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There were many pharmaceutical companies abiding in the fields, and they were well. Then several began to eat the others until they became so bloated nothing could satisfy them and they perished.

6/18/2013

4 Comments

 
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This graphic roughly shows the structure of the pharmaceutical industry when I joined it in the last gasps of GHW Bush's administration. There were 34 companies that were large enough to merit the title of big pharma.  In that legendary time, Merck was the largest raking in a cool $5.2 billion a year.  Pfizer was number 14 making $1.4 billion a year.  There were many blockbuster drugs on the horizon. I worked at American Cyanamid which was bought by American Home Products.  I left and went to biotech and watched as AHP shed the Cyanamid Agricultural Chemicals business and passed it off to BASF, closing the only agricultural chemical division that was making more money than the pharmaceutical division (Lederle Labs).  The the mass orgy of cannibalism began. As the graphic shows, 34 companies became 7. In 2011 Pfizer had moved to number one with a whopping $56.4 billion in revenues. Merck had dropped to #3 with a still huge $40.1 Billion in cash flow. Novartis which formed when Ciba-Geigy and Sandoz merged.  Ciba-Geigy, itself a merger of Ciba and Geigy. I guess Ciba-Geigy-Sandoz wouldn't fit on business cards, so a new creature emerged named Novartis. 

In the graph below, you can see that 39 drugs were approved in 2012, which is fairly large compared to previous years.  It is important to note that 14 of those were new biologics.  In 1990, 23 drugs and 30 the following year, 1991 were approved.  If you look at the graph at the bottom of the page, one obvious factor is that the cost of developing a new drug (chemical) has risen to $800 million in 2000 from $300 million in 1990.  The best estimate for last year was $ 1.8 billion for 2012.  So where are all those savings that were supposed to come from the consolidation of the industry?  Well, they obviously don't exist. 

One huge problem is that a company the size of Pfizer needs multi-billion dollar earning drugs and those are hard to come by.  They weren't a particularly innovative company so in the 1990s they went on a merger and acquisition binge that destroyed Warner-Lambert, Pharmacia-Upjohn, Wyeth.  All were much more innovative companies than Pfizer.  Pfizer dismantled the research infrastructure of these companies, turning out the chemists responsible for producing the blockbuster drugs, that they acquired the companies for.  Now what?  We have several Brontosauruses that can't find enough food to survive.  As we have learned from the housing crisis, that "too big to fail" translates into "too big not to fail".  The cost savings of mergers are paper economies.  Mirages of accountants ledger books. The industry was in much better health in the late '80s and early '90s that it is now.  What are the big guys doing?  Looking for innovation in the small company arena, buying the small companies, so they can get innovative products and destroy the culture of innovation that brought the new drugs in the first place.  

"Well, what is to be done?" you ask? I'm glad you did.  Fortunately, I am arrogant enough to believe I have the solution.  Tune in tomorrow for part three, in which I solve all the world's problems. 

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4 Comments
Ed Holland
6/19/2013 12:20:16 am

HI Adam, I agree with your analysis so far. I look forward to reading your thoughts. Add OSI Pharmaceuticals to the list of small companies being brought up by large Pharma. I understand they were closed down by the new parent company - Astellas -recently.
Ed

Reply
Stacy R
6/19/2013 11:08:10 pm

I, too, agree. Joined Schering-Plough in 1988. There were a few mergers, then the mega-mergers really began. BTW, it would be great if you could post the slide with the mergers in full size.

Reply
Adam Kallel link
6/20/2013 12:19:04 am

Ed, You pointed out another one. It's true it just keeps goingon.

Stacy,it's getting harder and harder to find someone who hasn't been negatively impacted by merger mania.
here is the URL for the image http://www.afgventuregroup.com/dispatches/wp-content/uploads/Screen-shot-2011-05-13-at-3.47.30-PM-.png

If you aren't already, We would love to have you as a connection on Linkedin or a twitter follower. You can click the icons on top of the page.

best to all
Adam

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Vladimir Zhukarev link
6/20/2013 02:32:58 am

Dear Adam,
What you are describing is absolute truth and absolutely inconceivable at same time! Merck leading the pack of the pharma industry 'fat cats' in cutting dramatically on the R&D but still packing up their profits and keeping their top management compensations!
Isn't it the best indication of the 'very high quality' of their current top management on the first place? Hello Wall Street bankers who replaced industry professionals in all these organizations! If I am not mistaken, just relatively recently, during the healthcare discussions, when public would question skyrocketing prices of their drugs the justification by the same management was: this is due to huge investment into the discovery of new drugs by the in-house R&D. So, I am not asking what is in the pipeline for new drugs anymore but, I think, the public is entitled to see existing drugs going dramatically cheaper now, after 'in-house R&D' investments are going to be dramatically lower.

Vladimir Zhukarev, Ph.D
Advanced Microscopy Consulting
Life Science and Bio-Medical Applications
‘From Image-to Discovery!’
vladimir.zhukarev@from-image-to-discovery.com.com
www.from-image-to-discovery.com

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    Adam Kallel Ph. D.

    Our CSO sounds off about drug discovery, computational chemistry and history

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