Riding the pharma roller coaster: in an industry in which many mergers have failed to create value, Fred Hassan has used them to take Pharmacia into the pharmaceutical big leagues. Here he explains how
Leading in the global pharmaceutical industry means mastering a hugely expensive game of trial and error. A company might discover a winning protein that could someday deliver a blockbuster drug but face expenditures of as much as $500 million for testing and trials before it could do any good. For the biggest companies, annual R&D budgets can run to more than $5 billion, a sum that has fueled an ongoing process of mergers, many of which have done little to boost long-term growth. Scientific and technological breakthroughs continually stoke investors' expectations.
This is the demanding environment in which Pharmacia's chief executive, Fred Hassan, has made his name by pulling off a series of unlikely turnarounds. Hassan, a 56-year-old chemical engineer born in Pakistan, took the reins of Pharmacia & Upjohn in 1997, two years after the merger of Sweden's Pharmacia AB and Michigan's Upjohn created the company (then headquartered in England), which was plagued by declining sales, profit warnings, and raging turf battles. Hassan restructured operations, moved the headquarters across the Atlantic to New Jersey, installed a new management team, and generated several promising new drugs.
Two years later, he engineered a merger with Monsanto when the St. Louis--based drug and agricultural company was under broad attack as the standard-bearer for genetically modified foods and other agricultural products. In the new Pharmacia Corporation, Hassan created a core pharmaceutical business and turned the agriculture business into an autonomous subsidiary to be spun off. Along with Monsanto's Searle unit came Celebrex, one of a new class of Cox-2 antiarthritis drugs and Pharmacia's first true blockbuster. With 2001 sales of more than $3 billion, Celebrex put Pharmacia in the industry's big leagues, with peers such as Pfizer, Wyeth, Eli Lilly, and Merck.
In mid-July of this year, Pharmacia agreed to an acquisition by Pfizer, thus creating the world's preeminent pharmaceutical company, for about $53 billion in stock. The acquisition is scheduled to be completed by year-end. It is expected that Hassan will initially serve as Pfizer's vice chairman after the closing of the transaction. In an interview conducted at Pharmacia's headquarters, in Peapack, New Jersey, prior to the merger announcement, Hassan spoke to Katy George and Mike Pearson of McKinsey about his view of the pharmaceutical industry, the lessons he has learned from his experience with mergers, and his thoughts on maneuvering in such a risky landscape.
The Quarterly: In today's challenging pharmaceutical environment, how can companies best create value?
Fred Hassan: By finding a flow of innovative medicines that answer the needs of doctors and their patients. The companies that will succeed in the long term are the ones that best sustain this flow.
Earnings from 1996 to 1998 were very strong for the industry because faster approvals kicked in at the US Food and Drug Administration via the Prescription Drug User Fee Act, and much of the new-drug application inventory that was in the system was released into the market. What used to be a 24- to 36-month review time shrank...