IAN READ, the chief executive of Pfizer, is not a man easily rebuffed. His attempt to woo AstraZeneca, a British drugs firm, included politesse—appearances before Parliament, web videos on Pfizer’s strategy—and, more importantly, a sweetened offer on May 18th worth around £70 billion ($120 billion). However, AstraZeneca’s board has rejected the bid and, as we went to press, it seemed dead in the water.

British politicians had cast Pfizer as a ruthless cost-cutter, out to gut British innovators. A rejected deal would therefore seem good for AstraZeneca and good for Britain. This reasoning, however, skirts two basic facts. First, AstraZeneca faces a rocky path on its own. The firm’s share price plunged by 12% on May 19th. The company will struggle to meet its goals of expanding revenue by 75% by 2023. More importantly, any relief at having saved a “national champion” ignores how modern pharmaceutical companies work.

Drugs firms are global, with operations distributed around the world. AstraZeneca, for example, has three main research centres. One is in Britain, but the others are in Sweden and America. The company has about as many staff in the Asia-Pacific region as in Europe. Drugs companies have also had to become ever more reliant on external partners in recent years. The change follows a treacherous period. As firms headed inexorably towards the “patent cliff”, the point at which they would lose intellectual-property rights over their bestselling drugs, investors doubted their ability to turn out new blockbusters. Bureaucratic in-house research departments inspired little confidence, trudging on with mediocre drugs that failed, expensively, in clinical trials.

Now, much of the work of discovering a medicine and testing, making it and selling it is done in partnership. For example, one way to cut the cost of drug trials is to hire clinical-research organisations. One such firm, Quintiles, of America, works in 100 countries. The company’s network helps it deal with regulators, find patients to take part in trials and recruit doctors to oversee them. Morningstar, an investment-research firm, reports that 33% of global companies’ drug development was outsourced to clinical-research firms in 2012. By 2022 it expects that share to reach 50%.

Firms’ changes to their research departments have been even more dramatic. Many have made deep cuts in those departments’ budgets. (AstraZeneca spent 16% less on research last year than it did in 2007.) They have not entirely given up investigating promising routes to potential new drugs, but the burden is increasingly left with outsiders.

Profitable new treatments can be “discovered” through mergers—many of AstraZeneca’s most promising drugs are thanks to the 2007 purchase of an American company. Or through licensing: Sanofi, a French giant, has a deal to sell drugs developed by Regeneron, an American biotech firm. Pharma firms cluster near universities—GlaxoSmithKline has more than 1,700 research deals with academia. And governments, which have long invested in the earliest stages of research, are now going further. On May 6th the European Union’s leaders approved the next phase of the Innovative Medicines Initiative, a public-private partnership to speed the development of new drugs. In February America’s National Institutes of Health and ten drugs companies announced an effort to accelerate research on intractable ailments, such as Alzheimer’s disease.

This does not mean that big drugmakers, and where they put their headquarters, are irrelevant. But the most successful ones will look ever less like the national champions of yore. For a hint of the future, take Index Ventures, a venture-capital firm. It invests in drug firms which each have a tiny staff, who oversee a drug’s development but hire outside labs and manufacturers to do most of the work. With little money sunk in fixed infrastructure, their executives are more likely to abandon unfruitful drugs earlier, diverting resources to more promising ones. This seems like a winning model not just to venture capitalists but to big pharma firms: Index’s investors include GlaxoSmithKline and Johnson & Johnson. 

Source:The Economist