astronomical.

I don’t know if a license bank has ever been done or what a configuration might look like but here’s one possibility: Put the licenses on a PA server, start a consortium, and allow startups and consultants to ping the licenses for a fee based on number of papers downloaded or amount of time licenses are checked out. Or make us fork over a cut of anything we discover to the state. I could agree to that. Wouldn’t Tom Wolf like to be a partial recipient of the next antibiotic patent? Yes, this would be an investment for the state. It could cost several millions of dollars. No, Republicans won’t like it because… I don’t know why they wouldn’t like it. They’re always going on about helping small businesses but they want us to somehow use magic to afford the start up costs. I’m beginning to think that Republicans aren’t being honest with us about their love of entrepreneurs and small business people… Is that possible?

But the payoff could be substantial for the state if it attracts businesses and the patents generate money. That money could be used to fund education while some of it could be used to buy other things early discovery researchers might need. It could be self funding down the road because if you run for two consecutive terms, you could leave a nice little pile of patent shares for the state by the end of your them.

And since I need a real job, I will gladly work for the state setting up this system for a decent living wage. No, no, don’t thank me. See my LinkedIn profile.

So, there you have it. I have given you a possible solution to a pressing problem that doesn’t involve the governor making pointless visits to schools to encourage innocent children to go into professions in which they can’t make a living. As for teachers of STEM subjects, that’s where some of my former colleagues are going now that they can’t make a living in research. So, you know, you’ll have plenty to choose from.

***************************

Finally, Titli Nihaan has a recipe for a hot dip on a cold day. Pay attention. 😉

The problems with mergers

No nuts for you.

Tim Wu at the New Yorker wrote a piece about the all too predictable outcomes when United merged with Continental back in 2010.  There were sharp increases in fares in newly uncompetitive markets and a gradual decline in overall service.  I think the decline goes back even farther than that when United eliminated or sharply reduced pensions for flight crews and pilots back in the early naughties.  I remember distinctly the beaten down and depressed looks of the flight attendants on one of the flights I took from Philadelphia to Denver when I was on my way to a conference. When asked, the flight attendant made some remark to the effect that she had lost a lot in retirement benefits. It felt like we were hurtling towards Soviet era customer satisfaction with poorly compensated and indifferent flight attendants. Was this really what United wanted its customers to experience: a demoralized employee workforce, fewer services and a plethora of new fees, the profits from which were not going to the employee pension fund?

By the way, Tim, that ritualized abuse that you feel Americans are experiencing after the approved mergers of airlines and cable companies, for example?  I call it “exploitative profit mining”.

Then I saw that the New York Times Magazine was doing a big story on the lack of productivity in drug discovery (which I have been predicting for years now) and maybe it was time to go back to “trial and error”.  Now, I’m not going to say they’re wrong because we have tried proteomics, genomics, combinatorials, target based drug design, RNA interference and a whole lotta other “omics” type technologies and none of them have pulled off the “immaculate reception” to save the game that they promised to deliver.

But the thing that really made me laugh was the idea that any bean counter is going to let the R&D division go back to “trial and error”. My last impressions of the industry just before Pharmageddon was that “trials and errors” were distinctly money wasting activities. First, there was no metric that could be applied that could accurately determine exactly how many trials would be necessary to achieve the desired outcome. Secondly, there was the negative word “error”. Error implies failure, not a measurable objective, like a lead in the pipeline. To MBAs and the finance industry that now direct drug discovery research, it is important to minimize negative outcomes like errors, nevermind that it is the way the scientific method works and that we learn as much from error as success. Errors are the way we eliminate dead ends and turn our attention to more promising avenues. It’s how we work the kinks out of all those “-omics” technologies. Whatever. Executives would much prefer “predict and succeed”, which is theoretically a better use of time and money but rather less like science.

