COMMENT

The impact of mergers on pharmaceutical R&D

John L.LaMattina

Mergers and acquisitions in the pharmaceutical industry have substantially reduced the number of major companies over the past 15years. The short-term business rationale for this extensive consolidation might have been reasonable, but at what cost to research and development productivity?
Concerns about the productivity of pharmaceutical research and development (R&D) are becoming increasingly common in both the mainstream media and scientific literature. A range of possible causes have been identified, from more challenging therapeutic targets to excessive bureaucracy, and various approaches to address these issues have been put forward (for example, see REFS 1,2). However, the impact of mergers and acquisitions on R&D productivity is less well documented, because R&D integrations and cuts are largely done privately. In this article, it is argued that although mergers and acquisitions in the pharmaceutical industry might have had a reasonable short-term business rationale, their impact on the R&D of the organizations involved has been devastating. those of start-up companies that arose during this time, and it is likely that when a new idea for treating cancer arose in 1990, 20 companies would have initiated projects on it. Given the difficulties that are encountered in R&D, it could reasonably be assumed that only three or four of these companies would have been successful at bringing a drug based on this idea to market. Furthermore, the greater diversity of portfolios among a larger number of companies both large and small could increase the chances of finding new drugs in general. Indeed, a recent analysis has indicated that the number of new drug approvals during the past 60years is correlated with the number of companies3. Now, with so many fewer major companies involved in pharmaceutical R&D, the chances of success in the industry overall are likely to be dropping precipitously.

John L.LaMattina is the former President of Pfizer Global Research and Development, and is currently Senior Partner at Puretech Ventures, Boston, Massachusetts 02116, USA. e-mail: john.lamattina@ comcast.net doi:10.1038/nrd3514

Industry consolidation When people bemoan the poor productivity of the pharmaceutical industry at present, they often refer back to the heyday of new drug approvals by the US Food and Drug Administration (FDA): the 1990s. Indeed, in terms of the number of new drugs that were approved, this decade was more productive, with an average of 31 drugs per year between 1990 and 1999 (compared with 24 per year between 2000 and 2009), with a peak of 54 drugs in 1996. One possible contributory factor is that multiple entries in a single drug class (such as statins) were more economically viable at thetime. However, another underlying factor contributing to the productivity observed in the 1990s was the large number of pharmaceutical companies at that time. Many of the drugs that were approved in1996 originated from companies that no longer exist; indeed, out of the 42 members of the Pharmaceutical Research and Manufacturers of America (PhRMA) in 1988, only 11 (~25%) remain today (see Supplementary information S1 (figure)). The R&D portfolios of these companies, although differing in size, tended to be broader in scope than

R&D reductions From a business perspective, mergers and acquisitions are often considered to be attractive as they remove duplication, reduce costs and produce synergies. Furthermore, in the early days of mergers in the pharmaceutical industry, organizations often described them as being part of a growth story. In these situations for example, the merger of Bristol Myers with Squibb in 1989 the R&D divisions were fused. Programme overlap was minimized and new projects were added, and major R&D cuts did notoccur. This has changed radically in the past decade. In major mergers today, not only are R&D cuts made, but entire research sites are eliminated. Nowhere is this more evident than with Pfizer. Before 1999, Pfizer had never made a major acquisition. Over the next decade, it acquired three large companies Warner-Lambert (in 2000), Pharmacia (in 2003) and Wyeth (in 2009) and multiple smaller companies, such as Vicuron, Rinat and Esperion (Supplementary information S1 (figure)). Over this time frame, to meet its business objectives (a euphemism for raising its stock price) Pfizer closed
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COMMENT
numerous research sites in the United States, including those at Kalamazoo, Michigan (formerly a site for Upjohn), Ann Arbor, Michigan (formerly a site for Warner-Lambert) and Skokie, Illinois (formerly a site for Searle). It has also recently announced the closure of the Sandwich site in the UK. These sites housed thousands of scientists, and many major drugs such as atorvastatin (Lipitor), amlodipine (Norvasc) and sildenafil (Viagra) were discovered there. The same pattern has been observed after most of the mergers and acquisitions by other major pharmaceutical companies during the pastdecade. There is another key aspect to such cuts. Historically, the pharmaceutical industry has prided itself on investing more in R&D (as a percentage of revenues) than any other industry. At times, companies have invested as much as 20% of top-line revenues into their pipeline. However, Pfizer now projects that in 2012 this figure will only be 11% (between US$6.5 and $7billion). The extent of this decrease is further emphasized by comparison with the pre-merger R&D expenses of Pfizer and Wyeth in 2008: $7.95billion and $3.37billion, respectively, and $11.3billion in total. Other large pharmaceutical companies have announced similar cuts in recentyears. Thus, at a time when our understanding of the basis of diseases continues to increase substantially, the ability to exploit this information in the private sector is being compromised. It is hard to envision that R&D output, as measured by new drug approvals, will improve in the coming years based on this reduced investment. platforms, data handling or adverse event monitoring. Establishing which system to use or creating a hybrid takes substantial time for decision-making as well as implementation. It is easy to see how early-stage R&D will be slowed in such situations, as during this period which can take at least 9months generally no new programmes are started and hiring will be frozen. Undergoing one merger will have a substantial negative impact on the momentum of research programmes, but enduring this multiple times can be crippling.

