Business | General
Painful times for drugmakers
Radical changes in research and development are needed if big pharma is to reinvent itself.
- By Lina Saigol
- Published: 00:03 May 13, 2008
Some of the world's biggest pharmaceuticals companies, including GlaxoSmithKline and AstraZeneca, face their worst crisis in decades, as their future revenues are under threat from shrinking drug pipelines, increased competition from generics and a slew of patent expiries.
"For the first time in history, the industry will have negative growth in 2011," says Alexis de Rosnay, global co-head of healthcare at Lehman Brothers. This is a time-bomb the sector has known about for some time.
Its last big answer, up to about three or four years ago, was to pursue large-scale mergers and acquisitions.
AstraZeneca was created in a £52 billion deal in 1999. GSK resulted from a £120 billion deal in 2001. Pfizer launched a $53 billion takeover of Pharmacia in 2003 and Sanofi-Aventis was formed from a $64 billion merger in 2004.
But the megamerger strategy has failed to create value for shareholders. Costs were cut. Yet the hoped-for hothouse of new drug development never materialised.
Richard Girling, global co-head of healthcare at Merrill Lynch, says: "The problem is not so much the size of companies but the concentration and reliance on single products."
"This has been exacerbated by a lack of innovation over the years," says Girling.
The pain will be felt acutely over the coming few years, as patents expire at an ever faster pace, with fewer new blockbuster drugs coming through to replace them.
In the US alone, drugs collectively worth more than $62 billion in 2006 sales are due to go off patent during 2008-12, making it easier for rival companies to sell generic versions of the same drugs.
As early as this year, GSK could see Lamictal go off patent.
At the same time, Johnson & Johnson could lose protection of Risperdal and Merck's patent on Lamictal could expire. By 2012, AZ's Seroquel and GSK's Avandia are on top of the patent expiry list.
Threat to Pfizer
Perhaps the most extreme hit will be at Pfizer following the expiry of the patent on its blockbuster cholesterol pill Lipitor in 2010. Lipitor accounts for almost a third of Pfizer's revenue and more than 40 per cent of its profit.
There are already some signs that companies are realising that a new approach to corporate dealmaking is needed, if the dearth of new big-money drugs is to be plugged.
"Big Pharma is looking more honestly at its product pipelines," says John Studzinski, head of M&A at Blackstone. "[They are seeing] many distinct financial characteristics and considering ways to finance and monetise these on the micro level.
"On the macro level, top-line growth is flat and is putting more pressure on companies to once again reassess merger and consolidation strategies," he adds.
Several large companies have chosen to focus on acquiring biotech companies as a way of counteracting profit erosion.
This was the strategy AstraZeneca decided to pursue when it spent $15 billion of its war chest acquiring Medimmune, the US biotech company, to help develop new products.
Similarly, Shire purchased New River Pharmaceuticals in the US to access its attention deficit and hyperactivity disorder drug Vyvanse to replace Shire's older drug Adderall XR.
But biotech deals have proved to be very dilutive for the acquirers and forced big pharma to look at diversifying into specialty disease sectors, medical devices and drug technologies.
Novartis, for example, has been focusing on the oncology market, while Johnson & Johnson has built a presence in medical devices, including coronary stents that keep clogged arteries open, while Roche acquired Piramed, the UK-based biotech firm for $160 million, to strengthen its oncology and arthritis pipelines.
Others have chosen to build their presence in the more resilient consumer healthcare areas. Last month, Novartis spent $39 billion to acquire 77 per cent of Alcon, a US eye-care business, from Nestle.
"GlaxoSmithKline and Novartis have been good examples of companies that have preserved their consumer business realising that it is a very good route to diversification in difficult times when pipelines are struggling," de Rosnay said.
Companies have also gradually acknowledged that radical changes in research and development divisions are also needed if Big Pharma is to reinvent itself. "Management have finally realised that having larger R&D functions does not mean bigger drug pipelines," de Rosnay said. "But it will take a brave chief executive to stand up to the market and say this must change," he added.
- Financial Times
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