Healthy Skepticism Library item: 8253

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Publication type: news

Wachman R.
Big Pharma set to dissolve as competition dilutes profit
The Observer 2007 Feb 4
http://observer.guardian.co.uk/business/story/0,,2005202,00.html

Full text:

Just as Sanofi-Aventis ponders a deal with Bristol-Myers Squibb, creating a new giant to rival the world leader, analysts are suggesting the age of medical monoliths is over. Richard Wachman reports

Sunday February 4, 2007
The Observer

It is a familiar story: pharmaceuticals giants getting together to create even bigger corporations that have more cash to develop blockbuster medicines with the potential to treat life-threatening diseases. And it makes sense, right?
Not to everyone. As Sanofi-Aventis, Europe’s biggest drugs group, ponders a merger with Bristol-Myers Squibb, its smaller US rival, to create an organisation as big as world leader Pfizer, questions are being asked about the rationale for such deals.

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Neil Ransome, head of the pharmaceuticals arm of PricewaterhouseCoopers’ corporate finance department, says: ‘Evidence that mega-mergers in this sector improve the rate of discovery of new drugs is not compelling.’ An analyst at a leading investment bank agrees: ‘Big is not always beautiful, although there are advantages in scale.’
British experts need look no further than our own drugs giant, GlaxoSmithKline, formed by a merger in 2000, to get a taste of what ails Big Pharma – the top-earning pharmaceutical companies. Although chief executive Jean-Pierre Garnier and his scientists have worked hard to build up a ‘pipeline’ of potential blockbuster drugs, the share price has bombed from around £18 not long after the company’s formation to about £14.20p now.

GSK’s fourth-quarter profits are expected to be hit by the weak dollar, but the consensus in the City is that it will still report pretax profits of £7.8bn when it unveils its full year results on 8 Feb, compared with £6.7bn in 2005. Sales are predicted to have risen to £23.4bn compared with £21.6bn last time. Expectations for this year are likely to be muted because of slowing growth in GSK’s top selling asthma drug Advair, and new rivals for its second biggest drug Avandia, for diabetes. The group is also hoping for approval for breast cancer drug Tykerb and cervical cancer vaccine Cervarix.

Jeremy Batstone, pharmaceuticals analyst at broker Charles Stanley, insists that prospects for new products are encouraging. ‘GSK is successful, although it has taken a long time to take off,’ he says. Others prefer to wait for the promised pipeline to materialise before recommending GSK to clients.

Ransome says several factors are weighing on drugs groups: increasing competition from generics; the rising cost of bringing drugs to market, in part because new products must pass through more regulatory hoops; and pressure from politicians for companies to cut the prices of prescription drugs sold to subsidised health services on both sides of the Atlantic.

Nonetheless, if Sanofi-Aventis does buy BMS, investors will probably support the transaction. The combined entity – which would command a market value of £90bn – offers scope for cutting hundreds of millions in costs.

As always, there are ego issues in the mix. Buying BMS would be a coup for Sanofi chairman Jean-Francois Dehecq, who is due to retire in 2009. ‘If he can pull this one off, the Europeans can, at last, put one past the ubiquitous Americans,’ says an industry source. But Dehecq may not have a clear field. Oddo Securities analyst Jean-Jacques Le Fur believes rivals may try to block Sanofi, to prevent it dominating several therapeutic fields, such as cancer. He mentions Novartis and GSK as rival contenders, as well as AstraZeneca, which recently disclosed plans to collaborate on diabetes drugs with BMS.

The talk in the City is about ‘short-term earnings accretion’, a boost to the bottom line, assuming a merger materialises. But if there is no deal perhaps history will judge this as a turning point: the moment Big Pharma began to rethink the merits of consolidation.

A week before news of the merger between Sanofi and BMS leaked into the public domain, Pfizer chairman Jeffrey Kindler unveiled a shake-up that sent shockwaves through the industry. It wasn’t just the axing of 10,000 jobs: he also indicated the company might have to start doing things very differently. That was remarkable for a company that made profits of $15bn last year. But are blockbuster products what it’s all about these days? When generic manufacturers were thin on the ground, companies could make a good living from a handful of big sellers. Now, generic companies have become global. Conventional firms such as Pfizer and GSK take on average eight years to develop products from initial research to regulatory clearance. After that, patents can be challenged in as little as 10 years. So they must run fast to maintain momentum.

