How God let down pharma giants

In the beginning, the God created man and a few diseases. Millions of years later, He commanded: Let there be a pharmaceutical industry. To take care of the diseases which, by then were tormenting and well spread. Man had also multiplied himself providing a vast market base to the industry.

The Almighty’s next round of review came soon enough. It took only less than two centuries and not millions of years as before. Seeing His children suffer, and the industry prosper, the God intoned an encyclical: no new ailments.

Who is hit by the God’s decision? Unkind felt the pharmaceutical industry. Drug making is perhaps as old as the mankind. But an organised industry for the purpose saw the light of the day only in 18th and 19th centuries.

Industrial fortunes were boosted in the early 20th century by the discovery of antibiotics. There after the sales and profits were on ever rising curve. Neither recession nor natural calamities could dampen the industry’s spirits. Now all of a sudden it finds itself trapped in a blind alley. Reason? No new diseases there calling for a fresh theraptic crop. It is a double whammy with God ill disposed towards the industry. The patented drugs are also going to be over soon. It was on patented drugs that the industry built its prosperity. In the next five years as many as 120 drug companies will lose their patents.

It will be a free for all then. Real laissez-faire will rule the market. Generic drug makers (read all in the industry) will seize the patents or formulas to for a killing. Low cost companies like India will benefit. Not surprising that the multinationals in the industry are fast sinking in the investor estimation. Mirroring discomfort levels, the pharma scripts on Wall Street declined by over 35 per cent in the past one year.

Forward movement thus stalled, the industry can now grow only sideways. So the orgy of mergers and acquisitions. Pfizer’s plucking of Pharmacia Corporation at $52 billion is not the last. In fact it will accelerate the m-trend of the m-trend to help the company country and boost the profit during the available interval. With Pharmacia in its hold Pfizer is the biggest behemoth in the industry boosting $45 billion in annual revenue and an R&D budget of staggering a $7 billion. In sheer size it is 40 per cent bigger than Glaxo Smithkiline (still better known as Glaxo) its nearest rival. Both Glaxo and other companies are frantically looking around for partners to challenge the might of new Pfizer. But the going for them in not smooth. Product overlap and antitrust issues will clog the road. And they will all doing so from a position of weakness. Most of them are in a tight corner with product delays and competition. 
The huge investments being made on R&D are also proving to be less and less cost-effective. Across the world amount of money poured into pharma labs tops $35 billion. Back in 1990, there was only a fourth of it. But the number of approved drugs is falling every year. With $32 billion worth patented drugs losing protection meeting both ends meet will be tough enough. 
In fact all was not well with the industry is the past two years. Before being plagued by the post-patent thoughts, it had nightmare. To begin with, collective bargaining forced medicare cost down across America and Europe. In the process hospital fees drug price are trimmed by as much as 35 per cent. By and large the drug companies survived the onslaught through transfer pricing. 

The next blow came from the form of AIDS – related drugs. With the virus spreading fast hopes flew high. The drug companies warmed up for rich haul. The drugs were put on the market with astronomical price tags. But outraged public opinion stopped the firms on the track. Companies caved before huge demonstrations and media fire. For the industry a whole in the Viagra range was not enough to fill the deep hole left open by competition losses elsewhere. All this does not mean the drug industry is down and out. Far from that. It being an essential ingredient for civilization. But the shape and content will change, with R&D spreading its tentacles to traditional and herbal methods of curing. The industry will retain its vibrancy. With little scope for patents the competition will be severe.

An example then to see. Take for instance steel. Though at a slow pace steel production is going up. The big giants in the steel industry are there with reduced market shares. The same thing will happen in drugs too. Vibrancy and super profits will go. But survival is assured. For you and me there will be cheaper medicines in. Let us all hope this is no phantom of a false dawn.

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