Wednesday, November 26, 2008

Are Pharma Companies Headed Down the Same Path as Automotive? Part 2

Last week, I blogged about what may happen to Big Pharma after the dust settles from Big Auto and the rest of the financial crisis. I think that I made a pretty good case for revenues being off in the future. (I never said that I was humble.) In this blog and the next, I’ll write about what might happen to Big Pharma’s partners, the outsourcers and consultants.

This week’s blog will focus on the outsourcers. The whole idea behind outsourcing is to lower costs through economies of scale and price differentials (arbitrage). With either a stable revenue base requiring efficiencies or growing revenues that could be managed better, drug companies have used outsourcing, in particular, offshoring, to reduce their costs. But, what happens if those revenues decline dramatically? An article published this week (Sports Business Journal, November 17, 2008) suggested that drug companies’ revenues could decline by as much as $10 billion (10-20% we think) next year because of expiring patents and perhaps significantly more if the Universal Health Care promise from the Obama campaign platform occurs. Research and development spending could be greatly reduced as well.

For example, recently, Mike Huckman in his CNBC blog, ( ), noted that Charles River Labs’s pre-clinical laboratory business is off because small biotech firms aren’t spending there now. He implies that this problem with early stage testing could indicate more trouble further out. Mike also talks about how the credit crunch is curtailing these firms ability to finance drug development. My point is that as the business is shrinking, expenditures will fall, and fast, to preserve profitability. If there is no business activity then there’s nothing to outsource, right? Not to mention that outsourcing requires a financial outlay up front to start off which probably won’t be happening in 2009. If we are correct in our presumption that revenues and expenditures decrease next year, big Pharma is sure to revisit its outsourcing strategy. Deloitte’s decision earlier decision to close its outsourcing operations in the Asia/Pacific seems to indicate that the salad days of outsourcing may be drawing near.

I think that the train has already left the station for many outsourcers. Rates have been rising and companies have been becoming less enamored about the limitations of working with outsourcers. The traditional outsourcing meccas of India and China are being challenged by other emerging locations such as the Philippines, other Southeast Asia countries, Central and South America, Eastern Europe and even some areas of the US. This adds to the challenges these suppliers are confronting. While I’m not suggesting that the outsourcing industry will crater anytime soon, I believe that the rapid growth is over and there may be some consolidation to come.

The global recession and changes in public healthcare will affect the pharmaceutical industry adversely and probably for some years to come. The ripples will go beyond the industry itself. The outsourcing companies, whether they supply clinical trials, payroll, or other backroom functions, and who have profited from the drug companies’ growth in the latter part of the twentieth century are going to have to recede with them.

Next week, I’ll finish this series with my blog on how consulting companies will deal with Big Pharma’s coming downturn.

As always, we welcome your feedback. Please contact us at We look forward to hearing from you.

Contributed by Guy de Lastin

Sunday, November 16, 2008

After Big Auto, Is Big Pharma Next?

