Saturday, January 26, 2008

Industry: Will there be a shakeout in the pharmaceutical sector?

In my recent blogs, I’ve been writing about if Big Pharma is in trouble. I think that I’ve made the point that it is and probably will be in trouble for the next decade. The question is what happens next?
Probably what has happened in every other industry with excess capacity since the Industrial Revolution. There will be a shakeout. Strong players will survive and the weaker ones will go by the wayside. OK, that’s simple enough, but, how will this occur? I have some thoughts here.
First, the well documented saga of the drying up of Big Pharma’s new product pipeline should put a premium on companies with strong research and development teams. Differentiation will have to come to those who can produce their own products. The feeding frenzies that result from bidding wars for perceived valuable targets generally result in overpriced acquisitions that rarely pay back in the expected manner. Companies that can’t develop their way out of their difficulties could end up as acquisition targets of Indian or Chinese companies.
Next, those self styled health care companies that are really conglomerates in disguise may begin to be broken up. In the balmy days of easy revenue growth, all sorts of synergy arguments (at the risk of dating myself, I can remember these arguments from the Sixties) could be made for having other product groups like medical devices and consumer products. Reality will begin to set in as the oft promised synergies do not materialize. Once managements realize that they cannot continue to deliver the earnings expected by the markets then those private equity groups I was blogging about last time are going to start sniffing around. Even a company like Tyco that is not a pure health care play has spun off its medical device group. Anyone care to speculate on how long they will remain on their own before someone tries to bring it into play with other device manufacturers?
Finally, my last two observations will result in fewer large players in Big Pharma. The ones that remain will have strong research and development groups and be taking advantage of offshore opportunities in places like India and China. These players will focus on pharmaceuticals solely and not be distracted by devices or products like hair shampoos. Medical devices will probably have a shakeout and consolidation like Big Pharma. The consumer products will get absorbed into that game that’s playing out between major players like Proctor & Gamble and Wal-Mart. Foreign competition from new markets in Asia will arise and put pressure on market share and for those new start ups with new patents requiring funds for clinical testing, FDA approval, and marketing. The inevitable bidding wars for these start ups will continue as always. But, if Big Pharma gets its act together in developing new products then the bidding may not be as frenzied.
Friday’s (January 25th) pounding on Wall Street for Big Pharma (check’s Pharma Watch List for details) probably had more to do with overall market conditions than Big Pharma’s own problems. However, unless something changes soon, Big Pharma might have many more days like that one. Unfortunately, the shakeout I’m predicting is inevitable now. Now, it’s all about who makes the cut and who doesn’t.
I’d be very interested in hearing from you about this subject. Also, what companies do you think will make the cut or not? In future blogs, I plan on looking at specific companies and handicapping them. Something tells me that there will be some really good Big Pharma stories out there for the next few years.
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Contributed by Guy de Lastin

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