The Financial Times has an article today on the cutbacks taking place in the pharmaceutical industry. It conveyed concern that cost cutting might interfere with innovation:
As one industry observer cautioned yesterday: “It’s hard to tell at what point you stop cutting the fat and start cutting the meat.”
That may be true, but despite the recent cost cuts I can state with confidence that in most if not all big pharma companies “the meat” is still safe.
But maybe rather than worrying about preserving the integrated big pharma companies it would make sense to consider breaking one or more of them up.
Big pharma considers itself to be highly innovative –discovering new drugs, developing them, registering them, manufacturing them and selling them. Unfortunately, if you examine the marketed products of almost any big pharma you will find very few drugs that made this whole journey. The majority were in-licensed, and many of those at a late stage of development or after they were already marketed.
What if a consortium of private equity firms decided to put their money to work on a medium large pharma –something with a $30-80 billion market cap like BMS, Schering Plough, or Abbott? The companies’ cash flows should be able to support a lot more debt than they currently carry.
What could investors do to maximize value? Here’s one possibility:
First, some asset sales and closures
- Close down all basic research centers (or sell them if a buyer can be found)
- Out-license all drugs in pre-clinical and clinical development, or break the R&D group into therapeutic area-focused units and sell them to other big pharmas anxious to fill their pipelines
- Divest some manufacturing assets and run the remaining plants at 3 shifts per day, 7 days per week –increasing asset utilization and maintaining the tax advantages
- Reduce administrative functions consistent with the reduced complexity of the business and with a leaner, debt-laden organization
Then, focus on the remaining functions
- Continue to promote currently marketed drugs –but review sales force effectiveness and marketing spending to optimize it
- Invest in adherence tools to expand the sales of existing products
- Continue a limited development organization to create line extensions to boost sales and extend patent life
- License in marketed products to keep the portfolio full
This could work well, especially for the first player that tries it. There should be a large set of willing buyers for pipeline products in particular.January 24, 2007