Saturday, January 12, 2008

Industry: Is Big Pharma in Trouble?

Is Big Pharma in trouble? And, if it is, how bad could it be? Or, maybe I should explain why I’m making such an outlandish statement. I’m looking at three events this week. The first is an article that appeared in the Financial Times indicating that the United Kingdom’s National Health Service (NHS) was seeking a 10 per cent reduction in the cost of medicines that it purchases. A spokesperson for the NHS said that he hoped to have these negotiations completed by June. Next, the Newark Star-Ledger ran an article talking about the slow down in new drug approvals at the Food and Drug Administration (FDA). The writer, George E. Jordan, offered stark proof of what many have known for some time, that new drug research is slowing down compounded by an apparently more careful review process at the FDA. Finally, in this election year, there were the results of the New Hampshire primary. The Republicans still have no clear frontrunner. What does pass for frontrunners don’t appear to be too focused on the issues of concern to Big Pharma. With the Democrats, Hillary Clinton is alive and well with renewed vigor and I think we all know how she feels about Big Pharma. Her rivals can’t be expected to be much friendlier. Now, where do all these leave Big Pharma?
The dangers of undue concentration with only a few customers or one is shown in the United Kingdom, especially when they have the full force and authority of a legislature behind them. Combined with key drugs coming off patent and the threats provided by generics, profit margins will be squeezed. Those margins could come under further pressure if new “blockbuster” drugs don’t come out of the pipeline to offset the older products. The cost cutting and employee layoffs that have been the norm lately in Big Pharma may not be over. And, as if this isn’t enough, the impending U.S. Presidential election does not augur a friendlier environment in the future.

So, going back to my original question, is Big Pharma in trouble? I believe the answer is yes for the reasons that I’ve just given. The next question is how bad could it be? With revenues ready to tank, an inappropriate expense base, and no good prospects ahead I’m predicting that we will see several years of Big Pharma earnings declining under pressure. Some of the players may begin to fall out. My friend, Larry Rothman, in an earlier entry (A Challenge to the Life Sciences Services/ Consulting Industry, December 12, 2007) said that he believed Big Pharma management couldn’t buy their way out of trouble currently because of overly high values yielding poor results. If market valuations begin to fall then acquisitions might start again. But, that would only be bottom feeding and a turn around could still be several years off. Without new products, reduced industry capacity, a more realistic cost base, and a predictable pricing formula for its products then Big Pharma will continue to be in big trouble. There will be no quick or easy answers here. We may be looking at a decade or more before things get better for Big Pharma.

Contributed by Guy de Lastin

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