The loss poses a daunting challenge for Pfizer, one shared by nearly every major pharmaceutical company. This year alone, because of patent expirations, the drug industry will lose control over more than 10 megamedicines whose combined annual sales have neared $50 billion.
This is a sobering reversal for an industry that just a few years ago was the world’s most profitable business sector but is now under pressure to reinvent itself and shed its dependence on blockbuster drugs. And it casts a spotlight on the problems drug companies now face: a drought of big drug breakthroughs and research discoveries; pressure from insurers and the government to hold down prices; regulatory vigilance and government investigations; and thousands of layoffs in research and development.
Morgan Stanleyrecently downgraded the entire group of multinational pharmaceutical companies based in Europe— AstraZeneca, Bayer,GlaxoSmithKline,Novartis, Novo Nordisk and Roche— in a report titled“An Avalanche of Risk? Downgrading to Cautious.” The analysts wrote,“The operating environment for pharma is worsening rapidly.”
The same concerns apply to drug giants in the United States. They are all struggling with research failures as they scramble to replace their cash cows, like Pfizer’s multimillion-dollar gamble on a replacement for the cholesterol-lowering drug Lipitor, which failed miserably in clinical trials. Drug companies cut 53,000 jobs last year and 61,000 in 2009, far more than most other sectors, according to the outplacement company Challenger, Gray&Christmas.
“This is panic time, this is truly panic time for the industry,” said Kenneth I. Kaitin, director of the Center for the Study of Drug Development atTufts Universityin Medford, Mass.“I don’t think there’s a company out there that doesn’t realize they don’t have enough products in the pipeline or the portfolio, don’t have enough revenue to sustain their research and development.”
While industrywide research and development spending has nearly doubled to $45 billion a year over the last decade, theFood and Drug Administrationhas approved fewer and fewer new drugs. Pfizer andEli Lillyhad major setbacks last year in once-promisingAlzheimer’sdrug experiments.Merckstopped testing its top acquisition from its merger with Schering Plough, a blood thinner that caused dangerous amounts of bleeding.
Drug company executives have begun addressing the calls for reinvention.
“We have to fix our innovative core,” Pfizer’s new president, Ian C. Read, said in an interview recently. To do that, the company is refocusing on smaller niches incancer, inflammation, neuroscience and branded generics— and slashing as much as 30 percent of its own research and development spending in the next two years as its scientists work on only the most potentially profitable prospects.
Consumers should see a financial benefit as lower-cost generics replace the expensive elite drugs, but may suffer in the long term if companies reduce research and do not produce new drugs that meet the public’s needs.
“You don’t lay off R&D if it’s just a cycle,” says Erik Gordon, a clinical assistant professor at theUniversity of Michiganbusiness school who follows the pharmaceutical industry.“That kills progress.”
The federal government is also concerned about the slowing pace of new drugs coming from the industry.Francis S. Collins, director of theNational Institutes of Health, recently proposed a billion-dollar drug development center at the agency.
“We seem to have a systemic problem here,” Dr. Collins said, adding that government research efforts were intended to feed the private sector, not compete with it.
Mr. Read of Pfizer says new products can replace some but not all of the patent losses.
“The hurricane is making landfall,” said Jeremy Batstone-Carr, an analyst at Charles Stanley Securities, but he added that Pfizer is among several drug companies giving solace to shareholders by returning money through stock buybacks and dividends. Pfizer’s best asset, he said, is its $20 billion stockpile of cash. Yet since 2000, Pfizer’s and Merck’s share prices dropped about 60 percent, while the Dow rose 19 percent.
Several of the drug titans have bought competitors with newer products to fill their own sales gaps, essentially paying cash for future revenue as their own research was flagging. In the last two years, Pfizer paid $68 billion for Wyeth, Merck paid $41 billion for Schering-Plough, Roche paid $46 billion forGenentech, andSanofi-Aventispaid $20 billion forGenzyme.
Henry G. Grabowski, a professor of economics and director of theDuke Universityprogram in pharmaceutical health economics, likened the recent pharmaceutical megamergers to those that occurred in the banking and telecommunications industries when they were hit by financial shocks in the 1990s.
But he warned that this wave would not guarantee significant research developments in the long term.
“It’s never been shown that these big horizontal mergers are good for R&D productivity,” Dr. Grabowski said.“I’m in a show-me mode that they get you any real advances other than some short-term cost efficiencies that wear out.”
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