Saturday, August 7, 2010

Big Pharma – Why the Doom and Gloom?

OK, last week, I announced the end of Big Pharma. CNBC and the Wall Street Journal haven’t called me yet. (And, if they ever do, you’ll know that it’s been really slow week in the markets.) I suspect that many of my readers (you’re out there somewhere) probably dismissed me as either a crank or a sensationalist. But, for that faithful minority who have kept the faith, I can say that there is a method to my madness. In this blog, I’ll write about some of my reasons for taking this position.

First, I’d like to return to GlaxoSmithKline’s problems with Avandia. Shelley DuBois has written an interesting article about this at ( ). In particular, she raises the point of what does it mean for future drug investments if after eight (8) years on the market a drug can be pulled by the FDA, not to mention the potential for litigation. This is important because it hits right at the heart of today’s drug business – making money. If a reliable cash flow can’t be forecast, investors will seek a higher return to offset the risk. However, potential returns aren’t infinite. I make the point to reinforce that business as usual is over for the pharmaceutical companies.

Next, here’s another interesting blog ( ) by Martha Rosenberg at She has two points that in particular stand out for me. She notes the move of Big Pharma away from its current big molecules to vaccines and biologics and the resistance being encountered from the anti-vaccine movement and how it may be returning to inventing new diseases for the drugs that it’s just happened to have developed. Martha then proceeds to list and describe eight new diseases that we may soon see being advertised on television soon. ( I also like how Martha snuck in the fact that a former CDC director, Julie Gerberding, is now the president of Merck vaccines.)

I’m using these two sources to substantiate my case that Big Pharma’s revenue model is dead and future growth will be unsustainable. If greater risks without offsetting higher returns are to be the future then new private sponsorship of drug development will wither away. Healthcare reform will act as a ceiling to potential returns.

Healthcare reform will also act as a brake, or at least introduce uncertainty, into “new” diseases being introduced for reimbursement anytime soon. A move to prevention as opposed to treatment on the part of the public could cause new drugs to be less successful upon introduction than in the past.

In closing, I see much turmoil ahead for pharmaceutical companies. Let’s watch earnings announcements over the next several years and see what happens.

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

Contributed by Guy de Lastin

No comments: