A Season in Financial Hell - Pharmaceutical Executive


A Season in Financial Hell

Pharmaceutical Executive

Gary Pisano
Gary Pisano
Professor of Business Administration,
Harvard Business School,
author of Science Business

We've been down the megamerger road before, and it hasn't worked. I can't think of one company, other than Novartis, that was better off for having merged. The buyers always say the same thing—"there's synergy." But they rarely produce it.

Even Merck, which has avoided big acquisitions until now, went for it. Their merger was motivated by Schering's pipeline. But the market presumably values the pipeline reasonably fairly, so there's really no free lunch. In fact, we know that people tend to overpay for mergers, relative to their value. So you immediately put your own shareholders in the hole. They've already overpaid for stock that they could have bought at the market price, usually for 50 percent less. So now you've got to do 50 percent better, just to make your shareholders whole.

You can cut costs, but it's a one-shot deal. And everybody knows what that means: laying off a lot of people. So now everybody in the organization, at all levels, is thinking about how to keep or enhance their position. They're not thinking about "How do I develop a new drug?"

Now Pfizer has $70 billion in sales, which means it has to add, say, 10 percent annual growth. Think how many drugs Pfizer needs to launch to generate $7 billion in extra sales. Seven blockbusters—in one year. But these guys can't even do one or two.

The Big Pharmas should be acquiring companies that do things differently from themselves, not more of the same. If I were advising Roche, I would have told them to leave Genentech exactly as is with their 60 percent share, and take the $48 billion and go acquire a dozen innovative biotechs—one of which might be the next generation's Genentech.

I assume that Roche is aware that the gold mine at Genentech isn't just Herceptin and Avastin, but the management team that created all that value. The power of Genentech is that it's very well integrated among research, early development, clinical development, manufacturing, process development, and marketing. If Roche goes in and decouples, and starts saying, "Genentech, you're just going to be a research or early development group," they will destroy a lot of capability.

Sylvie Gregoire, MD
Sylvie Gregoire, MD
President, Human Genetics
Therapies Business,
Shire Pharmaceuticals

We can't avoid these three megamergers. It might become worrisome if the trend continues [to the point] that there will be just one big European and one big American pharma—like other industries where such large consolidations occur. Whether that's good for innovation is unclear.

I'm not sure that blockbusters will drive future growth in the industry. It might be personalized medicine and smaller total products—$300 to $500 million, not $3 to $5 billion. How you meld an extremely large infrastructure with focusing on niche products is also unclear.

The current economic crisis will have an impact on sales—for example, on which products get on the Medicare and Medicaid formularies and how much they cost. The uncertainty creates a lot of fear, from an investor's perspective, about what will happen to this industry, and you can see how we follow the trend in terms of stock price.

However, the worst part to this crisis is the fear that exists, and all the sources of novel products that have been completely shut down as a result. VCs are not investing in small start-ups. No one wants to take any risk. With the financial markets closed, it's harder for even midsize pharmas to raise cash in order to do a good acquisition. And that will contribute to the drying up of the industry pipeline, creating a further lull in the innovative cycle.

At Shire, we believe that the quality of the revenues and the risks associated with those revenues is better handled by diversifying, and therefore not completely dependent on a particular territory. If some reform occurs in the US and the majority of your revenues are from the US, that's an issue. That's why our goal is by 2015 to have 25 percent of our revenues coming from outside the US, Canada, and the big five European countries.

It's a time of global change and turmoil for our industry, but that was happening anyway, before the economy tanked. The added challenges force us to focus on doing it better. We should see that as opportunity, not the death of innovation.


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