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Healthy Skepticism Library item: 11847

Warning: This library includes all items relevant to health product marketing that we are aware of regardless of quality. Often we do not agree with all or part of the contents.

 

Publication type: news

Beyond the pill
The Economist 2007 Oct 25
http://www.economist.com/business/displaystory.cfm?story_id=10026788


Full text:

Drugs firms are casting about for new business models

“THE future is not terribly bright for most drug companies,” says a new report from Sanford Bernstein, a respected New York investment firm. Such blunt talk is unusual on Wall Street, but it is no exaggeration. Drugs firms, once rich and the favourites of investors, are urgently seeking cures to a variety of ailments.

One is the erosion of patent protection. Not only are the copy-cat manufacturers of cheaper generic drugs becoming emboldened by cost-conscious politicians and legal rulings in their favour, but big pharmaceutical companies are also facing an unprecedented wave of patent expirations over the next five years. Pfizer alone will lose some $13 billion in revenue a year when Lipitor, its blockbuster cholesterol drug, goes off-patent as early as 2010.

The industry’s best hope lies in innovation, its traditional strength. But it is finding it extremely difficult to come up with new blockbusters. As the Bernstein report notes, the global industry saw 24 new drugs approved by the US Food and Drug Administration in 1998 on the back of $27 billion spent on R&D. Last year, the industry spent $64 billion, but only 13 new drugs were approved by the regulator.

And even new drugs can no longer reliably command the huge premiums they once did. Peter Lawyer, of the Boston Consulting Group, reckons the global drugs market doubled in value to $600 billion in revenues in the decade to 2005, chiefly from growth in America. But there is little chance it will double again by 2015, he argues. If America were to adopt European-style controls on drugs prices, as some Democratic presidential candidates are proposing, half of the industry’s profits would disappear.

Drugs are also being pulled from the market. Usually this is for safety reasons, such as those which last year forced Pfizer to kill torcetrapib, an experimental cholesterol drug, after spending $1 billion on it. Traditionally, drugs firms did not yank products that were safe even if they sold poorly. But now that has changed. Jeffrey Kindler, Pfizer’s boss, decided to wield the axe as part of his drive to reduce costs and last week pulled Exubera, an inhaled insulin product, off the market. For this, Pfizer took a $2.8 billion charge.

So what can Big Pharma do? Mr Lawyer thinks the deterioration in the American market will force drugs firms to come up with new business models that go beyond the industry’s traditional and largely vertically integrated approach to developing, manufacturing and selling drugs.

A sign of this happening is a recent move towards outsourcing. When times were good, drugs firms refused to outsource manufacturing because doing so, they argued, would result in quality problems and risk giving away trade secrets. That strategy is being rethought. AstraZeneca, a big British drugs firm, recently announced that it will start shifting manufacturing operations to Asia as part of a cost-cutting drive.

Firms are not only changing how they make drugs, but how they market them-especially in America. On one estimate, big drugs firms spend less than a fifth of their revenues in America on R&D, but over a third peddling pills. Raymond Hill, of IMS Health, a consultancy, says that firms too often “differentiate pills using sales reps” rather than by superior innovation. That, he says, needs to be reversed.

Bosses of drugs firms now publicly acknowledge the problem. Daniel Vasella, chairman of Novartis, a Swiss drugs giant, agrees that his industry must innovate or risk falling into a low-margin ghetto of commodity pricing. Last week he announced a shake-up to help Novartis do so. “We must rethink all assumptions, from innovation to marketing to sales and promotion,” he says.

To hedge risks in prescription drugs, Dr Vasella wants to grow his firm’s generics division, as well as increase its presence in diagnostics, non-prescription drugs and biotechnology. Novartis recently decided to launch a generic version of Epo, a popular drug pioneered by Amgen, an American biotechnology firm, in Europe-the sort of cheeky move usually seen only from generics firms.

Lots of big drugs firms are moving into biotechnology to fill their product pipelines. Earlier this year Astra Zeneca bought MedImmune, an American biotechnology firm, for about $16 billion. A takeover battle may soon erupt over Biogen Idec, another large American biotech firm.

Roche, another Swiss firm, has made a hostile bid for Ventana, a medical-diagnostics company in Arizona, and other firms are moving in on makers of medical devices and non-prescription drugs. Terry Hisey of Deloitte Touche Tohmatsu argues in a new report that such deals go beyond hedging risks in their traditional businesses: he reckons it heralds a dramatic new “convergence of drugs, devices and diagnostics” which could lead to innovation and new opportunities for growth. If he is right it would be good news indeed for an industry sorely in need of rejuvenation.

 

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