Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

In five years, Allergan CEO Brent Saunders has gone from compliance executive to M&A buccaneer and possible leader of what would be by far the biggest pharmaceutical company in the world in a Pfizer-Allergan combination. People who benefited from the outsize returns Saunders has repeatedly delivered are probably howling with glee at the prospect. 

But it's a bit scary for scientists and pharma traditionalists. Saunders has historically been against spending money inventing drugs and has built his impressive career around avoiding it.

 "The idea that to play in the big leagues you have to do drug discovery is really a fallacy," Saunders told Forbes earlier this year. "You have to do research, you have to be committed to innovation. I strongly believe that, but discovery has not returned its cost of capital."

Here’s how he described Allergan’s R&D model on the company's earnings call just last week. He doesn’t explicitly say that he doesn’t think much of discovery, but it’s conspicuously absent:

We operate in an open science model, developing promising products that frequently originate with smaller companies. These companies often lack the infrastructure to bring their products through expensive late stage trials, or the commercial presence to recoup their R&D investments. The innovation ecosystem is full of these smaller companies who have extraordinary ideas and brilliant scientists. We want to be the magnet for their great ideas in this new innovation ecosystem. Our model is designed to bring these extraordinary ideas to market.

That’s a non-traditional approach. It is particularly unheard of at Pfizer, a century-plus-old company that spends more than a billion dollars on R&D each quarter and has developed drugs such as Lipitor and Zoloft. Allergan spent about 7.5 percent of its net sales on R&D last quarter, Pfizer spent 14.1 percent, close to the industry average. And Pfizer's sales are nearly three times Allergan's. 

R&D Expense As A Percentage of Net Sales
Source: Bloomberg

Saunders has argued that large pharma discovery often destroys value due to its expense, high failure rate and inefficiency. Many of its successes are already sourced from smaller companies in one way or another, in his view, so it's more logical to just license and buy medicines in later stages of development. 

Bigger companies excel at the many difficult expensive steps required to actually get a promising drug to market -- running big clinical trials, wrangling with regulators and applying marketing muscle -- but the benefits of scale don't seem to carry over to discovery. 

He has a point. Pharma R&D productivity has been on the decline for years, with a recent spike in approved medicines not as promising as it first appears. A Deloitte study estimates the internal rate of return on R&D for 12 of the biggest life sciences companies was just 5.5 percent in 2014, up only slightly from 5.1 percent the year before. That was the first increase since 2010. The study estimates that 58 percent of the projected revenue from late-stage products in the 12 companies' pipelines comes from assets bought elsewhere instead of developed internally. 

Number of New U.S. Drug Approvals
U.S. Food and Drug Administration.
Chart only includes new molecular entities. Biologic drugs are included starting in 2004.

But the rosy picture Saunders paints -- where Big Pharma firms stop doing discovery, buy out innovative biotechs and skip hand-in-hand with their tiny friends toward FDA approval and massive profit -- is incomplete.

For one thing, M&A is easy to get wrong, especially when it comes to drugs still in development. And bigger firms switching entirely to an external model of drug development has far-ranging consequences. 

It's hard for small companies to find funds to search for the kind of "first in class" drugs and novel approaches that Saunders says he wants, because there's such a massive failure rate. Venture funding is a fraction of what it is for software and tends to look for less-risky assets, which is why there's a trend towards digging up Big Pharma castoffs. It can be tough to take big, long-term risks without the much larger buffer of money and time that Big Pharma often has. Biotechs and academics also lack expertise in making the transition from early ideas to human experiments. 

Saunders could very well remake himself. He's certainly been eager to position himself as a champion of innovation lately, perhaps as a pitch for the Pfizer job. But it's hard to imagine him entirely shedding a position he's argued so forcefully, and that has led to so much of his success.

The result may be more deals, but fewer new medicines.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Max Nisen in New York at

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Mark Gongloff at