Healthy Skepticism Library item: 14041

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Publication type: news

Wachman R.
Big Pharma self-medicates in a bid to lift ailing returns
The Guardian 2008 Jul 27
http://www.guardian.co.uk/business/2008/jul/27/glaxosmithklinebusiness.pharmaceuticals

Abstract:

Tough times are forcing firms to diversify, says Richard Wachman

Full text:

Big pharmaceutical companies are looking for new sources of profit. Many blockbuster medicines are coming off patent and prices for prescription drugs are falling as governments and health insurers demand bigger discounts. In the US, the public has turned against the drug firms, which for years could push through huge price increases thanks to their marketing clout and influence on Capitol Hill.

Revealingly, Tachi Yamada, former boss of research and development at GlaxoSmithKline, was reported recently as saying that it used to be an industry in which ‘it was almost too easy to be successful’. Now life is harder for Big Pharma which must also battle with regulators demanding higher standards in the wake of a number of high-profile health scares.

But the companies are not standing still. Only last week, Swiss giant Roche bid more than $40bn to take full control of its US biotech partner Genentech in a move that commentators said was indicative of the insatiable appetite of the pharmaceuticals for new drugs to offset the decline in their own product pipelines. They are spending more on research and development than ever, but productivity has slumped for reasons that go beyond tighter regulatory scrutiny and oversight.

R&D is more complex and, consequently, more expensive. Drugs multinationals must also grapple with the harsh truth that ‘there are fewer unmet clinical needs today than 20 years ago’, according to Alan Shepherd of IMS, the healthcare consultancy. ‘A lot of the big breakthroughs have already been made, although important research continues in fields such as oncology,’ he says.

Shepherd’s point is illustrated by the massive growth of ‘me-too’ drugs, medicines that are only slightly different from market leaders, launched with the aim of grabbing a share of an already lucrative market. In his book, The Truth about the Drug Companies, Marcia Angell notes that we now have six branded medicines to lower cholesterol, ‘all variants of the first’. Angell quotes Dr Sharon Levine of the Kaiser Permanente Medical Group, who says: ‘If I am a manufacturer and I can change one molecule and get another 20 years of patent rights, why would I be spending money on… looking for brand new drugs?’

Roche’s move on Genentech, however, will give the Swiss control of new specialist products, as well as scope to make cost savings of more than $800m, boosting the bottom line and, importantly, bolstering its pipeline of drugs undergoing clinical trials.

With fewer blockbusters coming to market, Big Pharma must look elsewhere to lift profits. GlaxoSmithKline, the British group under new chief executive Andrew Witty, unveiled a plan last week to generate revenue by selling generic medicines in developing countries, where analysts say there is enormous untapped potential.

Witty’s plan to sell generics via a venture with Aspen of South Africa not only strengthens its profile in countries such as India, but also underlines a trend for Big Pharma to reduce its dependence on a handful of top-selling patented medicines and to diversify into generics. Experts say global generics are worth $70bn, about an eighth of a world drugs market of $550bn. But with medicines valued at $150bn coming off patent by 2015, the generics sector is expected to grow in the years ahead. Already in Russia generics account for about two thirds of the value of all drug sales, says Mark Purcell, an analyst with Morgan Stanley.

Simon Friend, head of PricewaterhouseCoopers’ pharmaceuticals division, says: ‘Five years ago, Big Pharma saw generics as the enemy; now, the business is viewed as part and parcel of what they do. Companies are diversifying to have a foot in both camps.’

Novartis was the first big patented drugs company to make a splash in generics, paying $8bn to acquire Hexal of Germany in 2005. The sector is also expanding from within: Israeli group Teva, is bidding for Barr, a US rival.

For now, though, the drug companies remain highly dependent on blockbusters: GSK generates 40 per cent of turnover from just two products, Avandia and asthma drug Advair. Past concern about the safety of Advair has hit both sales and GSK’s stock price.

So desperate is Big Pharma to secure future profits that some groups, such as Roche, are diversifying into diagnostic equipment to become more broadly defined ‘healthcare’ groups.

Elsewhere, cold winds are blowing from the US, where Barack Obama is threatening to hole Big Pharma below the waterline. Obama wants Medicare to bulk-buy drugs for the elderly and sick to drive down prices that on average are twice as expensive as in Britain. As things stand, doctors order drugs on a case-by-case basis from individual companies that ‘charge the earth’, says one analyst.

Predictably, Big Pharma is squealing, but with polls showing credit-crunched Americans are more concerned about healthcare costs than Iraq, they should, perhaps, expect the worst.