Right after the election, incoming White House chief of staff Rahm Emanuel hit the Sunday political shows armed with the old saw, "Never let a crisis go to waste." He was talking about the government's opportunity to mix strong medicine into the trillions of spoonfuls of sugar it's feeding to a bedridden economy. But the saying applies equally to the pharmaceuticals industry, which, despite an onslaught of problems, many self-inflicted, has the wherewithal to make substantial changes and emerge from the recession in ways other corporate behemoths, bent only on survival, might not have the luxury to do.

There's certainly been no talk of a pharma bailout -- although one could argue the Medicare Part D prescription-drug benefit of 2003 came pretty close. (Biotech is a different story, with trade groups in the U.S. and U.K. asking recently for government help.) The top 20 drug companies in late September had an average $7.5 billion in cash and very little debt, according to research firm Datamonitor plc.

But keeping in mind some companies are in worse straits than others, stark facts apply: sputtering productivity, political backlash, ultracautious -- and increasingly cost-conscious -- regulators and generic competition loom large. As Goldman, Sachs & Co. analysts put it in a November report, "The industry is under siege from multiple forces."

With Pfizer Inc. as the prime example, they called for radical change to unlock "significant 'trapped' value" -- an extra $110 billion in market cap for six of the largest companies -- "which can only be unlocked if companies are willing to consider alternative strategies, such as spinoffs of mature products, break ups and merge-spin scenarios."

Nice work if an investment banker can get it, of course. But there's merit to the argument. It would be easy for analysts, given pharma's cash hoard, to encourage accretive M&A, as Deutsche Bank Securities Inc.'s Barbara Ryan did in December, calling for 1990s-style megamergers, with Pfizer and Merck & Co. the main aggressors.

After all, it's what pharma seems to do naturally: spend its way out of trouble. "It's not a perpetual motion machine, but it's a pretty fair imitation," says Sanford Steever, editor of the Health Care M&A Report, published by Irving Levin Associates Inc. in Norwalk, Conn.

Not counting Roche Holding AG's $43.7 billion bid for the 44% of Genentech Inc. it doesn't already own -- a deal far from sealed -- this year's M&A dollars spent through November are slightly behind or on par with previous full years, depending on which data cruncher you ask. Levin Associates says it's equal; research firm Dealogic says this year is slightly behind. Both say dealflow is down but disagree on the numbers.

Now, with public and private biotechs increasingly desperate for funding, the time would seem ripe for more pharma shopping. But biotech managers and investors who are hoping for a sale should be warned: Buyers are more likely to browse gingerly through bargain bins than line up at the doors before dawn.

There are several reasons. First, because of unsettled markets, stock is a terrible currency. Meanwhile, it could take a few months for proud sellers to adjust to the new reality. Such stubbornness will "retard the pace of M&A for three to six months as management and boards look back over their shoulders at share prices higher than they are today," says Thomas Reid, head of the corporate practice at Davis Polk & Wardwell in New York.

Second, there's only so much good stuff out there. And with the ranks of desperate sellers swelling, the big guys can choose from the devils they already know. Case in point: Roche last month bought Memory Pharmaceuticals Corp., its partner in developing Alz-
heimer's and schizophrenia drugs, for 61 cents a share. And that was a 319% premium to Memory's stock price.

Getting credit might be a temporary problem for the most ambitious deals. As of press time, a report questioned how much debt Roche would be able to tap for its Genentech deal. And credit agencies threatened to downgrade Eli Lilly and Co. when it used debt to help pay for its $6.5 billion takeover of ImClone Systems Inc. But raising debt shouldn't be a long-term problem, especially for smaller deals. "The costs of credit are still high, but that will change," says Reid, a frequent counsel to underwriters. "If any industry can attract credit, it'll be pharma."

A further restraint on M&A is that many drug companies want to get smaller, not larger. Since the beginning of 2007, there have been at least 75,000 biopharma jobs lost worldwide, according to the latest tally from industry news blog Pharmalot. Throw in the drip of layoffs at small firms that has become a steady stream, and that number could top 80,000 by year's end. (By comparison, the U.S. lost 2.7 million jobs from December 2007 through November 2008.) All this after the 2004 American Jobs Creation Act, in which Congress allowed drug firms to repatriate off-shore profits nearly tax-free as long as the funds -- wink, wink -- benefited the U.S. work force.

Though short of the Goldman call for radical reform, there has been movement. Pfizer sold its consumer product line and cut research in therapeutic areas that require expensive testing, such as cardiovascular disease; Bristol-Myers Squibb Co., aiming at a more focused strategy in cancer and other "specialty" areas, has sold off more than $4.5 billion in non-drug assets, with plans to sell part of its baby-food division in an IPO, too. Not content with divestment, Bristol also tried to buy ImClone for $4.7 billion before Eli Lilly swooped in with the $6.5 billion offer.

GlaxoSmithKline plc spent much of the decade decentralizing its research units and then, as top management turned over, spent this year making a flurry of medium-sized bets. Lilly has cast its lot with biologics.

AstraZeneca plc CEO David Brennan told a Reuters conference last month that his firm, still digesting the April 2007 $15 billion acquisition of MedImmune Inc., was far more likely to pursue license deals in coming months "because then we share the risk and share the reward."

What's clear is that Big Pharma, whether spending to acquire or license, can rescue only a fraction of those needing lifelines. Funding for biotechs, public and private, has plunged this year. According to Burrill & Co. of San Francisco, the sector raised $18 billion through September. It raised $47 billion and $44 billion in 2006 and 2007, respectively.

The public markets have been especially cruel. For the occasional biotech with a huge debt load, lifelines will be scarce. "Corporate buyers are sitting on their wallets, and [private investors] are not in a hurry to part with cash they could use for their own portfolio companies," said Angiotech Pharmaceuticals Inc. CEO Bill Hunter, telling analysts in November why his Vancouver, British Columbia, firm, even with products on the market, was having trouble raising new capital with a $500 million debt burden.

Retrenchment has already begun. In November, at least 15 North American biotechs took cost-cutting measures, according to Burrill & Co. Of 370 publicly listed firms tracked by Burrill, 54% had a market cap under $100 million as of Dec. 1. In the first two days of December alone, eight firms announced about 300 job cuts.

Look for consolidation among biotechs, including more reverse mergers, as failed public firms with leftover cash serve as vehicles for private firms to nab a stock ticker. Archemix Corp. and Transcept Pharmaceuticals Inc. are two recent examples that found shells. There have been and will continue to be bankruptcies, but they should be exceptions.

For biotech, it's an old story. Boom, bust, repeat. But the next two years could rewrite the story for some of the biggest drug firms in unprecedented ways. No doubt we'll see deals, but how creative, and in which direction?

One hint that big firms are thinking in new ways came Dec. 2 from former AstraZeneca finance chief Jon Symonds. Now a Goldman Sachs managing director in London, Symonds told a Financial Times conference that the firm would soon launch a fund to help develop early-stage compounds plucked from at least one unnamed pharma partner. Though short on specifics, it's a model other financiers have tried with mixed success, but never with top-tier assets from the biggest firms, if indeed that's what the unnamed pharma partner intends to hand over. (A Goldman spokesman called reports of the speech "speculative.")

The great wave of consolidation in the 1990s, coupled with the belated rush to snap up proven biotech drugs, has generally produced headaches, not long-term solutions, says Michael McCully of biopharma deal consultant Deloitte Recap LLC, but it's a way of life that's hard to shake. "From the big companies' perspective, the day you stop doing deals is the day you admit failure."