We might also try to eliminate the mergers and acquisitions of the drug companies by bigger drug companies, a trend that has interrupted project after project in the last two decades and caused the elimination of entire therapeutic areas. The increase in mergers occurred at the same time that biology is undergoing a 21st century scientific revolution. The finance industry’s unchecked enthusiasm for trading drug companies like baseball cards has blighted many promising new technologies and the careers of thousands of highly trained scientists, hence, no new blockbuster drugs. We probably do not need to conduct any additional trials and errors in merger experiments before we kill off the field entirely.

Just my non-MBA opinion but the lack of blockbuster drugs in the pipeline was entirely predictable fifteen years ago by those of us who experienced the joys of constant M&As. Maybe the bigger problem is that the MBAs never asked those of us in the trenches about the effect of mergers on productivity. Hmmm, one can only imagine why…

Derek Lowe and his insider commenters weigh in on the New York Times Magazine as well.

Pharmageddon

Mary McLeod, Pfizer's HR chief used to commute via helicopter

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.

Thursday: We’re not seeing things after all

Yves Smith at Naked Capitalism wrote a post about a study that confirms what we’ve been thinking for years: Short term thinking is destroying whole industries and will have severe repercussions down the road.

Andrew Haldane and Richard Davies of the Bank of England have released a very useful new paper on short-termism in the investment arena. They contend that this problem real and getting worse. This may at first blush seem to be mere official confirmation of most people’s gut instinct. However, the authors take the critical step of developing some estimates of the severity of the phenomenon, since past efforts to do so are surprisingly scarce.

“A short-term perspective is tantamount to applying an overly high discount rate to an investment project or similarly, requiring an excessively rapid payback. In corporate capital budgeting settings, the distortions are pronounced:

Most recently, in 2011 PriceWaterhouseCoopers conducted a survey of FTSE-100 and 250 executives, the majority of which chose a low return option sooner (£250,000 tomorrow) rather than a high return later (£450,000 in 3 years). This suggested annual discount rates of over 20%. Recently, Matthew Rose, CEO of Burlington Northern Santa Fe (America’s second biggest rail company), expressed frustration at the focus on quarterly earnings when locomotives lasted for 20 years and tracks for 30 to 40 years. Echoes, here, of “quarterly capitalism”.”

Haldane and Davies argue the effect is significant:

“First, there is statistically significant evidence of short-termism in the pricing of companies’ equities. This is true across all industrial sectors. Moreover, there is evidence of short-termism having increased over the recent past. Myopia is mounting.

Second, estimates of short-termism are economically as well as statistically significant.
Empirical evidence points to excess discounting of between 5% and 10% per year.

The result is that projects with long-term payback, beyond the 30 to 35 year timeframe, are treated as having no value. No wonder we don’t fund basic science, infrastructure, or climate change related projects”.

The writers point out the first order bad effects: good projects don’t get funded, and those projects are often the ones with the highest potential for broad social impact (would we ever build the US highway system now?). But the knock-on effects are if anything more pernicious. The fact that most investors employ overly high discount rates produces is the same result you’d see with oligopoly pricing: overly high returns with restricted output. And this is consistent with the picture we see in most of the world. Perversely, the corporate sector has been a net saver for nearly a decade in the US, longer than that in some other economies. As we wrote with Rob Parenteau last year:

Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on average ran a net financial surplus of 1.7 percent of the gross domestic product — a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P. More recent studies have indicated that companies in Europe, Japan and China are also running unprecedented surpluses.

This fits nicely with what we R&D professionals have been seeing.  Its effects are especially profound with respect to the pharmaceutical industry because almost by definition, pharmaceutical research is a long term affair.  *Maybe* you can design a better silicon chip in a faster timeframe if everyone gave up sleep but with life sciences related research, Harvard’s Law applies:

Under the most rigorously controlled conditions of pressure, temperature, volume, humidity, and other variables, the organism will do as it damn well pleases.

You can’t make money in the short term in research.  Therefore, research must be cut.

It’s logic only a financier could love.