Here's what the FT had to say about pharmas and Biotechs:
Merger: Drugs hit gene gridlock
SATURDAY FEBRUARY 7 1998
Driving brains not profit, is the task facing Glaxo and SmithKline, says Daniel
Green
There can be nothing more frustrating for a Ferrari driver than getting stuck in
atraffic jam. That is what has happened to the drugs industry, and the
proposed œ100bn merger between Glaxo Wellcome and SmithKline
Beecham is an attempt to get the traffic moving. It is a risky strategy because it
involves people rather than mere money.
Glaxo and SmithKline are prepared to take that risk even though, by the
standards of any other industry, they are enormously rich. The combination
would be a behemoth with annual sales of œ17bn, employing more than
100,000 people and, if City analysts are to be believed, making œ5bn a year
in pre-tax profits early next decade.
Why should the rich take risks? Because they have a problem that could
seriously damage their wealth if their rivals solve it first. The problem is that
their gridlocked Ferraris - the glittering research centres and sales forces
packed with PhDs - cost billions of pounds a year. If only there was a way
they could go faster . . .
Start with sales. Drugs are tested through clinical trials that should give an
objective evaluation of how good they are. They do not. Patients are different
(do you prefer aspirin or paracetamol?) and trials are different (should you
measure how quickly your headache goes or how long before the next one
starts?).
The bottom line is that doctors and patients are eminently persuadable about
medicines. The more sales people there are on the road, the more drugs are
sold. And anyone who has watched US television in the past three years will
have noticed that drug companies have discovered television advertising.
The Glaxo SmithKline combination would be the biggest drugs company in the
world, able to afford a huge sales force, negotiate for the best advertising
slots, and sell more.
The R&D jam is not harder to understand, but the description takes a little
longer. Seventy years ago, new medicines were discovered with what
scientists call "bucket chemistry". Plants and soil gathered outside the factory
or on a seaside holiday would be tested on animals and people in the hope
that some medical effect would turn up.
If something looked promising, chemists would try to make a similar
compound to see if it worked better, or hurt less. It was a slow process, but
aspirin and penicillin were high spots. After the second world war, the doctors
moved in. They wanted to understand how a disease worked before looking
for a drug to treat it.
The great pioneer was ICI's James Black, who studied how adrenalin affected
the heart in the 1950s. He found chemical "receptors" for adrenalin and
suggested that a drug might occupy the receptors and keep the adrenalin out.
Knowing roughly what to put in his bucket, and what to test it on, led to a
group of best-selling drugs to treat high blood pressure. These beta-blockers
helped bring Black a knighthood and a Nobel Prize.
The Black model is still how drugs companies work. The difference is that
understanding how diseases work is largely about studying genes, and finding
the key to fit the genetic lock involves computers, miniature robots and finding
people who understand how to apply them in molecular medicine.
In the past five years, SmithKline has built a Ferrari of genetics research. It
has identified thousands of pieces of DNA, the chemical that holds genetic
material, and probably has more genetic information than any other company
in the world.
The trouble is that knowing chemical structure is just the start. A gene is not a
medicine. A gene is something that makes a protein in the body. A disease
may start when a gene misbehaves. But how, where, when and why the gene
does what it should not remain to be answered.
There are so many possibilities that SmithKline has offered some data to other
drugs companies in the hope they get somewhere.
Glaxo has a solution. It is one of the top companies in the computerisation of
bucket chemistry which goes by the more high falutin' name of combinatorial
chemistry. It is a way to put together pieces of molecules in different ways
very quickly. Specialist combichem companies in the US claim to be able to
make a million different compounds a week, and Glaxo is probably not too far
off that number.
But Glaxo's Ferrari is also stuck in a jam. How do you test so many potential
drugs before the next million come through the door? Glaxo - and about every
other drugs company - have part of the solution: banks of robot arms working
day and night testing molecules against targets like James Black's adrenalin
receptors. What Glaxo needs is many more targets, and that is what
SmithKline's genetics research is producing. It sounds such a sensible merger,
then. Not according to some, such as Merck in the US and the UK's Zeneca.
They may yet change their minds but for the moment can point to lots of
problems.
First, the available evidence suggests that people are more productive in small
laboratories. There are more than 2,000 biotechnology companies, and Jan
Leschly, SmithKline's chief executive, once said: "Biotech companies can turn
geniuses into millionnaires. We can't."
Second, there may be more efficient ways to clear the traffic jam. How about
learning more about what the genes and molecules do before doing millions of
potentially useless screens?
Third, and most importantly, is the damage big mergers can cause. Michael
Standing, a vice-president with management consultancy Gemini, points out
that Glaxo has a market valuation of œ60bn. Its annual accounts show its
assets are worth less than œ2bn Much of the difference lies in the value of
people's ideas, techniques and skills. Standing says that both companies could
get the financial side of their merger perfect, but if they mess up the human
side, they risk destroying most of their value.
We are likely to hear a lot over the next few weeks about the finances of this
proposed merger. The figures will sound convincing. But investors considering
the prospects of these companies and the alternatives should remember that
the numbers are a small part of the story.
People who buy cars for their theoretical top speed sometimes find that a
people-mover would have been a better idea. |
