Link: http://www.guardian....1040234,00.html
Date: 09-12-03
Author: Nils Pratley
Source: Guardian Unlimited
Title: Bitter pill for the world's drug companies
Comment: You won't see me crying any crocodile tears for these boys and girls.
Bitter pill for the world's drug companies
Investment bankers prescribe merger therapy
Nils Pratley
Friday September 12, 2003
The Guardian
The pharmaceuticals business, on the face of it, looks like the epitome of a modern, mature industry that has found a comfortable way to make profits by the billion: it's global, hi-tech, and has the ultimate customer, the healthcare budgets of the world's richest countries.
It does not look like an industry with a looming crisis, yet that is the conclusion of a research report by pharmaceutical analysts at investment bank Dresdner Kleinwort Wasserstein. They think the world's major drugs companies are operating a business model that is unsustainable and "rapidly running out of steam".
The solution, they argue, is more consolidation. That may sound like more of the same, given that most of the drug corporations - including Britain's GlaxoSmithKline and AstraZeneca - were created by mergers, but it is consolidation with a difference.
This time, DKW says, the prime purpose of the deals should be to create dominance in just a few areas of therapy, such as oncology, cardiovascular or CNS, as the industry refers to the central nervous system. Parts of the combined operations that fall outside the core areas could be sold off, maximising the efficiencies in research and development and sales and marketing and making these huge corporations more manageable.
The crisis predicted by DKW is the result of the industry's failure to maintain the trick that it had performed since the late 1960s - namely to push up prices.
In the old days, a large drugs company would count on annual sales increases of 12-15% and would reckon to plough back 15% of its sales into research to develop the next generation of drugs.
Those ratios worked well, but they relied on half the sales increases coming in the form of increased prices. Globalisation seems to have put an end to that. Drugs now cross borders with ease, and it is harder to keep prices artificially high in some territories.
Nor are politicians as accommodating: most governments' healthcare budgets are under pressure and in the United States, the Democrats are calling for drug prices, which are among the world's highest, to be linked to a global average price.
In the wings are the generic suppliers, who have become skilled in challenging patents on prescription drugs and so get their copycat products to market much faster. The startling fact is that nine of the top 10 fastest growing pharmaceutical companies last year were manufacturers of generic drugs. It would not be such a problem if the companies could cut their costs of production - in other words, increase the efficiency of their research.
But the evidence shows that the labs are in fact becoming less efficient; a meeting of research heads at major drug companies this year concluded that it now costs $1.4bn to develop a drug, or new molecular entity (NME), compared to $800m three years ago.
There seem to be fewer new drugs around. Pharmaceutical companies give very early indications to investors of their research programmes and DKW calculates that over the next six years there will be 0.3 NMEs per company per annum, with sales potential of over $400m at peak. "That is a tenfold shortfall from the two to three NMEs promised by the industry only three years ago," it comments.
Adding up the bad news, the report concludes that the world's top 17 pharmaceutical companies will deliver growth in sales of prescription drugs of just 5.9% over the next six years.
One of the prime drivers of its proposed solution - mergers and takeovers - is clearly cost savings, and the table below indicates the scale of those. In some cases, the figure is huge - $4.9bn if Pfizer were to buy Novartis.
The 13 possible deals in DKW's table are not just about cost savings. It has excluded possible deals where sales growth would be diluted for the acquirer, and the other chief criterion is the "fit" between companies' therapy areas.
It will read as good news for Glaxo's professional advisers, since Britain's biggest drug company has four potential targets. Johnson & Johnson would boost Glaxo's dominance in anti-infectives and CNS; Aventis offers diabetes and anti-infectives; Schering Plough would bring anti-virals expertise; Novo Nordisk is strong in diabetes, where Glaxo's major product is Avandia.
For AstraZeneca, there are two major possibilities - Wyeth, which is complementary in CNS and thrombosis, and Novartis, whose strength in hypertension and heart drugs fits well with the British company's drive in the cholesterol market. The latter would rank as a mega-deal, with cost savings of $3.1bn and a combined global market share of 8.7%.
That share of the market might seem high, but consider how pharmaceuticals compares to the automotive business, another industry that is global and mature. In automotives, just five companies account for 60% of the market; in the drugs game it is 20. Within a few years, it will almost certainly be fewer.