According to a recent report from Accenture, up to $1 trillion of ‘enterprise value’ – future profitability – has been wiped out because investors no longer believe Big Pharma can deliver decent, sustainable growth over the medium term. Says Ransome: ‘The industry is in flux. Biotechnology rather than simple chemistry could drive profits in future. Biotech solutions take into account the genetic profile of patients. So we may get fewer blockbuster drugs which offer a one-size-fits-all solution, but perhaps make little impact on up to 40 per cent of patients.’

GSK’s Garnier has recognised the trend: steering clear of consolidation, prioritising R&D, offering fat rewards to scientists who deliver, and agreeing with biotech companies to give GSK first refusal for sophisticated, more tailored drugs.

Could the trend go further? What about turning the whole industry on its head by separating research, manufacturing, sales and distribution? There are plenty of academics in the US openly talking about the failure of vertical integration.

A few weeks ago, analysts at Citigroup shook the market with research suggesting that breaking up GSK could boost the value of the firm by half and enable the company to return about £20bn to shareholders. Citigroup’s drugs expert Kevin Wilson reckoned, for instance, that GSK’s consumer business – which makes Ribena and Lucozade – could be split from the vaccines, oncology and cardio-metabolic arms.

But Garnier disagrees. He says: ‘We have made significant progress, by improving efficiency and building a very promising pipeline. We have taken big steps to reinvent the Big Pharma R&D model. I will not claim victory, because that is unrealistic, and the environment is tough. We cannot relax and we have to be paranoid if we are to produce new, important drugs and make R&D more predictable. The Big Pharma model is not broken, but it must evolve. This is a journey.’

Pfizer – which gave the world Viagra and its best-selling medicine Lipitor, for lowering cholesterol – also finds itself under pressure from shareholders. Lipitor, which generates $13bn of Pfizer’s revenue, comes off patent in four years’ time. And competitors are muscling in with alternatives to Viagra, sparking concern about future sales. Now, Kindler is talking about the need to do everything differently: paying as much attention to drugs with a turnover of $500m as to ones that generate 10 times that. He did not say it in so many words, but Kindler is surely questioning the rationale for big company mergers and the cult of the blockbuster.

Whether any of this has any bearing on a possible takeover of Bristol-Myers Squibb by Sanofi or someone else remains to be seen. Ransome says: ‘Change is in the air. I doubt it will happen quickly. But watch this space.’

Why we don’t swallow what drug firms say

Big drug groups have rarely been less popular: a recent survey in the US found most people held them in the same low esteem as tobacco firms.

According to a study published last week by accountancy group PwC, the public, doctors and health insurers believe the industry has put profits before patients, abandoning its original vision of improving health and alleviating pain. Peter Claude, a partner at PwC, says: ‘It is difficult to comprehend why an industry that has saved so many lives is held in such low esteem. But the public is questioning its motives.’

Big Pharma is in the doghouse for several reasons. In the US, prescription drug prices have rocketed and the most vulnerable patients are the least able to pay – those on Medicare without supplementary insurance.

All over the world, drugs companies are in an expensive race with each other to come up with new treatments and market them, sometimes aggressively, to health specialists. The public backlash comes after a number of high-profile drugs were withdrawn following allegations of dangerous side-effects.

In 2004, Merck pulled arthritis treatment Vioxx after it emerged that it could increase the risk of heart attack and stroke. Now, the group spends $1m a day fighting lawsuits linked with Vioxx and has set aside a fighting fund for legal action which could go on for years.

The PwC survey reveals that 73 per cent of respondents agree that drug companies spend too much time and money attempting to prevent generic medicines from competing with their branded products. ‘Consumers strongly believe drug companies should work with generic manufacturers to make generics available upon expiration of their patent,’ says the report.

There is also suspicion that the industry is nowhere near as innovative as it claims. One analyst says: ‘Big Pharma spends too much time promoting treatments that are mere variations of top-selling drugs already on the market. That way, the companies make big profits, while spending relatively little on research and development.’ Another complaint turns on the reluctance of drugs groups to provide affordable HIV/Aids medicines to developing countries. GSK, however, says the company is now providing cheap HIV drugs to Africa, which it regards as a ‘not-for-profit’ territory, and other giants have taken similar measures. But a recent Oxfam report said insufficient progress had been made. It accused the EU and the US of apathy, and of protecting the interests of its multinationals, some of which are fighting to have patents enforced. Pfizer, for example, is challenging the Philippines government in a bid to extend its monopoly on Norvasc, a blood-pressure drug. And Novartis is engaged in litigation in India to enforce a patent for Glivec, a cancer drug, which Oxfam says could save many lives if it were available at generic prices.