Effect Measure

Since we don’t do much health services posting around here I sometimes forget how terrific the blog Health Care Renewal is. It’s always interesting. Sometimes it brushes against things we are concerned about here and last week there was a post with some good links about GlaxoSmithKline, a Big Pharma company active in influenza antivirals (Relenza) and pandemic vaccines. The companies of Big Pharma represent some of the most profitable on earth, making so much money that normal rates of profit, like what you might get from defense contracting, are considered failure. They justify their obscene profits with the argument that they must invest heavily in research and development if we are to get the benefits of the magic wonder drugs that will cure cancer, heart disease and make our lives better (but if you have an erection lasting longer than four hours, call your doctor immediately). In truth these big companies don’t usually do their own research and development. They license the products of small biotech companies and market them. That’s what happened with Relenza, the flu antiviral zanimivir, that GSK bought the rights for. But when profits dip to semi-obscene levels companies like GSK need to tighten their belts to keep the shareholders and Wall Street happy. When they do, it’s instructive to see them do it in the least valued part of their operations — research and development:

Now the company is cutting their own head count in research, to what sounds like a pretty serious degree. There have been substantial cuts at their sites in Italy and the UK, and the Research Triangle and Pennsylvania sites are getting it even harder, from what I’m hearing. Some chemistry areas are losing more than half their people. (Derek Lowe, In the Pipeline blog)

Reports are that some GSK sites are axing 40% of their research personnel. If the high price of drugs is because of deep and risky investment in research, why would this be the first place for deep and hard cuts? The obvious answer is that these companies are not in the business of making drugs. Drugs are just a dollar’s way of making another dollar for GSK. It doesn’t need a healthy science effort because it is cheaper to outsource research to small biotech companies. That way you can scarf up the winners, vastly decreasing your risk. Is this good business? Depends on your point of view. It’s bad for the public but pretty good for shareholders and Wall Street, if that’s what it’s about:

The pharmaceutical industry is indeed in sad shape. Why this is so is no mystery.

Mismanagement in such a complex industry by people often seemingly more interested in short term profit and their own personal gain, and in kissing the ass of Wall Street instead of long term goals of actually discovering, developing and marketing innovative new drugs and advancing the frontiers of science, is apparently a feature of the landscape.

While there are many rationalizations about why we have such a situation, and while some of the rationalizations contain many reality-based truths, you’d be nuts to believe such an arrangement could actually produce good results. (HC Renewal)

Nuts if you believe good results means good drugs at reasonable prices. But GSK doesn’t believe that. That’s how it keeps its sanity. And how competent scientists lose their jobs.


  1. #1 stu
    June 17, 2008

    The pharma companies are businesses like any others. There is no obligation for them to conduct operations in way that pleases anyone in particular. If the employees get laid off, they have to find other work. BTDT, although I have always left before the place implodes. Am I missing something? Are you suggesting that pharma should be nationalized to improve the access of the people to drugs?

  2. #2 Anon
    June 17, 2008

    Pharma companies have only a few “core competencies”; drug developement processes, drug production processes, marketing and branding, and operations. They might be cutting costs in the short term by offloading the R&D process to smaller companies but they then become dependent on them. They are doing the same thing with drug production by contracting out to have this done in developing countries. If you are not a fan of large pharma, you should probably applaud this news as it signals the weakening of the organization. It is unfortunate for the scientists, but as the previous post suggests, they will find work, probably with the smaller firms that are doing the interesting, innovative drug discovery activities.

  3. #3 revere
    June 17, 2008

    stu and Anon: My problem is that drug companies justify their exorbitant profits on the grounds they invest in risky R&D. They have successfully used this myth to justify the FDA preventing people from going to Canada for cheaper drugs. Joe Lieberman makes this phony case all the time. If they are just a business (which they are) then they should submit to the market and not complain when people go to generics or Canada. I agree with you there is nothing special about Big Pharma. They are just like soap companies, except more profitable. That was my point.

  4. #4 traumatized
    June 17, 2008

    Wait, this is mismanagement or just a manifestation of the drying up of the drug discovery pipeline?

  5. #5 F Fulmer
    June 17, 2008

    traumatized writes:

    Wait, this is mismanagement or just a manifestation of the drying up of the drug discovery pipeline?

    No. Pharma can’t even reach the low hanging fruit anymore because midgets can’t reach that high, and the midgets fired all the Giants whose shoulders they once could stand on.

  6. #6 stu
    June 18, 2008

    OK on that, it wasn’t clear from the post. They can’t justify special treatment from imports if they can’t demonstrate a compelling reason why they would be harmed by lifting import restrictions. But, that’s a different animal from their internal business practices. Just normal and customary American capitalism, I’ve seen it up close for so long it doesn’t even register. You should have seen the typical pre-Sarbox start up, you and I would call it fraud except for the fact that it was fueled by clueless investors who throw their money away on risky adventures. If nobody bought stock in poorly run companies, they would not exist. You just have a lot of bad practices and executives skimming off stock here in the US, it’s the seamy side of business. I work for a foreign company (European), and it is much, much less focused on the bottom line. But, it also can miss the boat when things change. But I digress.

  7. #7 Anon
    June 19, 2008

    Hey Revere,

    I guess I agree with your follow-up as well. I just guess that three things are anti-competitive here. One is, as you suggest, markets are being proped up by FDA biased regulations. Second, drug companies do not price their products for the open market (i.e., different pricing based on contracts with PBMs and health plan formularies, foreign countries bargain for best prices). And, finally, there is little “real” competition among drugs – the payer is not the prescriber is not the consumer.

  8. #8 miso
    June 19, 2008

    Perhaps a more in-depth analysis of the Relenza joke might have justified your using it as an example of what is wrong with GSK.
    We all know Relenza was abandoned, pre H5N1, and GSK didn’t have the brains to see there was still money to be made with it’s antiviral because of bird flu fears. Even recent pleas for trials of an injectable Relenza are being ignored by GSK, because any hint that Relenza isn’t a complete dud,(despite the science) might cost GSK more dearly in it’s legal battle with Biota.
    The real joke on GSK is that they relinquished back to Biota the rights to long acting neuraminidase inhibitor (LANI)candidate compounds which Biota parleyed into a partnership with Sankyo with it’s own LANI compounds.
    LANIs are the next generation NIs that should replace Tamiflu and Relenza.

    GSK cut off their pipeline to spite their face.

  9. #9 Debbie S
    June 19, 2008

    “They justify their obscene profits with the argument that they must invest heavily in research and development…”
    Many observers swallow this, yet it’s utterly illogical, because the widely-publicized figures on enormous rx co. profits are the sums left after ALL their expenses — including for research.

  10. #10 School Marm
    June 20, 2008

    Oh my! What is the Sb coming to? Can you not express yourself without resorting to such vulgarity, Mr.Revere?

    School Marm

  11. #11 PhysioProf
    June 20, 2008

    You know that when (if) their financials look better, they’ll just dip right the fuck into the academic biomedical science pipeline for their next blockbusters.

  12. #12 revere
    June 20, 2008

    School Marm: We have used “naughty” words on occasion here. We try to save it for when we think it is most appropriate. We thought this one expressed the GSK attitude just right.

  13. #13 Dude
    February 7, 2009

    Fuck big Pharma

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