The drug formula that didn’t work

Matthew Lynn says the mega-mergers that reshaped the global pharmaceutical industry over the past decade have delivered little of what they promised

For all that money, you might expect some significant returns for shareholders. You might also expect patients – the customers, let’s remember – to see some benefits, either from more medical innovation, or from lower prices for the drugs they need.

In truth, none of that has happened. Take GlaxoSmithKline. Far from turning into a British Microsoft, it has looked more like a British AOL Time-Warner: an assembled mega-conglomerate which has never lived up to expectations. It certainly hasn’t worked out the way either Sykes or Garnier promised when they merged. Today, GlaxoSmithKline is still a substantial beast, and the second-largest player in its industry. But it is very hard to argue that it is stronger than either of the companies that formed it. Its share price has underperformed for years. It has struggled to find new medicines to fill its pipeline. Indeed, when its new chief executive Andrew Witty took charge of the business earlier this year, he had to talk of a revolution within the company. He didn’t have much choice. Investors wanted change: if it didn’t come from within, they’d find someone from outside to deliver it.

Nor is there any point in just picking on GSK. None of the mega-mergers in the drugs industry have produced companies that are demonstrably stronger. Indeed, in the sense that they distracted managers from finding and marketing new and better medicines, they may well have weakened rather than strengthened the industry. ‘The basic business of the drug industry is developing drugs and getting them to consumers and physicians,’ argued Patricia Danzon, Professor of Healthcare Management at Wharton Business School, who has done extensive studies on the pharmaceutical industry, at the time the GlaxoSmithKline deal was announced. ‘Maybe a bigger company can do it more efficiently and faster, but whether that is a winning strategy remains to be demonstrated.’