Never more than five years behind the reality of fundamental business trends, the New York Times reported last Sunday that the pharmaceutical industry is facing serious challenges. According to the Times' discovery of last decade's news, the patent cliff has finally arrived because this year, ten brands will expire with collective, annual sales of almost $50 billion. At the same time, the Times noted, the pace of new drug approvals has slowed to a crawl, while governments and other third-party payers increasingly resist paying premium prices for branded (as opposed to generic) drugs. Pharma has also hurt itself with a weekly drumbeat of dirty tricks (off-label marketing, twisted clinical trials, rigged publications, bribes to influential physicians) that continually erode the public's indulgence for the high profit margins that come from sick people.
With aphasic understatement, the Times noted Morgan Stanley's recent downgrade of all Big Cap pharmas based in Europe (including GlaxoSmithKline, AstraZeneca, Roche, Novartis, and Novo Nordisk). Of course the Times story did make clumsy attempts at alacrity by including gee-whiz quotes such as, "the hurricane is making landfall," "We seem to have a systemic problem here," and "This is truly panic time for the industry."
So far, so stale. When the Times' story attempted to report on pharma's strategies for improving the situation, the lack of even superficially critical discernment became apparent. In fairness, the failing is not unique to the writer or to the Times. To the contrary, the foundational cliché of mainstream journalism is: on-the-one-hand-this, on-the-other-hand-that reporting. In such fashion, the Times first reported that the sky is falling on pharma and then referred to three paths that industry leaders are taking to restore mid-'90s glory. Alas, the prospects of even one approach were not discussed because the corollary of this two-handed, "objective" journalism consists of, "let the reader decide."
So what about pharma's main paths toward redemption? The biggest effort lies in cultivating new markets and relying on cheap labor in the developing countries. Conversations that include mention of the BRIC countries (Brazil, Russia, India and China) replaced "outside the box" in pharma's hallways shortly after 9/11. The Times quoted Sanofi-Aventis' CEO, Chris Viehbacher, to the effect that Europe (and implicitly, the US) has become an "ugly" place to do business.
Now beyond the fact that the pursuit of new markets and cheap labor were the hallmarks of 19th century European imperialism, the short story is that pharma will not be able to capture its traditional, 30% margins (net income over sales) in China and the other developing countries. Victoria's governor-general ceased to run the Raj in 1947, while the days of corrupt generals and royal families skimming local wealth under the US's pursuit of "stability" (imperialism in skinny jeans) are numbered. Seventy-five percent of all US prescriptions are filled with low-margin generics and the percentage of generic use in developing countries will be appreciably higher. Moreover, China, India, Russia and other countries know about the profit potential and the national security importance of a domestic pharma industry. Accordingly, they've made it clear that they will favor competitive local products over those from American and European companies. For these and other reasons too long to discuss here, the prospect is that the proportion of pharma's sales volume from developing countries will continue to grow, although the big margins that the industry enjoyed in the US during the '90s will not materialize.
Another strategic direction mentioned and unexamined by the Times concerns giving up blockbuster products for those in smaller, niche categories. That clearly makes sense, or at least it would have 20 years ago, when the industry was far more fragmented. After two decades of shortsighted mergers and acquisitions, senior executives know that they can't support quarterly earnings growth for a company with $160 billion of capitalization by relying on small, niche products. Even now they can make small product revenues work by jettisoning substantial parts of their dinosaur mega-companies, but that won't happen because executives don't receive higher compensation for managing smaller companies.
Finally, the Times mentions personalized medicine as the scientific paradigm that will lead to breakthrough products and public willingness to pay premium prices. Perhaps that's so, in the same sense that education will provide Americans with prosperity and well being in the 21st century. Well-being and breakthrough drugs may both come to us some day, but not soon, certainly not in time to pay next month's rent.
All is not lost, because here and there one can discern some efforts by a few innovative people in pharma that just might restore profitability and integrity. That news is fit to print on another day.
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