Social consequences For individual employees of companies that are in the process of merging, uncertainty about their future is often high. It is hard to quantify the impact that such uncertainty has on productivity, except that it is negative, and probably strongly so in many cases. Leaders of organizations who have completed multiple mergers may express the view: Weve done this before and we know how to do it. Mechanically, this may be true, but for many employees who survive mergers, the thought of repeating the exercise is not embraced, and could prove to be numbing to their motivation. Going forward It is unlikely that the era of large mergers in the pharmaceutical industry has ended. However, as a strategy to achieve top-line growth, it has a clear flaw if the R&D engine is not growing robustly enough to keep pace, more mergers and acquisitions will be needed to continuegrowth. Not all CEOs of major pharmaceutical companies believe in this strategy; for example, John Lechleiter, CEO of Lilly, has stated his opposition to large-scale combination. And not all CEOs of merged companies believe in cutting back R&D; for example, Mercks new CEO, Kenneth Frazier, has recently stated that Merck will focus on investing in drug development to drive growth. Whether other leaders in the pharmaceutical industry will come around to the views of Lechleiter and Frazier remains to be seen. However, the experience from the past decade on the negative impact of mergers and acquisitions on R&D productivity should make these leaders pause when considering major mergers in thefuture. Such mergers should also be concerning to patients, physicians and payers, particularly bearing in mind recent cutbacks in areas of research such as antibacterial drugs and neuroscience. Industry consolidation has resulted in less competition and less investment in R&D. At a time when there is a major need for new treatments for conditions such as Alzheimers disease, drug-resistant infections and diabetes, such a trend is alarming.
1. 2. 3. Paul, S. M. et al. How to improve R&D productivity: the pharmaceutical industrys grand challenge. Nature Rev. Drug Discov. 9, 203214 (2010). Garnier, J.-P. Rebuilding the R&D engine in Big Pharma. Harvard Bus. Rev. 86, 6876 (2008). Munos, B. Lessons from 60years of pharmaceutical innovation. Nature Rev. Drug Discov. 8, 959968 (2009).

Pipeline advancement After a major merger, the rate of progress of compounds in the development pipeline seems to decrease. For example, comparing data from Pfizers pipeline updates (which are posted on its website every 6 months) before the Wyeth merger in February 2008, and in February 2011, reveals that 40% of the compounds (not including those from Wyeth) have been in Phase II development for more than 3 years, which is below the industry average (J. Arrowsmith, personal communication). Indeed, R&D seems to be especially vulnerable to the negative impact of mergers and acquisitions. Having a sense of how mergers occur in R&D organizations is helpful for understanding this impact. R&D organizations will be the last part of the companies to begin merger discussions before regulatory approval because of the commercial sensitivity of the pipeline and the intellectual property of the company. And when the discussions about integrating the R&D organizations finally occur, the initial focus is on Phase III programmes, followed by mid-stage candidates, with the early-stage discovery programmes handled last. These reviews are extensive and time-consuming, as they require careful consideration of scientific issues such as efficacy and safety data for each programme, as well as commercial issues such as potential duplication and strategic directions of the merged company. In addition, research organizations often differ procedurally in some fundamental processes such as IT
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Competing interests statement

The author declares no competing financial interests.

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