Merck announced this morning that it is acquiring Schering Plough for $41 billion, in a continuing effort among pharmaceutical manufacturers to look outside their industry for business models, and to import the popular US financial institution strategy of becoming "too-big-to-fail."
Reaction among financial analysts was mixed, with some passing out in ecstasy and others spontaneously orgasming.
Commented one analyst, Henry Happybuy at Stanford Bearshit, "this is great news! It must be a really good deal! Which two companies again?"
The combined Merck-Schering will be in an exciting race with Pfizer-Wyeth to see which (if either) can first apply "too-big-to-fail" technology. Industry analysts believe Pfizer-Wyeth may be further down the learning curve, and may have the inside track - Pfizer already has several failed mergers under its belt which have collectively destroyed more than $200 billion (and counting) in market capitalization. Surely they've learned something.
A senior strategist for one of the companies commented at length - off-the-record - on the compelling logic of the deal. (Below the fold)
A New Business Model
"The pharma industry is always in a state of evolution - ever since the days of selling snake oil 'herbal medicine' off the back of wagons. A decade ago, the big change came when we realized - with the huge 'me-too' drug opportunity, and the extension of Reagan-style deregulation to healthcare, that we didn't need all those whiny scientists. We could hire marketers to apply branding science to the new me-toos, spend $ billions on DTC TV ads, and increase the sales force by a factor of 10. Drugs like Schering Plough's, Claritin, which barely beat placebos in clinical trials, could make more than $3 billion a year. The golden age of pharma marketing was born."
"But, as the pendulum swung back, and there were modest crackdowns on key marketing tools like Caribbean orgies for physicians and pedicures for their house pets, we realized we needed to keep evolving. New technologies that will allow real time monitoring of physician prescribing (achieved through biometric implants and new satellite optics technology), will help for a few more years, but its been clear for a while now that we need to try other things."
"Returning to some kind of model like developing efficacious drugs to treat real diseases seemed like kind of a big step backwards. So we decided to put more effort into legal innovation -- Pfizer even hired a McDonald's lawyer to run the company. But it turned out that when we crippled the regulatory system, the resulting approved drugs ended up killing too many people. Not only did people file lawsuits - we actually lost some of them! No one could have foreseen all this."
"But we've learned our lesson now - the real key to revitalizing the pharma industry will be financial engineering and figuring out how to get to 'too big to fail'."
The Innovative Insight
"We first started to hit upon the new model in the board room a few years back. It suddenly occurred to us that our board-member and senior-executive compensation were, on average, 100-500 times bigger than those of our leading scientists - a clear indicator that we were the real creative class within the company! We decided to start listening to the market."
"Hell, looking at compensation as a key metric, the average snot-nosed investment banker must have been 10-100 times as creative as our top molecular biologists and biochemists. (And really, how smart can you be if you decided to spend year after year in graduate schools to get PhDs in that kind of complicated technical stuff?)"
"So it was clear to us that board members and senior executives that the next real wave of innovation should most logically come from us. Now almost none of us actually have science or medical degrees. So we realized that this was like the market whispering directly into our ears: innovation in pharma will come from other fields! That meant financial innovation."
"More recently, its become obvious that for financial innovation to really drive an industry, and maximize profits, it is best coupled with vast government subsidies - hence the 'too-big-to-fail' strategy."
"If you can enter the realm of 'too-big-to-fail', the government will shovel billions in taxpayer money at you every time you screw up - and you do not need to demonstrate competence at anything! You just email them the bank account numbers!"
But just how big does a pharmaceutical company have to get to be 'too-big to-fail'?
"Well, Pfizer clearly hasn't gotten to that point yet - the scale of their failure would be legendary in any other age!"
"We think the magic number will be getting down to about three pharmaceutical companies, each with about a third of the prescription drug market. At this rate, it should take us another couple years - max - to get there."
Great days ahead for the pharmaceutical industry - and the advancement of medical science!