They're busy merging inside. Photographer: Gianluca Colla/Bloomberg

Pharma Mergers Aren't a Miracle Cure

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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This morning brought news of a major reshuffle in the pharmaceutical world:

Novartis AG (NOVN) will focus more on cancer, GlaxoSmithKline Plc (GSK) on vaccines and Eli Lilly & Co. (LLY) on animal health as the drugmakers announced a series of deals for a total of as much as $28.5 billion today.

The transactions, as well as a plan to form a consumer-health joint venture with Glaxo, are part of an overhaul of the pharmaceutical industry spurred by the loss of sales as best-selling medicines lose patent protection. Pfizer Inc., the world's biggest drugmaker, sold its infant-nutrition business to Nestle SA for $11.9 billion in 2012, and then last year spun off its animal-health unit.

Novartis agreed to buy cancer drugs for as much as $16 billion while selling most of the company's vaccines division to Glaxo for $7.1 billion and its animal-health unit to Lilly for $5.4 billion.

Pharmaceutical blogger Derek Lowe puzzles over what this means:

What's not clear (in what I've seen so far) is how this will work -- for example, is Novartis just buying the existing drugs and the pipeline, and incorporating those into its existing research? What happens then to all the people in GSK's oncology? And so on. We'll see what details emerge.

I think we can be sure of one thing: The pharmaceutical industry, once a reliable source of large profits, is finding it harder and harder to make profitable new drugs.

You see this cycle in many industries, or maybe an undulating sine curve is a better geometric metaphor: Companies bulk up via mergers or expansion, in the hopes that diversifying will insulate them from downturns in their core markets. Over time, it becomes clear that this strategy has problems of its own, because broad-based conglomerates are hard to manage. The folks at the top can't possibly have expertise in all the pies they now have a finger in, so Megacorp loses strategic focus and bumbles around in markets it doesn't quite understand. Eventually, some bold visionary decides the company needs to slim down and streamline its "core competencies," which makes management nervous because what if something goes wrong in its core markets? "Let's diversify!" someone says, and the whole process starts anew.

The undulation speeds up when there's deep underlying trouble in the whole business -- trouble that neither merging nor de-merging can really fix. Focusing more intently on oncology drugs isn't going to help much if you don't have promising targets, and if regulators and insurers are pummeling you for lower prices on whatever you do manage to produce.

But no one really knows what to do about those problems. Merging and de-merging at least gives a worried management something to do with its time -- other than polishing up the old resume and finally getting serious about nursing school.

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Megan McArdle at

To contact the editor on this story:
James Gibney at