Does consolidation kill innovation?
The claim we hear when a merger or acquisition is asnnounced is that bigger companies can innovate more because they have better, combined R & D resources and greater ability to get new products on the market. But the reality is that merged companies are worse at innovation, at least in the pharmacy industry. That's according to a recent article in the New York Times ("Where Are All The New Drugs?", 10/5/03).
The article looks in particularly at Glaxo Smith Kline, the number two drug company in the world (after Pfizer), and the result of a series of mergers over the past decade. The main components of the current company include Swis-based Glaxo, UK-based Burroughs Wellcome, and US-based Smith Kline French. The thought was that that they would create a new research and marketing powerhouse that could expedite getting a steady flow of new drugs on the market.
However, according to the article, the pace of innovation has slowed to a trickle. The company has produced only one major new drug a year, for the last few years, and the consensus is that needs to bring out five a year to maintain profits, as its money-making older drugs like Paxil, drugs lose patent protection from generics. But that's not just GlaxoSmithKline's problem. "Poor lab production is bedeviling almost every drug company. Across the industry, introductions of new drugs plummeted last year to 17 from a high of 53 in 1995, despite a bear doubling in annual research spending to $22 billion."
This comes after a wave of major mergers and acquisitions in the industry. As the article points out, 38 major drug companies have merged since 1994. And one of the chief reasons cited for most mergers was building "lab synergies."
Of course, there are plenty of other reasons that might contribute to a slowdown in new drug development, including the usual complaints about strict government testing requirements. One of the ironic consequences of recent giant steps in human genome studies may have actually confused researchers for the short terms, as they try to develop ways to use new masses of information to help develop therapeutic drugs.
But the chief culprit has been in the chaos caused by mergers, and its impact on lab scientists, who are constantly immersed in corporate politics." The bureaucratic task of combining two companies became the sole chore for many top scientists, some of whom had to shuttle between continents, they said. That took a toll on research projects. "
As one researcher noted, "What ensued was an incredible number of augments about who was doing what." The result is multi-year long demoralization that sucked the creativity out of the process of drug creation, a process that combines inspiration with systematic proof.
Perhaps the drug companies will get over the growing pains of mergers and settle down. On the other hand, the mergers have not stopped, and between the desire to grow and the increasing financial problems of some of the major companies, the political pressures to swallow or be swallowed are just too great to resist.
Yet I think it goes further. Innovation, we have seen over and over, is rarely a property of oligopolies. In the entertainment world this is clearest. Movies, TV, music are all stuck in ever-deeper ruts as oligopolies grab ever more power. Software developers get more cautious as they get more successful, afraid to rattle their existing customer base. This leads to extending the brand (pseudo variety), not upsetting the industry. Small companies thrive by gambling on just such disruptions.
A similar process is at work in the pharmaceutical industry. Smaller, creative firms merged to form slow-moving mastodons. It seems to be a change in attitude toward risk, a breakdown in communication, and a deeper politicization of the whole enterprise.
It comes down to this: as companies get bigger, they rely less on flexibility and originality and more on brute market power. In many cases, "synergy" turns into lethargy, as too much depends on maintaining the status quo.
