Given the huge costs of bringing a drug to market, and the ticking clock of a drug’s patent protection, it is easy to understand Big Pharma’s current fascination with mergers. A case in point is the recently abandoned deal between Pfizer and UK-based AstraZeneca. Among other things, Pfizer was interested in the considerable tax savings of reincorporating in Britain; gaining access to cash “parked” overseas; and the many drugs in AstraZeneca’s developmental pipeline.
However, it was no secret that Pfizer would have cut R&D budgets, as well as employment. Indeed, on May 13, Ian Read, Pfizer’s chairman and CEO told members of Parliament that “We’ll be efficient by some reduction in jobs. What I cannot tell you is how much or how many or where. I do not expect the combined [R&D] budget will stay the same. I expect it to be lower. How much I cannot say.”
And this is not a new phenomenon. In a Bloomberg Business Week article from July, 2009, entitled “Mega Mergers Can’t Cure the Pharmaceutical Industry,” the authors note that “[M]ergers have typically contributed to declines in R&D productivity.” A report issued this month by Mizuho Bank goes further, and presents data supporting its finding that several Big Pharma firms have significantly cut R&D expenses following mergers.
Former FDA deputy commissioner, physician, and consultant Scott Gottlieb laid it out a few weeks ago in a Wall Street Journal piece entitled “A Biotech Lesson for Big Pharma Mergers: Never break up research teams that may be on the brink of a pioneering drug.” He documents both the perils of breaking up strong R&D teams, and the success stories when they stay together—including Genentech’s breast cancer drug Herceptin.
Which brings us to the proposed hostile takeover of Allergan by Valeant. You could hardly find two more different pharmaceutical companies. Valeant is a highly leveraged company whose growth strategy involves buying companies and cutting expenses. Allergan, on the other hand, is relatively debt free, and concentrates on new product development.
As described on Seeking Alpha, Valeant intends to fund this takeover by assuming at least $15 billion in new debt. As the anonymous author puts it “Allergan doesn’t have a mortgage, but Valeant is going to take out a mortgage on Allergan’s assets. Valeant already has $17 billion in debt of its own, so the proposed combination would have a total debt of $32 billion.”
Famed financial commentator Jim Grant [Grant’s Interest Rate Observer] doesn’t buy into Valerant’s claim that its acquisitions will bear fruit. “We don’t see the data to support the contention.” One of Grant’s analysts—referring to sales results—says “The longer a business is under a Valeant umbrella, the worse it performs.” Grant also points to Valeant’s unusual accounting and reporting practices.
As to R&D, listen to David Pyott, CEO of Allergan: “If the Valeant model is applied to our business, it would result in a rapid deceleration of our strategy. If I were to imagine where we’d be [after a takeover by Valeant], I’d say we’d see quite a dramatic fall in our growth and a cancellation of R&D.”
To be sure, the financial media is full of commentators dead set against the proposed Valeant/Allergan deal. Notably, though, plenty of opposition has also come from patients and health care providers. According to Allergan, more than 500 physicians, nurses, patient advocacy groups, and medical associations have expressed their appreciation for the Company’s many contributions in the fields of research and development, product innovation, market creation, and physician support and services.
Why? Because they understand the painful, real-world impacts that can result from a buy-and-slash-costs management philosophy.