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Biopharmaceutical Industry Consolidation Diminishes Future Drug Discovery

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A recent editorial by Fintan Walton, the Chief Executive of PharmaVentures proclaimed that “The issue is not M&A but how in the future we find effective medicines.” These words were prompted by the recent Pfizer attempt to acquire AstraZeneca. Walton continues:

“In the end the real question is how we as a society can actually find the drugs that are desperately needed for many incurable diseases? The Pfizer bid for AZ is only a symptom of the continuous reconfiguring and restructuring of how pharmaceutical R&D can be performed so that we can efficiently find these cures.”

Walton then goes on to elaborate on a number of ways that R&D can be more productive, many of which are, frankly, already underway. Any industry can and should strive to get more productive – the biopharmaceutical industry is no different. However, Walton misses the key point underlying the industry’s consolidation – mergers diminish the overall capacity of the pharmaceutical industry to discover new drugs.

A consequence of any merger is the inevitable consolidation of the two companies. The goal, of course, is to streamline the new organization, make it more efficient, and wring out redundancies. In this process, however, cost cutting is inevitable. Part of the rationale for doing a merger is the elimination of billions of dollars in expenses. This is expected across the entire company – Administration, Sales & Marketing, Manufacturing and R&D. These savings are not cosmetic but instead can be quite drastic. The Pfizer acquisition of Wyeth is a perfect example. In 2008, the combination of the R&D investments of the two companies was close to $12 billion. In 2013, Pfizer spent $6.55 billion. Clearly, $5.5 billion in R&D savings post the Wyeth acquisition is not only the result of efficiencies. Rather, it comes from the elimination of research sites, programs, and scientists.

Some may react to this in a Darwinian sense claiming that such austerity eliminates the weaker programs and allows a greater focus on only the very best ideas. However, in drug discovery, it is not obvious as to what really are the best ideas. I have seen extremely promising programs crash and burn after hundreds of millions of dollars had been invested along with a decade of effort from great scientists. Alternatively, I have seen programs considered to be long shots turn out to be major successes. Pharmaceutical R&D is an unpredictable, arduous endeavor.

In integrating the two companies, research needs to be consolidated. Let’s say that each company is working on five oncology programs. However, given the budget targets, the new R&D organization will only be able have the resources to work on seven. Management will be forced to eliminate three projects. While done with the best intentions, the fact is that you can never be sure that you haven’t dropped what would have been a major new advance to treat brain cancer. Likewise, the seven kept could all fail. But what you can be assured of is that you need fewer people to prosecute seven projects as opposed to ten. Thus, the major outcome for R&D in mergers is that there will ultimately be fewer scientists in R&D and fewer ideas being pursued.

This point has been lost in the recent asset swap between GSK and Novartis, in which Novartis got GSK’s oncology assets in exchange for Novartis’ vaccine business. In effect, GSK has decided to reduce drastically its oncology R&D investment. This certainly allows GSK to focus on other aspects of its business where they have strength and where they have been successful. But wouldn’t it be better in the long term for cancer research if both organizations had teams of scientists pursuing cancer R&D?

Literally dozens of pharmaceutical companies have disappeared over the last 20 years, not just small companies, but major ones like Upjohn, Pharmacia, Searle, Warner-Lambert and Schering-Plough. They have disappeared for excellent business reasons. But as a result, at a time when there is an explosion in the understanding of the cause of diseases, industry contraction has resulted in fewer scientists pursuing these new insights. In the long term, that doesn’t benefit the world’s health.