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.
At long last Big Pharma's ill-begotten profits are slated to take a major financial hit. *
THE NEW YORK TIMES
Pfizer’s multimillion-dollar gamble on a replacement for the
popular drug Lipitor, which lowers cholesterol, failed in clinical trials.
By DUFF WILSON
March 6, 2011
At the end of November, Pfizer stands to lose a
$10-billion-a-year revenue stream when the patent on its blockbuster cholesterol
drug Lipitor expires and
cheaper generics begin to cut into the company’s huge sales.
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Pfizer could lose $10 billion in annual revenue when the
patent on Lipitor, the cholesterol-cutting drug, expires in November.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 Stanley recently
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 at Tufts University in 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, the Food and
Drug Administration has approved fewer and fewer new drugs. Pfizer and Eli Lilly had major
setbacks last year in once-promising Alzheimer’s
drug experiments. Merck stopped
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 in cancer,
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 the University of Michigan
business 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 the National
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 for Genentech, and Sanofi-Aventis paid $20
billion for Genzyme.
Henry G. Grabowski, a professor of economics and director of the Duke University program 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.”
As they move beyond the blockbuster model, companies are refining their
approach toward personalized medicines and forming more partnerships. Using
genetic or other tests, the plan is to sell new drugs not to millions and
millions of people, but to those who would most clearly benefit.
Still, the industry faces intense pressure from generic competition and has
tried every tactic to ward it off, including extended-release versions of the
same medicine and new pills that combine two ingredients. But 75 percent of all
prescriptions
in the United States are now low-price, low-profit generic drugs.
At the same time, pharmaceutical companies are being urged by managed care
and government health programs to cut prices and improve reimbursement terms
for their most profitable pills.
That follows similar practices in Europe, where Germany and the Britain,
among other countries, are all increasing pressure for lower drug prices.
“Europe is an ugly place to do business today and will be in five years’
time,” Christopher A. Viehbacher, chief executive of the French drug giant
Sanofi-Aventis, said in an interview.
In the United States, Mr. Viehbacher said generic drugs were taking over the
primary care market, leaving the best growth potential in specialty markets and
in emerging nations like China, Brazil and Indonesia.
Even in those markets, health systems will not be the profit centers that
the United States has been. China, emerging this year as the third-largest
pharmaceutical market behind the United States and Japan, plans to cut hundreds
of drug prices by an average of 40 percent.
The drug industry has long said that Americans fueled the research engine,
spending much more per capita on prescriptions than in any other nation, and
paying the highest prices for prescribed medicines.
Drug industry lobbyists have beaten back Democratic proposals to set prices
at the lower levels of nations like Canada or to allow Medicare to
directly negotiate prices. The industry, by supporting President Obama’s health care
overhaul, capped its contribution at $90 billion over 10 years in return for
the promise of up to 32 million newly insured customers starting in 2014.
The new law also contains a major threat to drug industry profits in a
little-known section that would allow centralized price-setting. Beginning in
2015, an independent board appointed by the president could lower prices across
the board in Medicare unless Congress acted each year to overrule it. Medicare
pays more than 20 percent of the nation’s retail drug bills.
The industry has also been unsettled by the scores of fraud, bribery and
kickback cases involving conduct that federal investigators contend have added
billions to the nation’s drug bill. The penalties have been stiff, and the
settlements steep.
In 2009, Pfizer paid the largest criminal fine in the nation’s history as
part of a $2.3 billion settlement over marketing drugs for unapproved uses.
Some analysts say larger fraud and foreign bribery cases will come. The drug
companies are responding with extra-careful sales training and vows to restrain
marketing zeal. But the change in corporate culture could cost them: internal
documents show some of the companies have profited spectacularly from seeking
federal approval of a new drug for a limited use, then marketing it far more
widely off label.
Other changes are afoot that will no doubt affect the bottom line. They include
growing restrictions on gifts, fees and trips to influence doctors to use their
products; curbs on the ghost writing of medical journal articles and a push for
more disclosure of negative study results. As the golden age of blockbuster
drugs fades, so are some of the marketing excesses of the past two decades —
the tactics that helped bring in immense profits.
Some analysts see the industry’s decline as an investment opportunity. They
say drug stocks are good buys because of low price-to-earnings ratios, which
typically reflect industry decline or investor pessimism, and high dividend
yields averaging more than 4 percent a year.
