New Pharmaceutical Firm With Hefty R&D

Overnight, a pharmaceutical giant has been born, as two U.S. companies--Monsanto of St. Louis and American Home Products Inc. (AHP), of Madison, New Jersey--announced Monday that they will merge. The new corporation, which still has no name, will devote $2 billion of its consolidated annual research budget to pharmaceuticals and the remaining $1 billion to agricultural projects. This puts it on par with other big R&D spenders such as Merck & Co. of Whitehouse Station, New Jersey, and Pfizer Inc. of New York City.

The new corporation will operate under an unusual dual governance: Both Monsanto's chief Robert Shapiro and AHP's chief John Stafford will serve as its CEOs. Together, the co-CEOs will administer a $35 billion manufacturing empire that markets all manner of products--from Monsanto's weed killer Roundup, to over-the-counter drugs like AHP's Advil, to new gene-based medicines. Among the pharmaceutical subsidiaries that will come under their umbrella are such firms as the Genetics Institute of Cambridge, Massachusetts, G. D. Searle of Skokie, Illinois, Immunex Corp. of Seattle, and Wyeth-Ayerst of Philadelphia.

This merger "reflects the fact that the cost of developing [new] pharmaceuticals is so high," says Jeff Trewhitt, spokesperson for the Pharmaceutical Research and Manufacturing Association in Washington, D.C. He estimates that it now costs between $300 million and $600 million to research and develop a new biomedical product, way up from the 1976 average cost of around $125 million per product.

Companies require "massive" research budgets, Trewhitt says, to remain competitive in the drug industry. One way to achieve that mass is to consolidate. Bill Gans, CEO of the biotech firm Pathogenesis of Seattle, agrees: Even big pharmaceutical companies are searching for ways to assemble funds to support more research, he says, because it "requires enormous investments to stay in the areas where new technologies are being developed."

Posted in Economics