Too Big To Fail?

Here’s my From the Editor column from the March issue of my magazine. Enjoy:

Too Big To Fail?

The pharmaceutical industry is experiencing a deepening productivity crisis. The industry’s preferred escape mechanism from this predicament has been to increase investment in current business activities — primarily R&D and sales — to sustain productivity levels or, ideally, to exploit economies of scale. This has been implemented through organic growth of critical resources and/or M&A. The fact that productivity continues to decline after a decade of vigorous growth in investment levels, and against a background of increasing company size, bears testament to the fallibility of this strategy.

We published those words in the June 2002 issue of Contract Pharma, in an article called Networked Pharma, by Jennifer Coe of Datamonitor, which discussed “innovative strategies to overcome margin deterioration.” I cited the passage above in that issue’s From the Editor page, as I argued that “economies of scale” shouldn’t be a compelling reason for $10+ billion companies to acquire $8 billion companies.

A month later, Pfizer bought Pharmacia for $60 billion.

Almost seven years later, the industry is still experiencing that productivity crisis. And Pfizer just bid $68 billion for Wyeth.

I admit that I was naïve in the ways of business and industry back in 2002, but I have to say that my opinions on mega-mergers haven’t changed much. As I wrote then:

My problem with mega-mergers is that, after the pipeline has been temporarily sated (although it remains to be seen whether the original problems with the pipeline are going to crop up again), the buying company is left to integrate tens of thousands of workers, reprioritize drugs in development by both firms, and meet unrealistic sales and savings projections. Typically, this last part is only accomplished by jettisoning a portion of those thousands of workers, creating more short-term disarray.

Sure, it’s possible that the Pharmacia deal would have worked out for Pfizer had Cox-2 inhibitors (like Celebrex and Bextra) not been hammered by Merck’s Vioxx withdrawal, but we can’t prove a counterfactual.

So now, as every major pharma company is slimming down, reducing salesforce, closing or selling off manufacturing sites and shuttering labs, the industry’s biggest player is doubling down by acquiring a competitor that has strengths in small molecule R&D, vaccines/biologics and consumer health, but also faces patent expirations and an R&D slowdown of its own.

There’s been plenty of speculation from analysts and industry figures as to why Pfizer chose to pursue this type of deal, rather than going after small biopharmas and tech-based startups. Is it for the R&D model, the current revenues, the vaccines, the lower-margin-but-more-consistent consumer business? Is it to achieve even greater size? Frankly, I can’t see much value in being able to say, “We’re #1!” at a time when “too big to fail” has become an epithet.

In the acquisition announcement, Pfizer stated, “It is expected that no drug will account for more than 10% of the combined company’s revenue in 2012.” Given that Lipitor, which currently accounts for 25% of Pfizer’s sales, will be falling off the board by 2011, it’s possible they could have achieved this goal without adding Wyeth’s roster of products.

A lot of things have changed since 2002, but I still think that mega-consolidation — in any industry — rapidly transitions from “too big to fail” to “too big to succeed.”

—Gil Y. Roth