A couple of days ago, I happened to read the article in the latest issue of Forbes India. Titled, “Wall Street’s Drug Dealer” , this caught immediate attention for obvious reasons. The article analyses the rationale of recent global M&As like Actavis-Allergan, Warburg-B&L and Actavis-Forest and hails Brent Saunders as the hottest executive in global pharma business. The normally factual and unemotional Forbes magazine did manage to grabs eyeballs (read raise eyebrows) by declaring Saunders as the the hottest pharmaceutical executive at age 44 (highlighted box in Forbes article). While this may be true, several facts come to light. What’s even more interesting is that the combined Actavis-Allergan entity will be the 10th largest company in the industry with $ 8 billion in free cash flow and yet unprofitable on revenues of $23 billion. The new company will be the first big pharma that does not even pretend to engage itself in drug discovery programs ! This is bound to raise hackles with some of the big pharma purists of European and American origin who pride themselves as passionately R&D driven and making a difference to human lives.
For long, the industry aim was to increase shareholder value through traditional methods like
- improving R&D efficiency and productivity and launch series of new products
- targeted drug discovery programs with faster to market timelines
- increase number of approvals by the regulators,
- discover drugs for rare and difficult to treat diseases,
- build marketing juggernauts with over the line USP (Lipitor)
- manage PLC creatively through IP extension on indications, formulation label and so on (ever-greening)
- M&As.
M&As were more aggressively pursued as active growth option since the advent of 2000s due to declining drug regulatory approvals since 2006 (FDA approved just 17 in 2010 compared to 41 in 2014), declining R&D throughput and also an effective way to deploy cash reserves and avoid tax implications in recent times (Pfizer unsuccessful bid on AZ).
This has now given way to an emerging paradigm of pure financial jugglery as the primary driver of increasing shareholder value. The new normal for creating and delivering value has nothing to do with R&D. Financially nonviable or bloated costs companies are zeroed in by financial investor behemoths (Warburg Pincus) and acquired overnight. Costs are stripped out to the bone, headcounts slashed to tune of 60-70%, plants shut down to move mfg base and settlements done with the feds to ensure compliance. In a span of 2-3 years, results become visible, stock prices climb significantly and the company is sold off to another suitor. Reminds one of the legendary Fred Hassan who perfected the art of “knight in shining armour” for Pharmacia Upjohn, Schering Plough and later Bausch and Lomb. Little wonder that Brent is the perfect student of Prof Fred Hassan in his stint at SP. This has now been cultivated into a fine art and if the series of past few deals is anything to go by, it bears the stamp of Fred style. Fred is loved and revered by Wall street. No CEO has ever come close to Fred in creating the huge shareholder value at time of sell-off.
So where does this lead to? Is R&D not going to play a critical role anymore? Of course it will. As long as we grapple with newer and newer diseases and there are unmet medical needs, research and drug discovery will always remain pivotal to the drug industry sustainability and growth. What remains to be seen is managing duality of short-term, quarterly shareholder expectations and long term profitability. Again a similar situation to running a sprint vs. a marathon.
Interesting times ahead. One is reminded of the fantastic movie “The Wolf of Wall Street” where the simply brilliant Leonardo Dicaprio plays the role of Jordan Belfort. Of the several memorable quotes in the film, one stands out.
The only thing standing between you and your goal is the b******t story you keep telling yourself as to why you cannot achieve it.
Disclaimer: The views expressed in this post are solely of the author and does not have any link or connection with any individual or organization or does not attempt to establish correlation of any kind whatsoever.