The sweeping biotech business model

R&D has been replaced with acquisitions. The latest is J&J’s deal to buy out Momenta for $6.5 billion. This week alone Sanofi, BMS, and other big pharma companies have spent billions on the purchase of smaller, promising companies who have drugs that could lead to happy investors.

Drug companies have slowed their stock buybacks after the Covid-19 crisis and spent their money instead on buying each other. This, however, is a symptom of a larger crisis: the failure of big pharma R&D.

We need to ask why smaller biotech firms can develop so many new drugs while the bigger companies flounder. Is it because smaller companies are more nimble and don’t have to deal with big pharma bureaucracy? Or are the people who can think outside the box leaving big pharma?

Along with the M&A activity is another disturbing trend. A lot of big pharma people are joining smaller biotech companies because of the promise of a huge payday. Executives at these small companies often leave with diamond parachutes that ensure they will never have to work again and they’re taking talented employees with them. But, it doesn’t always work out well for lower-ranking employees.

Laurie, a close friend of mine, left a good job with Pfizer to take a job with small biotech in Cambridge as a Director. For a year she often worked ten-hour days and answered email on weekends. When her company was recently acquired her boss got a multimillion-dollar payout while she got very little. “I joined with the promise of working for a small company where I could really make a difference”, she said. “I knew it was risky but the hiring manager said that if we were bought we would all be taken care of. I know now that was not true. I came away with enough money for maybe half a year while my boss just bought a huge house out West and paid cash for it. In the end, he took care of himself and hung us out to dry”.

Business can be a cold environment especially when employees give so much and are not fairly rewarded for all their hard work. I know, nothing in life is guaranteed but all this M&A activity means high drug prices as drug companies refill their bank accounts.

The pattern of M&A indicates to me that the pharma business model of always looking for the next big blockbuster needs to be reexamined. Drugs coming off patent means a loss in revenue and a thumbs down from Wall Street. In many cases, the next new drug is another “me too” drug that may have slightly better metrics than current ones on the market.

Ever since the first blockbuster drugs arrived Pharma seems to be addicted to bigger and bigger molecules that bring in a lot of money. It’s become more of a business and less about patients. While we await Pharma to save us from the pandemic so we can return to a normal life we should also remember that their is billions waiting to be made which in turn is going to lead to some very happy investors.