Pharma Giles writes.....

Sheer Economics: How We Got Into This Fix And Why It’s All Your Fault

Posted by Derek

I hate to devote yet another post in my enormously popular blog on this subject, after a good part of the week has been devoted to layoff news and the like, but this one is too much to ignore. A reader sent along a link, which quotes a Morgan Stanley appraisal of the pharma industry as an investment.

Here's what they're telling their clients:

". . Look guys, this R&D stuff is like, so Seventies. Don’t any of you pharma executives remember the basic management principles you were taught at Harvard on your MBA courses? So forget the fancy and expensive in-house science stuff and ten year product development cycles. You can outsource all of that and realise enormous cost savings now. Sure, torpedoing your R&D will mean they’ll be no new products in five years or so, but that doesn’t matter, doesn’t it? Modern business is all about bigger bucks NOW. Cars, washing machines or medicines, it’s all the same. Who needs expensive in-house product development when you can just buy in ideas? And what does it matter that all of the little innovative companies are getting hoovered up by the bureaucratic behemoths who are all clutching at fewer and fewer of the same straws because they’ve killed their R&D golden gooses for the sake of one good dinner? Forget all that. The future is someone else’s problem. All you need to know is that you’ll be rich NOW if you listen to us… "

It could be said in fewer words, but it's all there. If you're looking for the reason the big companies are doing what they're doing, look no further. Agree with it or not, there's a case to be made - and there's Morgan Stanley, making it - that the cost of running new drug projects in big pharma is just too high relative to the risks of failure. Those returns, in fact, are calculated to be off by a factor of three.

Now Morgan Stanley is one of the world’s leading global financial services firm and a market leader in securities, asset management and credit services. They make much, much more money than we scientist-types do, and therefore they must be much, much smarter. And more honest. After all, there is no way a company like Morgan Stanley would issue smug, self-serving reports saying takeovers, mergers and asset stripping are all good things, solely because that’s how they make their billions.

But let's say the Morgan Stanley folks have their numbers off. Perhaps it's only twice as profitable to bring in outside drugs as it is to develop them internally. Don't believe that one, either? Maybe it's only 25% more profitable - can you imagine making a move that would increase your company's return on investment by 25%? Industries get remade by such changes at the margin, and this one is remaking ours. Why do we have any internal R&D left at all, if those figures are anywhere near right?

Remember dear readers, that this is the sort of relentless logic that makes my pro-industry blog so popular. I can take a flawed premise, such as “in-house R&D provides a poor return on investment compared to in-sourcing”, and from it develop a whole argument that says that as a result, our pharmaceutical industry leadership is perfectly correct in ditching all of you losers out there in R&D land.

I’m a scientist, and so you can be reassured that what you’ll get from me is sound reasoning, supported by documented facts supplied by those who know what they are talking about (such as pharma CEOs and their financial advisors). There’s no place in my popular writings for emotive rants from disaffected soon-to-be former employees based on a psychological need to suggest that pharmaceutical industry leaders are somehow responsible for its failings. Not even in the “comments” section.

You know you can trust me. Look, I even have a beard. Not designer stubble or a mangy, moth-eaten patch of scrub like some bloggers I could mention, but a full, luxuriant growth that looks as if it could rival a rainforest for biodiversity. The glasses are important too. Would you trust your doctor if he didn’t have glasses? Of course not.

So there you are, dear readers. All of the layoffs in R&D are because modern in-house R&D is a poor return on investment, and it’s so much cooler and cost-effective to go around buying up little start-up companies instead. Never mind that all of these little hothouses of innovation will soon be bought out by bigger companies desperate to back-fill the R&D talent they let go a few years earlier. Or that people like Morgan Stanley will be advising their clients to put their money into third world ventures, real estate, energy or armaments rather than into start–ups in a pharmaceutical sector that’s already been milked dry.

Indeed, it is my opinion that one of the most psychologically comforting theories that we in R&D have for our present fix is likely wrong. I refer to the "Evil Clueless MBA CEO" theory, which has its satisfactions, but is a hazardous way to think. “Hazardous”, because such thinking is a great way of saying “downsize me, yes - ME!” these days. It is always dangerous to assume that people who do things you disagree with are doing them because they're just idiots or because they're innately malicious. So given that my innate conservatism equates “dangerous” with “wrong”, what that leaves you with is that these actions, stupid and malicious though they may appear, are probably being done for reasons that appear valid to the people doing them.

Using my relentless blowtorch of scientific logic, it therefore doesn’t matter if outcomes are stupid and malicious, so long as the intent is genuine. The fashion for bringing in MBA-trained executives to run R&D operations they didn't really understand may have resulted in years of maladministration, pointless reorganisations and bureaucratic paralysis and has caused the poor productivity in R&D that we see today, but it wasn’t a result of malice or stupidity. It was just another R&D project that failed.

So that makes it all perfectly OK, you see. I know, I know - some of these reasons are things like "lay-offs help me keep my high-paying CEO job", and we can't ignore that one. But nevertheless I will, because I still work in the industry (which, chances are, dear reader, isn’t like you) and I’d like things to stay that way for as long as possible. I know which side my bread (and my beard) is buttered.

So if these cost estimates are right, how did we get here? It is blindingly obvious that the attraction of “small pharma” to big pharma is that the in-licensing world unloads the risk from the large pharma company (and its shareholders) onto the investors in the smaller ones. Yet it is equally obvious that, no matter where the risk is unloaded to, the low odds of success remain the same.

Yet because our leaders have become used to the idea that their own R&D scientists are just lazy time servers rather than poorly led, their desperation for new products is driving them to ignore the fact that licensed-in development projects are just as likely to fail as their own ones. And as the number of start-ups with decent ideas to offer starts to fall, so the price and the risk of “getting in too early” increases.

We've been talking a lot, for example, about the GSK-Sirtris deal. But we’ll stop right here, because that’s proving rather embarrassing for some very important people who are championing “in-licensing” as the future, and who I really wouldn’t want to upset if I want to carry on working in my nice little R&D laboratory.

So I’m going to carry on agreeing with the safe line of management thinking that the current collapse of R&D in major pharmaceutical companies is all the fault of the scientists working for them, coupled with a dodgy economy and an oppressive regulatory environment. After all, you’ve had hundreds of billions of dollars thrown at you, along with the best facilities and equipment that money can buy, and yet you’ve come up with nothing. OK, that’s not quite true, but that’s what your CEOs are saying and who am I to argue with them?

Heaven forbid that major pharmaceutical companies would start to look at the success and productivity of their R&D executives rather than that of their hapless scientists. These executives are MBAs after all. Born leaders. The crème de la crème of managerial talent. Constant reorganisations (“all change is good”), risk-averseness and the development of vast layers of management accountability are surely the only way a modern research-based business can be run, according to modern management theory.

It’s a model that been adopted across the industry, so it must be right. Senior R&D executives being held accountable for failure as well as success? That way madness lies.

I’d sooner learn Chinese and emigrate to Beijing. In fact, I may have to if I want to keep working in the pharmaceutical industry…


In the real world, a lone voice of sanity tries to be heard above the gnashing of teeth and wails of lamentation. Or so the tone implies…