After Pfizer, is it time to question the MRC's budget?
For decades, it has been a truism that Britain has two truly world class manufacturing industries - defence/aerospace and pharmaceuticals. Does Pfizer's decision to close its huge R&D centre at Sandwich in Kent mean we are now in the process of losing one of the two? Unfortunately - and through no fault of our own - the answer may be yes.
If so then Vince Cable's description of the decision as "extremely disappointing" will be a vast understatement and the position of the Medical Research Council as the darling of the research councils will have to be questioned.
There has been from Pfizer little explanation of why it chose to close Sandwich down. This is a reminder of the brutal detachment with which foreign-headquartered firms can destroy UK assets. But it is clear that the main factor was Pfizer's failure to generate new blockbuster drugs in the past decade from its huge R&D investments around the world. Pfizer owns the world's most profitable drug. The anti-cholestorol drug Lipitor made a staggering $12.4 billion for the company in 2008. But the profits are about to dry up as the patent runs out and the firm's R&D work is regarded as "famously unproductive".
The inevitable pressures on R&D spending appear to have been brought to a head by the appointment of a new chief executive determined to maintain profits by cutting R&D. Yesterday was Ian Read's first announcement of company results to analysts and the Sandwich closure followed from his decision to cut R&D spending from around $8 billion a year to $6bn.
In the past, he told reporters, the company "continued to develop products with big bets even though the science wasn't solid".
"We need a focus at each stage. We need individuals to stand up and take accountability," he said. "If we don't have the data, we won't continue to invest."
The objectives is to create a "more focused and sustainable R&D engine for innovation".
The decision to cut R&D has long been sought by investors and the market reacted to the news of the change in direction by sending its shares up by a substantial 5.5 per cent yesterday.
The company has previously closed big labs in the US and another 1,100 jobs at R&D centres there are going in this round of cuts. But that still leaves the question of why Sandwich was not deemed worthy of being funded from the remaining $6bn a year.
On the radio this morning, David Willetts was anxious to argue that it did not relect on the quality of our science. The sciene minister said he had been told by Pfizer that Sandwich's expertise was in sectors that the company had decided to get out of. (Its priorities in future will be neuroscience, cardiovascular disease, cancer, immunology and vaccines.) But that's a kind of circular explanation - when you close something as big as Sandwich then, ipso facto, you are getting out of many of the areas it works on. So what else might be in play?
Most immediately, there is the track record of the Sandwich teams. If their ratio of hits to flops is worse than elsewhere in the firm, then that could tell.
Talent is a big issue for any pharma company. It seems improbable that Sandwich was struggling as it has not just the UK but the whole of Europe to draw on. On the other hand, the gap in skills with other parts of the world may be closing as they catch up in medical research.
Government relations could be part of it. If the company believes that NHS pricing mechanisms for its products are too mean, it may have concluded that there is little point rewarding the UK with the hi-tech jobs it knows ministers like.
By the same token, the booming markets in Asia and South America are an invitation to Pfizer to curry favour by moving prized R&D jobs into friendly states.
Finally*, cost is obviously a factor in this case. Have the mooted changes to R&D tax incentives possibly spooked the firm?
All this could easily add up to a case for cutting spending in the UK and putting more into emerging economies. That might seem to provide a Pfizer-specific explanation of the decision that would allow us to not start worrying about our pharmaceutical industry as a whole. But that would be a mistake as the shifts in the industry are tectonic, and potentially very damaging for the UK. Pfizer's 2,400 job cuts are only part of 6,000 hi-tech jobs that have been lost to the UK in pharma in the past 12 months.
The big, long-established players such as Pfizer are suffering from a continuing profits maliaise that stems from the lack of new blockbusters. One consequence of this is well known. The old guard are struggling to fend off low-cost generic insurgents competing with their core products. But I suspect there must also be a second, equally important consequence. In the quest to find new blockbusters, big pharma is probably being driven to attempt more ambitious science. Novel mechanisms at ever smaller scales and pushing back the boundaries of fundamental knowlege are no doubt fantastically exciting. But they are also expensive and their consequences uncertain. After a decade of failure, Pfizer seems no longer willing to hope for the best.
