Big Pharma – the research-based pharmaceutical industry which has always depended on patented drugs – is increasingly interested in “poor” countries as places in which to make and sell drugs, including the “generics” it used to view with deep suspicion. This important fresh story is well-told by The Economist, 15 November 2008.
The biggest firms are buying into smaller ones because the latter innovate better. As the New York Times noted in August 2007, Big Pharma is doing deals with generics firms (which sell non-patented drugs), as it notices that more and more of its old drugs are coming off-patent. It is also noticing that more of its profits are coming from “poor” countries, where research is cheaper too. And it looks like it may be changing one of its most-criticised marketing habits. It’s going to stay big by adapting fast, not least to opportunities in these poor countries. The background The pharmaceuticals industry has doubled in size in a decade. The industry’s global sales are over $640 billion, and PricewaterhouseCoopers say:
By 2020 the pharmaceutical market is anticipated to more than double to $1.3 trillion, with the E7 countries – Brazil, China, India, Indonesia, Mexico, Russia and Turkey – accounting around one fifth of global pharmaceutical sales. […] [T]he current pharmaceutical industry business model is both economically unsustainable and operationally incapable of acting quickly enough to produce the types of innovative treatments demanded by global markets. In order to make the most of these future growth opportunities, the industry must fundamentally change the way it operates.
By the way: only about a tenth of the health dollar goes on these drugs. “Poor” countries are the future IMS, a leading pharma information company, reports
Lower-income countries in general are making up a larger portion of global pharmaceutical growth. Twenty-seven percent of total market growth last year came from countries with a per-capita gross national income of less than $20,000. Those countries contributed only 13 percent in 2001.
The geographic balance of the pharmaceutical market continues to shift away from the US toward the world’s emerging markets — countries with a per-capita Gross National Income of less than $20,000 — where the availability of healthcare is expanding and there is an increasing need for treatments associated with chronic diseases more typically found in developed countries. Emerging markets currently represent 17% of the global market, but will contribute 30% of growth next year. The US will account for about 36% of the total growth in 2007, significantly less than the 54% it contributed five years earlier.
Big Pharma’s problems PricewaterhouseCoopers, the consultancy firm opines
:
Pharmaceutical companies everywhere are suffering a dearth of new compounds in the pipeline, poor financial performance, rising sales and marketing expenditures, increased legal and regulatory constraint s and challenges, and tarnished reputation.
Indeed, says IMS, though 2006 was a good year:
The rise to $643 billion, which also was spurred by emerging markets, bucked four straight years of declining growth.
Solving the “pipeline” problem It costs an average $800 million to produce a successful drugs (this high figure takes account of all the failures). Getting on for 20 percent of commercial research and development is done by Big Pharma, and 12 Big Pharma firms are in the Top Fifty of worldwide R&D spenders. But the payback seems harder to get. According to research by a New York investment firm, Sanford Bernstein, cited in a report in The Economist magazine (27 October, 2007):
The global industry saw 24 new drugs approved by the US Food and Drug Administration in 1998 on the back of $257 billion spent on R&D. Last year the industry spent $64 billion, but only 13 new drugs were approved by the regulator.
Some drugs are harder to develop than others. Cancer drugs, for instance, are tough:
Although the number of new cancer drugs entering clinical development more than doubled between the early 1990s and mid-2000s, only eight percent of candidates with known fates won marketing approval in the United States, according to a study recently completed by the Tufts Center for the Study of Drug Development.
This approval rate compares with an overall U.S. marketing approval rate of 20% for all new drugs that began human testing in 1993-97, according to Tufts CSDD. In addition, the study found, U.S.-approved cancer therapeutics that entered clinical testing in 1990-06 took an average of seven years to complete the clinical development and approval process, compared with about six years for all new drugs approved by the FDA during the same period. Firms may find it hard to maintain the pipeline of new drugs from within their own laboratories, but Big Pharma has spotted other ways of finding new drugs. Tufts says:
While the percentage of product approvals from big pharma has generally declined in this decade, approvals from small/mid-tier pharma have shown rapid growth. The emergence of small/mid-tier pharma has also spurred a greater number of partnerships and collaborations with big pharma. Tufts CSDD analysis shows that this is paying off: the rate at which new drugs entered clinical testing increased 52% from 1998-02 to 2003-05, following a decline of 21% during the 1990s.
Big Pharma and the Third World Big Pharma has also found that it is increasingly expensive to employ researchers and test drugs in the rich world. It is much cheaper to test drugs on poor people in Asia and Africa. But Big Pharma has also discovered that it is cheaper to do very difficult work in the “Third World”. Big Pharma is doing deals with generics companies, particularly in India. And it claims it can do so because India, for instance, now enforces patent legislation. That leaves Big Pharma freer to develop patents there. The generics opportunity – and patent expiry Visiongain, an analyst of the pharmaceutical sector, says:
In sharp contrast to the branded pharmaceutical market, which has stalled in recent years, the generics market is enjoying a period of unprecedented success. In 2005 the world generics market was worth $45bn, a growth of 14% on the previous year. Visiongain expects this level of growth to continue. The loss of patent protection by 2009 of almost $80bn worth of top selling drugs will be the major driving force for this generic market growth. Additionally, as healthcare costs in the developed world continue to increase, and the growth of pharmaceutical markets in developing countries continues to grow, more generic copies of successful drugs are being sold worldwide than ever before.
The reputation low point In 1997 several Western firms challenged the South African government about its refusal to defend the firms’ patents. The drug firms had always been portrayed as not caring about the poorer sufferers from HIV/AIDS. But now they faced accusations of a special hard-heartedness as they seemed to be using corporate and legal bullying. (Actually, they won a partial victory which has led to good things: they persuaded the SA government to safeguard patents better, which made the firms more willing to sell drugs to some SA patients at lower prices.) Drugs for poor people A new social entrepreneurship in the air, with foundations like those headed by Bill Clinton, and Bill and Melinda Gates, the most well-known. Clinton’s foundation works with UNITAID, set up by several governments including Brazil, France and the UK – to negotiate low pharmaceutical prices for use in poor countries. These new players can negotiate low-profit deals with Big Pharma, which is far more sustainable and scalable than expecting firms to give away their product. A new marketing strategy Big Pharma looks as though it is rewriting its old strategy – much criticised – of spending huge budgets on marketing. In the US Big Pharma was accused of spending more on research (less than 20 percent) than on marketing (around 30 percent). IMS Health, the sector analysts, have suggested that firms too often “differentiate their pills using sales reps” – rather than by making better pills. (Economist, 27 October, 2007) The adage used to be, as Jean-Pierre Garnier, GlaxoSmithKline’s outgoing CEO told the FT: “If you spend more, you get more”. But he went on to say that GSK has been testing other ways of doing things, not least to cut back on the firm’s 31,000-strong sales force. New methods, using 20-40 percent fewer sales people, look like proving as successful as the older more profligate ways. A word on Big Pharma profits The pharmaceutical sector is often accused of being highly profitable (like there was something wrong with that). But if you check the share price record of a few famous pharmaceutical firms, you’ll find the share prices of many have underperformed the FTSE 100 for most of or all the last few years, or have seen long term share price declines. The list includes GSK, Merck, and Pfizer. Others have done much better, for instance Sanofi-Aventis and Novartis. The point is, Big Pharma is a part of capitalism’s rough and tumble. No-one can predict which firms are going to do well, or for how long. You can check share price charts at hemscott.com.
