Last week the big pharma companies reported earnings and the news contained a minimum of cheer. If anything, most of the sessions revealed companies that resemble Wiley Coyote, the cartoon character who runs off a mountaintop but keeps churning his legs in midair without falling, until he looks down and sees the nearest ground is 5,000 feet below.
For some of them, gross revenues declined but earnings rose due to cuts in R&D and personnel. Others even reported earnings dips due to one-time events. In almost all cases the financial projections for the next two to five years were bleak. One major pharma in this area, Merck, even announced that they are suspending EPS growth guidance.
The equity analysts who follow these matters declared that Pfizer and GlaxoSmithKline (GSK) are pursuing one overriding strategy for the future while Merck is going in the opposite direction. According to this facile viewpoint, the first two companies seek to please investors and bolster earnings growth by cutting expenses for research and promotion -- including personnel cuts -- and by using cash flow to buy back shares and raise EPS. Merck, on the other hand, stated it intends to use cash, including "synergy" savings from the Schering-Plough acquisition, to maintain a high level of R&D spending.
These appear as alternative directions at Pfizer and GSK, contrasted to Merck, but to call them opposing approaches or strategies mistakes appearance for what's real and important. The differences here are those involving the experience and acumen of the respective CEOs.
Once a year every large pharma company conducts a "product equity review" where managers across a range of functions assess the many compounds in development. The effort results in decisions about which ones the company will continue funding in the hope of gaining approval for launch, and which ones will go to the lumber room. Managers in finance and marketing, during these sessions, focus on costs and commercial prospects while many of the researchers, both clinical and preclinical, often resemble stage mothers of the respective compounds on which they work. Researchers often invest substantial ego and career ambitions in "their" compounds. When marketing and finance emphasize a compound's risks or belittle its sales prospects, they effectively tell the researcher he/she has an ugly baby.
Managing this process is one of the most important things a pharma CEO does. It constitutes a major reason the directors pay their top executive seven figures each year. In the case of Pfizer, the company for several years maintained research activities in nearly every emerging therapeutic line. This made parsing the compounds according to their various prospects for research and commercial success a relatively straightforward task. What's notable here is that the CEO overseeing the research funding battle at Pfizer is a 57-year-old Brit, Ian Read. Read started working at Pfizer more than 30 years ago and during his long rise to increasingly responsible positions, he doubtlessly developed his own coterie of reliable confidants. It's likely he also acquired the confidence to treat some of the recommendations from his research scientists with the cavalier dismissals they occasionally deserve.
GSK's chief executive, Andrew Witty, is acutely aware that his company's ability to develop clinically significant new drugs has been disappointing investors for a decade or more. Beneath the unction and manufactured enthusiasm for auspicious compounds that senior executives regularly present to investors, Witty's actions show that he is at least realistic as far as accepting GSK's limitations and developing plans to accommodate them. Accordingly, he has tacitly suggested that if GSK is not adept at developing new drugs to substantially advance the standards of care, then the company will make money by acting as an investor, financier, marketer and supplier of sundry services for those companies that are up to the task. In such a case, cutting R&D, out-licensing compounds, and spinning off operations while retaining some equity are also straightforward matters.
The product equity review process does not differ radically at Merck except that the newly installed CEO, Ken Frazier, spent most of his time there as the company's legal counsel. His claim to fame did not consist of launching any innovative products or making any remarkable deals. Instead his star turn came from leading Merck's legal defenses against thousands of lawsuits over Vioxx that could have cost the company as much as $50 billion. So as CEO in charge of planning a course for the near future, Frazier deferred to his R&D leadership, a practice similar to a teacher grading her students by asking their parents whether their children are well behaved. The result is that Merck's products in development resemble the residents of Garrison Keeler's Lake Woebegone -- all the women are strong, all the men are good-looking and all the children are above average.
Strategies are sometimes better judged according to the men who make them instead of their relative chances for achieving success. In the case of Pfizer, GSK and Merck, the important differences are those among men rather than strategies.
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