If, as many in the industry now believe, the era of the blockbuster is over, then the old business model of big pharma is also over. The huge investments in R&D will become a thing of the past. For a while, firms will be able to grow profits by acquiring rivals and buying up new drugs (and the firms that own them). This is what drives the fashion for "strategic partnerships" and "outsourcing" R&D. But that can only defer the day on which the underlying dynamic of lower prices driven by generic competition across more and more of the market hits home [FT article good on this].
In other words, the pharmaceutical industry as we have known it may well be decaying. Its products may be being commoditised just as surely as steel and ships were in the last century. New drugs will still come through, but there will be fewer of them and they will be less profitable. Crucially, deciding which to invest in will be harder. None of this is Britain's fault. It's not the government's fault. It's not the scientists' fault. It's not the companies' fault. It is simply a consequence of having picked all the low-hanging fruit from the tree of blockbusters.
So, yes, Britain may well be in the process of losing one of its two truly world class manufacturing industries. And just because this decline is not our fault, that won't make it any less painful.
Many of the great and the good of British science will be at the Foundation for Science and Technology tonight to discuss the recent budget allocations to the research councils. Given yesterday's news and this year's huge pharma job losses, they might like to ask themselves whether picking the Medical Research Council as the winner yet again in this budget round really makes sense. Even if our science is brilliant, as Willetts argued, if the industry itself is decaying, what's the point? Wouldn't we be better off investing in science that underpins industries where profits are likely to grow?
* UPDATE FOLLOWING DISCUSSION AT THE FST TONIGHT
In terms of explanations for Pfizer's decision, the evening provided two additional explanations, both of which make my list look distinctly 20th century.
Patrick Vallance, the Senior Vice President for Medicines Discovery and Development at GSK, highlighted the importance of networks. As the industry shifts, he said, the three key components of strength are the big pharma firms, the underpinning science base and a flourishing ecosystem of biotech firms ranging from start ups to grown ups. We've got two of those three, but not the biotech sector which is massively stronger in Boston or San Francisco - and even Germany. So Sandwich's problem may not have been itself but the lack of an ecosystem to work with in the future.
A second explanation, offered by someone from Pfizer, is that Sandwich is just the wrong place for the key cutting edge work. The lab is geographically isolated and it is no surprise that work will be moving to Cambridge. If the centre had been built next to a top university in the first place, we might not have this problem now. From this point of view, it is encouraging that Willetts is talking in more muscular terms about the importance of geographical hi-tech clusters than Labour ministers did. (For Sandwich by the way, the implication is that any pharma work that does end up filling the facility will be relatively undemanding contract research).
I also felt that Vallance's speech vindicated my instinct that a core problem is the uncertainty of much of the sophisticated science now. He emphasised the "disconnect" between the vast spending on basic biomedical research in recent years and the lack of new drugs coming through. And he described the elaborate strategies GSK and others are using to decide on which disease areas to specialise in. To a large extent, these choices are driven not by the degree of suffering or even the size of the market but by how straightforward the science is.
There were some suggestions by pharma people there that although internal R&D spending may be falling at the big firms, total R&D spending is rising. I'm not convinced. In the Pfizer case for example, the firm has sold its strategy to analysts as a cut in R&D and I'm inclined to believe that is real rather than a mirage to dupe investors with.
Final conclusion: Vallance argued that the social contract with pharma firms had broken down because they had failed to produce enough good new drugs. This mea culpa was combined with sophisticated arguments for increased public spending. But I'm sceptical. Pfizer and other big pharma firms are cutting their spending on R&D. This means they think R&D is less valuable than it was in the past. In that case, why are we taxpayers giving medical R&D a bigger slice of our pie?
[Note on this note: I've had to be a bit obscure about who said some things at the FST as the speeches there are fair game but the discussions afterwards are confidential. You can catch up on the speeches in due course at the FST web site.]