Years before the current global economic crisis hit, executives driving the world's leading pharmaceutical companies already had plenty to worry about. The expiry of patents on a number of blockbuster drugs had seen the evaporation of many billions of dollars in annual revenues as bargain-priced generic products flooded the market, while the expiry of many more lucrative patents loomed.
At the same time, the cost of drug discovery had been rising exponentially, greatly increasing the risks to investors. This in turn led to a shrinking of research pipelines at a time when the industry was desperate for new ideas, says Ernst and Young pharmaceuticals analyst Andrew Jones.
"Even before this [global economic] crisis was happening, the industry was facing its own crisis," says Jones. "Revenue erosion was occurring because patents were expiring and generics were entering the market."
Now, big pharma companies have to deal with something that few of them have any recent experience of: falling demand. Within key markets, all in some phase of recession, sales volumes are now expected to dip sharply, according to analyst firm IMS Health industry relations vice president Doug Long.
"With the rising dollar and the economic slowdown, which has caused the first decline in US healthcare consumption in recent memory, pharmaceutical companies can expect to see a decline in sales," says Long.
All of this is expected to accelerate the already hectic pace of consolidation throughout the industry as companies look for ways to bolster their IP pipelines and reduce costs.
According to Jones, the top 20 or so big pharma companies are looking to prune about $20bn in costs, a significant chunk of which will come in the form of job losses, expected to be in the order of 85,000 by 2012. This is despite the fact that the same top companies between them have enormous cash reserves amounting to several billion dollars.
It's tempting to conclude from this that the credit crunch part of the crisis is of no concern to big pharma. However, with the exception of defence or space exploration, it is probably the most cash-hungry industry on the planet.
With so much of the low-hanging fruit already gone with respect to big blockbuster drugs, the chances of finding the next 'hit' are slimmer now than ever, while the costs of production continue to rise exponentially.
With cash up but valuations down, this year is expected to see one of the most intense periods of consolidation the industry has ever experienced. Pfizer's announcement last month that it put $68bn on the table to buy Wyeth certainly set the tone.
Other industry behemoths including Merck, Sanofi-Aventis and Johnson & Johnson are rumoured to be on the hunt for acquisitions, with Bristol-Myers Squibb and Schering-Plough expected to be snapped up soon. Like many of its competitors, Merck is facing a number of patent expiries on top-selling drugs with very few prospects of replacing them.
With a market cap of around $60bn and $6.8bn in cash and short term investments, it's looking to go shopping.
Generally speaking, the pharmaceutical sector is in fairly good shape financially. For the biotech sector, however, it's the exact opposite and a spate of acquisitions is expected this year.
According to IMS, in the US alone as much as 38% of the country's 370 small biotechs do not have enough money on hand to operate for one year and almost 100 publicly traded biotechs have less than six months' worth of cash. In London, the Wellcome Trust charity that funds medical research has reported a doubling of the number of biotechs requesting funding.
"If the crisis continues and money stops flowing into the sector, some of these companies will run out of cash and cease trading," warns Jones. But while many companies will go by the wayside, those with promising research pipelines are likely to receive cash injections, or merger offers, from pharmaceutical companies looking to buy new IP.
"We will begin to see strong alliances and deal making between pharmas and biotech this year and next," says Jones, adding that pharma companies are already moving to strike deals earlier in the product cycle, and in many cases even before the clinical phase in the hopes of getting to market faster.
Companies are also realising that they need to be more responsive to the threat of generics. "We have seen, especially last year, a number of pharma companies make acquisitions of generic businesses," Jones adds. "They see an opportunity to lower overall risk of revenue line and also generics companies provide product backing to enter generic markets."
In 2000, Viagra (sildenafil citrate) accounted for 92% of the market for prescribed erectile dysfunction pills. Pfizer made $1bn in sales of Viagra between 1999 and 2001 alone. Despite its best efforts, the company's patent on sildenafil citrate will expire in 2011–2013, leaving a gaping hole in earnings. Globally, the generic drugs business is worth around $80bn a year.
However, as with everywhere else, sales are dropping and are projected to fall further, according to IMS vice president of healthcare insight Murray Aitken. In the 12 months to September 2008, growth in generics fell to 3.6% from 11.4% the previous year, ending several years of double-digit growth.
"We are seeing the first significant decline in sales growth as manufacturers increasingly compete in fierce price battles within most of the world's major markets," says Aitken. "This trend is apparent in markets like the US and UK as generics companies contend with aggressive competition and cost-containment measures enforced by private and government payers."
In addition to looking at traditional generics, many pharma companies have indicated their intention to invest in biosimilars, or drugs that are approximates of existing products. Biosimilars have generated some controversy, especially in the US, and the FDA has indicated that new legislation might be required.
Generally speaking, technology changes and consumer demand for more specialised medicines will force pharma companies to reduce their reliance on mass-market drugs by developing products in new therapeutic areas and creating more personalised solutions.
"The last 18 months has seen much change in the sector and I think we will continue to see pharma businesses diversify their revenue mix away from higher-risk pharmaceuticals," says Jones.
Changing of the guard
There are many challenges facing the pharma / biotech sector over the next few years, and nobody can say really how well it will fare. For instance, the low-cost manufacturing bases and growing IP within countries like India and China could well see companies in those countries pose a major threat to the established order.
Big pharma has long been one of the most powerful lobby groups in the US, skilfully exerting influence on health policy makers and key regulators such as the FDA, responsible for approving most medical products in the US. Many feel that this power may be on the wane. If so, there would be huge implications for the industry globally.
Clearly the halcyon days are coming to an end. The industry must now think creatively about how to address the current threats – a major part of which will be a more collaborative approach to research – while also addressing some of the negative perceptions of the industry.
One thing that has given analysts cause for some optimism in all of this is the gradual changing of the guard within many of the top drug companies. It is hoped that this will engender some fresh thinking in the boardrooms while also helping to reverse some of the negative perceptions of the industry.
In a major change of strategy the new head of GlaxoSmithKline Andrew Witty recently announced in UK newspaper the Guardian that he will slash prices on all medicines in the poorest countries, give back profits to be spent on hospitals and clinics and – most ground-breaking of all – share knowledge on potential drugs that are protected by patents.
It's a radical idea, but the scale and scope of problems currently facing the industry demands no less.