Mergers: a cost-benefit analysis

As I write this, the news has just come in that Sanofi-Aventis has called off their attempt to merge with Bristol-Myers Squibb. While I’m sure this decision is subject to change, for now I welcome this all too infrequent display of good sense in the industry. I’ve never been able to convince myself that most of these mergers are a good idea. Perhaps if I were getting paid at the rate of the investment bankers involved I would be able to work my way around to another opinion. 

On the face of it, there are some good reasons for companies to get into these deals. Combining two organisations allows the new amalgam to cut costs in marketing, regulatory affairs, general administration - all these areas and more can be smaller than the sum of the departments in the two original companies. And if the merging companies have complementary pipelines and strengths in different therapeutic areas, the new one can in theory end up with a better research portfolio. In practice, though, the fit generally requires quite a bit of sanding and hacking - after all, there are only so many areas that most companies do drug discovery in, and some overlaps are inevitable.

That brings me to the real problem I have with pharma mergers - the effect that they have on research. The accountant’s view is that research is just one component of a pharmaceutical company (and an expensive one, too). The profit centres are much more interesting and exciting, right? Well, perhaps it’s just the researcher in me, but I think that everything in the industry comes down to discovering new drugs. All the efficiencies of the newly merged company are useless if there’s no money coming in. And all the mighty marketing power in the world is useless if there’s nothing to market. 

Of course, one or both of the merging companies have their current big sellers, so why not use the new organisation to make the most of them? That’s fine for the time being. But patented drugs are wasting assets, and every company in the industry, no matter how much money it’s making from its current blockbusters, hears time’s winged chariot gunning its engine and coming around the curve from behind. In fact, now that the merged company is larger, even more new drugs are going to be needed than before. Breaking down the two former vehicles and making them into a big new one might give you twelve cylinders instead of six - but what good is that if the fuel tank isn’t any larger? 

That’s the problem. It’s long been my belief that research productivity is the one key thing that doesn’t scale as a company gets bigger. In organisations of any size, adding twice the number of scientists will not necessarily allow you to discover twice as many drugs. The awful truth is that no one knows what will allow you to discover twice as many drugs.

And since the new company is larger, often with more research sites, there are now more oversight committees and layers of management to make sure that everything is being coordinated. After a certain size is reached, just keeping everyone from stepping on each other’s toes can take up too much of the time and effort that should be put into trying new ideas. 

Pointing this out will do no good - at least, it hasn’t in the past. Companies feel a lot of pressure to do something big and dramatic with their funds, and saying that you’re going to plough still more money into research and hope to invent your way out of trouble doesn’t excite shareholders, or investment bankers, nearly as much. Mergers it’ll be, then, for the foreseeable future. 

Derek Lowe is an experienced medicinal chemist in the pharmaceutical industry, working on preclinical drug discovery.