Sunday, May 4, 2014

Pfizer’s bid for AZ - the consequences will impact the industry long term as well as the UK science ecosystem


As reported in the Independent, Dr John LaMattina understands because he has led pharmaceutical R&D, in his case in Pfizer. Without this insight the real consequences of the consolidation of the pharmaceutical industry seems not to be fully appreciated. The truth is that this is a hugely complex issue with elements that are unique to the industry that cause those outside, even captains of other sectors, to fail really get it.

I too have led R&D and appreciate the issues – let’s briefly examine them...

M&A justification purely financial:

The purchase of AZ by Pfizer is a pure play financial transaction.  The large pharma are so huge that only multi-billions of $ revenue each year will sustain their market value.  The value that is supported by major institutional investors who expect steady returns – and don’t pension investors all benefit? This transaction will most likely go ahead – everyone has their price, but for the science base of the UK and the pharmaceutical industry pipelines of the future the real price is too high and no real solutions exist amongst the pledges being offered by Pfizer (or any large acquirer in existence today). Pfizer must look at sustainability more than their immediate financials.

Consolidating companies were pioneers & took years to build

During the 1960s through to the 1990s the ‘Fully integrated pharmaceutical company (FIPCO)’ model emerged. Glaxo, Beecham, ICI/Zeneca……all built on their early research roots to extend their internal activities and departments to shepherd their products through to the marketplace.  The early companies were pioneers and they built unique internal capability to develop the products everyone has come to rely on to retain our family units.  The next generation of companies is not being built in the UK on a sufficient scale to replace those being lost.

Consolidation loses value in R&D which is not compensated for by size

Many subsequent mergers (between the plethora of early companies) later have proven that creativity and productivity in R&D is inversely proportional to the size and maturity of the organisation. The reasons for this are an essay in themselves, too extensive to discuss here but are consistent with the teaching of Utterback and Abernathy (ref…). 

Consolidated companies need larger pipelines and seek more in-licensed products

The larger the newly merged companies become, the greater their need to fill their pipelines with new products – so a rise in in-licensed products is seen and more are required. These come from small biotechnology companies which in themselves are founded on early inventions and discoveries from academia. So the mega companies of today, such as will be a joint AZ/Pfizer entity will only survive long term with products originating from outside the company.

Cycle time of R&D is long and relies on a vibrant ecosystem

Here in lies the real issue. The R&D to Commercialisation cycle of pharmaceutical products takes around 25 years. Companies need more products and need them faster.  The presence of an extensive and vibrant R&D ecosystem in the UK is crucial to provision of this pipeline. Yet each new merger results in the closure of long established R&D sites, with a corresponding and overnight massive loss of value. The value and expertise that has taken 20+ years to build up is gone in an instant and the emotional heart and then brains of these sites are actively disengaged and separated.

The R&D base and investment has suffered long term erosion

Large pharmacos had started cutting internal R&D some years ago.  Once the human genome was sequenced there was a realisation that new discoveries and inventions were possible which would change the face of medicine. New examples emerged in smaller more nimble organisations and the large pharmacos which had become rich, fat, sluggish and unsuited to the adaptations required to recognise and exploit the new potential also failed at time even to recognise the new wave of medicine. At this time shining examples of a new companies which had been beavering away working with new modalities (i.e.Genentech, Amgen) were suddenly appreciated has the next pioneers with the drugs to match the reputation.

Reducing the large pharmacos in the UK to a remaining few is a serious blow for our future production of the next generation scientists and products.

The reduction in FIPCO internal R&D resource was heralded as being inevitable and ‘a good thing’. Strategic outsourcing to reduce internal bulk was discussed and became a new way of life. A significant situation then hit each one of the established pharmacos, each was facing a patent cliff. In turn each company reduced internal R&D budgets, driving outsourcing and downsizing and large merger transactions looked good on the basis of strong consolidation and synergies. Now the number of large companies is reduced to so few through, there is too great a concentration of resources being channelled through a few entities which completely alters the vibrancy of the external ecosystem. A single entity investing $200m in the UK will make entirely different choices to 10 companies each investing $20m. The commitment we need to extract from Pfizer is to understand fully this issue and to take some responsibility for ensuring the health of the UK ecosystem it is depriving of one of its home grown companies. We need Pfizer to sustain their combined company future R&D investment in the UK and we all need to realise that even this will not sustain the vibrancy of the past and provide the next generation of translational scientists and new products.

Condensing this to three relevant points:

Early R&D innovation never benefits from being in a bigger organisation - there is an entire literature on this - small fast moving somewhat chaotic groups spawn the new innovations.  So the bigger the Pharma the more they rely in the scientific ecosystem around them to feed their pipelines.

The presence and investment in R&D in the UK in the past has spawned the current generation of scientific leaders and numerous innovations and will be reduced to a critical level without some smart plans and investment.

The third relevant point is our industry works on a 25 year cycle from inception if an idea to final product (as a minimum). Large companies taking their investment elsewhere on the basis of cost reductions will not see productive returns in the near term (the 25 year rule will reign). The UK has a strong experienced science base with a proven track record of innovation.   So for the successful future of UK bioscience we need a Pharma R&D base here. The huge Pharma giants need their pipelines  feeding and their commitment to the UK will be all the stronger if they believe it to be a sustainable source of innovation for them.

Unless the promises made by Ian Read to David Cameron are binding Pfizer could pull out of the UK in 5 years and the whole cycle of invention, innovation to Products on the market will be broken.   AZ and GSK are this country's only real hope of sustaining the scale of investment that will make the difference for this current generation of scientists and their commitment has to be here for the next 25+ years. Pfizer have a US mindset and no allegiance to the UK.  Corporations have short memories and financial drivers.  Do the financiers really understand this? We must keep explaining……..

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