Existential Crisis in Pharma: Searching For A New Model

The Pharmaceutical Industry is in turmoil.  The loss of patent protection on numerous blockbuster drugs is imperiling revenue prospects while many of the industry’s largest players have discovered that research and development efforts do not scale, imperiling the logic underlying a great deal of M&A in the past two decades.

Reactions to changing dynamics in this industry have varied, but they are coalescing around a few central themes:

  • Acquisitions: Pfizer is a big proponent of this approach, having followed up acquisitions of Warner Lambert and Pharmacia nearly 10 years ago with its recent acquisition of Wyeth.  For those M&A history geeks: when Pfizer acquired Warner Lambert it paid Wyeth (then American Home Products) a >$1 billion break-up fee.  Not all Pharma companies have the stomach for a series of mega-deals, but many have shown a willingness to pay aggressive prices for promising bio-techs, essentially reprising T. Boone Pickens’ old strategy of “drilling for oil on Wall Street” for the pharma set
  • Rationalization: The enormous operating leverage that pharmaceutical companies enjoy when reaping the economic benefits of one or several blockbuster drugs permitted them to avoid scrutiny in the efficiency of their operations.  With revenue falling faster than costs, there is a new focus on justifying every dollar of expenditure.  Job cuts are the inevitable outcome of this approach.
  • R&D: Eli Lilly is boldly focusing on its own pipeline and publicly eschewing the option of an M&A driven solution.  While this approach might lack the sizzle of a more dynamic, headline-generating approach, the company deserves praise for charting a course focused on what it views as its core competency: R&D.

These are interesting times for an industry that very recently seemed to be at the top of its game.  Clearly the cash-rich pharma companies are not in danger of failing, but they surely must work to re-imagine their approach if they are to maintain the support of their shareholders.

About the author:

David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies and municipalities. He can be reached at 312-505-7238 or at [email protected].

In a former life David worked in R&D at several pharmaceutical companies, including some of those mentioned in this article; he is not currently a shareholder in any of the companies named in this article.

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