Plundering pharma

So, in an activist's fantasy world, what might a steroid-fuelled cost-cutter attempt? In 2006, had the world's top five pharma companies cut their R&D to zero, their pre-tax profits would have been 57 per cent higher. Slap on some gearing, too, and a pharmaceutical company could be squeezed for cash until its existing product patents expired.

Despite this, few companies have faced much flak. Admittedly, Pfizer (NYSE:PFE)'s long-time chief executive stepped down last year during a shareholder revolt over his retirement package, while GlaxoSmithKline has faced calls for it to divest its smallish consumer products division. But for most companies, modest share buybacks seem to be enough to silence critics.

That partly reflects the "black box" nature of pharma companies, with their dependence on science, regulators and long product horizons. But there are other, serious barriers to running pharma businesses for cash. Much of today's R&D supports existing products by finding new uses for drugs or doing testing that can extend patent protection. A company without a development pipeline would also struggle to retain its sales force, jeopardising sales of existing products.

Meanwhile, balance sheets are conservative for good reason. Cash is needed to self-insure against product liability claims (Vioxx anyone?). And legacy revenues are not exactly secure, as private equity-owned Nycomed may be learning. Its EU4.2bn buy-out of Altana Pharma last year occurred when the company's top product, Protonix, appeared to have at least three years of patent protection left. This month, a US court refused to stop production of a generic version. The case is on appeal but it serves as a cautionary tale.