The election’s over and I have to admit I feel a certain sense of vindication. I called it. OK, so did just about every political pundit worth their salt. I’ve waited a few days before I wrote this blog because I wanted to see what would happen in the markets and in the nation after Obama’s election. I also had an opportunity to read some of the other blogs and media to see what was going on.
In this blog, I’m going to write about what could happen to Big Pharma in the future. Everyone is focused on Big Auto and what little time they have left goes to the financial services industry. Well, I write about the healthcare industry, drug companies in particular, and their fellow travelers, outsourcing and consulting firms and I’m sticking with it. The reason for my stubbornness is that what certain sectors are experiencing right now will inevitably overtake Big Pharma.
Gene Epstein, the Barron’s columnist, asked in his November 10th column, Economic Beat, how long the slump would last. He focuses on real consumer spending and suggests that a recession could be more serious and last longer if it deteriorates. This would not be good for retailers or auto makers. Layoffs are continuing to rise. People are losing their medical benefits. Anecdotal evidence in the media suggests that people are deferring or going without their drugs because of hard times. Not a good sign. Let’s move over to one of my favorite topics, the pharmaceutical industry’s lagging drug pipeline. Lagging revenues, and no new products to help out, sooner or later, cash flows are going to be affected. Isn’t this what happened to the auto industry? Selling products nobody wants (toenail fungus doesn’t seem like a priority when the sheriff is repossessing your home) and having none of the products that people want or really need hasn’t been a winning strategy for the auto industry and it’s not going to work for Big Pharma.
One of my favorite industry bloggers, Mike Huckman over at CNBC posted a blog last Thursday ( concerning the impact of the global financial crisis on the drug industry. He summarizes the results of study on the health of the industry conducted by Ernst & Young. The end of the blockbuster era and the struggle to figure out what happens next are put forward. Mike does his usual superb job in outlining the issues. (If you follow the drug industry, you have to check in with Mike regularly. Right after you’re finished here.)
Now, don’t get me wrong. I’m not predicting the next Great Depression. Unless people really lose their heads down in Washington, D.C. and elsewhere, we’ll come out of this on the other side. But, I’m not saying that we’re not going to have a recession like we haven’t seen for a long time.
In my next blog, I’m going to write about the outsourcing companies and what’s going on over there. That’s going to be an interesting story in 2009.
As always, we welcome your feedback. Please contact us at We look forward to hearing from you.

Contributed by Guy de Lastin

Monday, November 3, 2008

Obama’s Won, Now What?

OK, I’m getting ahead of myself, but only by a little. I understand that I have to wait for the votes to be cast and then counted for the rest of the world to know what I do today – Barack Obama will be the next President of the United States.

I’m going to leave the significance of this momentous event to the historians and the pundits. I want to talk about what this means to the people who read this blog. What happens to the Life Sciences/Pharmaceutical Industry now that we have a new Democratic President? Actually, a lot depends on what happens in the Congress and the Senate. If the Democrats can achieve a filibuster proof majority in both Houses then President-elect Obama is sitting in the catbird seat. Without these, a lot’s possible but it won’t be as easy.

Let’s start with Big Pharma. In my last blog, I forecast tough times ahead, if not an actual overhaul of the business model:

We may see a very significant decrease in private funding of major new drugs.

Mergers or acquisitions? Especially with target companies valuations falling? Not likely, unfortunately, given the state of the markets, mergers and acquisitions, except in the financial services industry, are practically nonexistent.

New drug pipelines that are already running dry. The FDA has not exactly been setting records for new drug approvals despite record R&D spending by Big Pharma. Are we to believe that the promised "new regulations" will help or hinder FDA cycles--we would strongly suggest that things will get worse for a while and approvals will be even more difficult and slower.

We think that 2009 will probably show declining revenues for the major drug companies, dramatically so if the ambitious plans for universal health insurance and concentration of buying power occurs--in fact Obama may be a breath of fresh air here compared with the McCain campaign promises (more like threats) toward big Pharma. Profits will depend on how well they manage their cost cutting programs. I won’t even go into what the foreign exchange markets’ impact could be.

Next, let’s talk about outsourcing companies. Here the damage may be even bigger than just the pharmaceutical industry. With a new President talking about giving preferential tax rates to companies that bring jobs back to America, folks might not be so quick to outsource/offshore jobs as they once were. (Remember that filibuster-proof Congress?). The other side of that equation is the possibility that R&D done offshore certainly will be more cost attractive and therefore may still be compelling.

Now, let’s talk about consulting firms. These guys are normally pretty good at playing it whichever way it lays. There is a unique problem this time, two things are working against them:

First, I don’t think the drug companies have figured out what to do next. They won’t spend until they do.
Second, with cost cutting (efficiency) programs being put in place as a response to declining revenues, there is another good reason not to spend money on consultants without laser4 focused projects. So, there is another industry segment could be in for a hard time.

This will be my final blog entry before Election Day. Assuming I’m right about the outcome, we’ll have a lot to talk about in the next few months. If I’m wrong, I’ll get over it and figure out what could happen next.

As always, we welcome your feedback. Please contact us at We look forward to hearing from you.

Contributed by Guy de Lastin