[Ip-health] The Economist- Beyond the Pill: Drug Firms Are Casting About for New Business Models

[Mike Palmedo]

Beyond the pill - Drugs firms are casting about for new business models

Oct 25th 2007 | NEW YORK
The Economist

"THE future is not terribly bright for most drug companies," says a new
report from Sanford Bernstein, a respected New York investment firm.
Such blunt talk is unusual on Wall Street, but it is no exaggeration.
Drugs firms, once rich and the favourites of investors, are urgently
seeking cures to a variety of ailments.

One is the erosion of patent protection. Not only are the copy-cat
manufacturers of cheaper generic drugs becoming emboldened by
cost-conscious politicians and legal rulings in their favour, but big
pharmaceutical companies are also facing an unprecedented wave of patent
expirations over the next five years. Pfizer alone will lose some $13
billion in revenue a year when Lipitor, its blockbuster cholesterol
drug, goes off-patent as early as 2010.

The industry's best hope lies in innovation, its traditional strength.
But it is finding it extremely difficult to come up with new
blockbusters. As the Bernstein report notes, the global industry saw 24
new drugs approved by the US Food and Drug Administration in 1998 on the
back of $27 billion spent on R&D. Last year, the industry spent $64
billion, but only 13 new drugs were approved by the regulator.

And even new drugs can no longer reliably command the huge premiums they
once did. Peter Lawyer, of the Boston Consulting Group, reckons the
global drugs market doubled in value to $600 billion in revenues in the
decade to 2005, chiefly from growth in America. But there is little
chance it will double again by 2015, he argues. If America were to adopt
European-style controls on drugs prices, as some Democratic presidential
candidates are proposing, half of the industry's profits would disappear.

Drugs are also being pulled from the market. Usually this is for safety
reasons, such as those which last year forced Pfizer to kill
torcetrapib, an experimental cholesterol drug, after spending $1 billion
on it. Traditionally, drugs firms did not yank products that were safe
even if they sold poorly. But now that has changed. Jeffrey Kindler,
Pfizer's boss, decided to wield the axe as part of his drive to reduce
costs and last week pulled Exubera, an inhaled insulin product, off the
market. For this, Pfizer took a $2.8 billion charge.

So what can Big Pharma do? Mr Lawyer thinks the deterioration in the
American market will force drugs firms to come up with new business
models that go beyond the industry's traditional and largely vertically
integrated approach to developing, manufacturing and selling drugs.

A sign of this happening is a recent move towards outsourcing. When
times were good, drugs firms refused to outsource manufacturing because
doing so, they argued, would result in quality problems and risk giving
away trade secrets. That strategy is being rethought. AstraZeneca, a big
British drugs firm, recently announced that it will start shifting
manufacturing operations to Asia as part of a cost-cutting drive.

Firms are not only changing how they make drugs, but how they market
them=97especially in America. On one estimate, big drugs firms spend less
than a fifth of their revenues in America on R&D, but over a third
peddling pills. Raymond Hill, of IMS Health, a consultancy, says that
firms too often =93differentiate pills using sales reps=94 rather than by
superior innovation. That, he says, needs to be reversed.

Bosses of drugs firms now publicly acknowledge the problem. Daniel
Vasella, chairman of Novartis, a Swiss drugs giant, agrees that his
industry must innovate or risk falling into a low-margin ghetto of
commodity pricing. Last week he announced a shake-up to help Novartis do
so. =93We must rethink all assumptions, from innovation to marketing to
sales and promotion,=94 he says.

To hedge risks in prescription drugs, Dr Vasella wants to grow his
firm's generics division, as well as increase its presence in
diagnostics, non-prescription drugs and biotechnology. Novartis recently
decided to launch a generic version of Epo, a popular drug pioneered by
Amgen, an American biotechnology firm, in Europe=97the sort of cheeky move
usually seen only from generics firms.

Lots of big drugs firms are moving into biotechnology to fill their
product pipelines. Earlier this year Astra Zeneca bought MedImmune, an
American biotechnology firm, for about $16 billion. A takeover battle
may soon erupt over Biogen Idec, another large American biotech firm.

Roche, another Swiss firm, has made a hostile bid for Ventana, a
medical-diagnostics company in Arizona, and other firms are moving in on
makers of medical devices and non-prescription drugs. Terry Hisey of
Deloitte Touche Tohmatsu argues in a new report that such deals go
beyond hedging risks in their traditional businesses: he reckons it
heralds a dramatic new =93convergence of drugs, devices and diagnostics=94
which could lead to innovation and new opportunities for growth. If he
is right it would be good news indeed for an industry sorely in need of
rejuvenation.

--
Mike Palmedo
Research Coordinator
Program on Information Justice and Intellectual Property
American University, Washington College of Law
4910 Massachutsetts Ave., NW Washington, DC 20016
T - 202-274-4442 | F 202-274-0659
mpalmedo@wcl.american.edu