Tuesday, January 27, 2009


I've seen more than a few comments bemoaning the buyout of Wyeth by Pfizer as it will throw 8K people out of work and that these are just the sorts of jobs that the US needs to retain - i.e. "knowledge jobs" - and that this is the sort of merger that will further reduce the research and what-not done at these two companies. Although I certainly do not celebrate any job loss - particularly now - I don't believe this is the case that knowledge jobs are going to vanish. Here's why:

Despite Montel's travelling circus telling the nation about "America's Pharmaceutical Research Companies", a cursory examination of the annual reports for Pfizer and Wyeth reveal something peculiar...
To the left, is a page out of Pfizer's 2007 annual report with a little bit highlighted. Notice that R&D expenditures (the "knowledge jobs") are roughly 1/2 of the percentage of the SI&A (sales, informational & administrative) expenses. So Pfizer basically spends $2 on selling stuff to you through advertising, drug rep giveaways, etc. for every $1 they spend on research. Further in the text, this specific detail on radio & TV advertising is laid out: Advertising expenses totaled approximately $2.7 billion in 2007,$2.6 billion in 2006 and $2.7 billion in 2005.

So maybe Wyeth is better? Let's have a look at their 2007 annual report. Well, how about that? SI&A for Wyeth is a little over twice what is spent on R&D there too.

Now this isn't meant to trivialize what is a substantial amount spent on R&D by Pfizer and Wyeth. Combined, in 2007 they dropped about $11.1B in R&D expenses. But at the same time they spent over twice that on selling the public on these drugs - or selling us on the idea that they are heavy into R&D when they actually spend twice as much on things that have nothing to do with drug research.

The most oft-heard reason for Pfizer's purchase of Wyeth is that Pfizer is about to lose patent-protection on Lipitor, one of PFE's cash cows. This leads to a more interesting observation or at least personal speculation.

Anyone that really enjoys gambling on the stock market knows about how enticing the returns can be on a biotech company that gets FDA approval for one of the drugs in its pipeline. And anyone that has followed the sector knows that there is a veritable graveyard of zombies, corpses and tombstones for every one or two lucky souls that emerge. And what of these lucky one or two companies? Why, they're usually purchased by (or partnered with) the likes of PFE, MRK, BMS or one of the "Big Pharma" group. Case in point, I picked a page out of 2007 annual report of a company I used to follow - MEDX - to see how much they spent on R&D vs. SI&A.

Unsurprisingly, R&D dominates the expenses in this true biotech company. MEDX has some partnerships with BMS for some of their technology, though I haven't followed them for awhile.

The point of all this is my hunch that the merging of PFE and Wyeth into Wy-Pfi does not mean we should all expect a massive slashing of R&D budgets and thousands of scientists out of work. What I believe it forecasts is thousands of drug reps, HR and admininstrative staff out of work. (Perhaps unfortunate for the economy is that I suspect in many cases, the drug reps are better paid and disperse more dollars into the economy than the scientists.) New drugs are still the lifeblood of these companies. But PFE and their ilk have long been far larger marketing machines than R&D houses. The true drug innovation (and risk-taking) goes on at the smaller biotech firms and universities. Big Pharma is simply very innovative at finding new ways to extract dollars from our pockets through creative patenting, lobbying and marketing.

For more reading, I would definitely recommend the New Yorker's article "High Prices" by Malcom Gladwell for a glimpse at the marketing creativity of Big Pharma as well as "The Pipeline Problems" also in the New Yorker.