A decade ago, big pharma underwent the first pangs of restructuring, hoping that tried-and-true M&A would achieve faster increases in shareholder value than might have been anticipated if the individual companies had carried on alone. This was followed several years later by a series of mergers designed to create industrial-scale R&D programs in the age of genomics.
Now a third wave of restructurings is moving in the opposite direction based on the theory that better R&D productivity will be achieved through smaller units.
This year has seen the pace accelerate across the pharma spectrum. Roche, one of the value creation leaders, hopes to free itself from a self-imposed stifling of its discovery engine, while Pfizer Inc., suffering from indigestion from its spate of mergers and acquisitions in the past decade, late last month signaled a major overhaul of its R&D organization.
Neither of big pharma's first two restructuring efforts ever had much chance of working. The wave of mergers that started in the mid-1990s was driven largely by the desire to control channels and markets in the era of managed care, based on the belief that pharma's problems were a consequence of the fragmented nature of the industry, in which no one company had more than a 5% share of the global drug market.
Although these market-based mergers provided one-time benefits through cost-cutting, they only exacerbated the problem of how to create a consistent pipeline of drugs big enough to drive growth on an ever-larger revenue base.
On the other hand, R&D-based mergers missed two key realities for the industry: biology by its very nature slices both discovery and development into relatively small pieces, while the attempt to gain economies of scale in R&D may have actually stifled innovation owing to the increased need to manage enormous and often geographically diverse research groups.
The latest effort is at least more credible, as it starts to get at the creativity issues underlying drug discovery to create smaller, more accountable operating units that can still draw on the advantages of big pharma scale and resources. The challenge will be to make entrepreneurial islands work in the context of large, highly politicized and bureaucratic organizations.
At this scale, the timeline for demonstrating success is still measured in years. While the first moves in the rationalization of pharma R&D began at the beginning of the decade, the outcome is no foregone conclusion. Although pharma - and biotech - are beset with external pressures, the P/E ratios of the pharma group suggest investors are still waiting to see evidence from the value creation side of the ledger.
During the late 1990s consolidation, BioCentury's "Big Thinkers" series challenged the notion that either vertical or horizontal M&A would yield better returns for pharma's shareholders, asking whether investors would be better off putting their money in the proposed GlaxoSmithKline plc or in the BioCentury 100 index of the top biotech companies - which at $80 billion had a combined market cap that was about half the $165 billion of the combined valuations of Glaxo and SmithKline (see "The Big Thinkers Syllabus").
The answer is pretty stark. In the intervening