By Robert Cyran and Lauren Silva November 24, 2007
Will Big Pharma go the way of the chemicals industry? Some are fretting over this possibility. Just like chemicals firms 20 years ago, drug companies are struggling with high fixed costs amid burgeoning competition from generic makers.
In the 1980s, a handful of Middle Eastern governments realized they could capture natural gas flared off during oil extraction and use it as feedstock to make chemicals. That put Western chemicals manufacturers in a twist as their raw-material costs were often higher than the price of finished goods from the Mideast.
So companies like Dow Chemical, DuPont and Britain's ICI spent year after year cutting employees and selling assets in an attempt to compete. Drug companies should be familiar with the story -- many were owned by chemicals firms in this period.
The analogy isn't perfect. For example, drug makers have stronger patent protections than chemical groups did.[This is IMO a very large distinction!] Unfortunately, the number of new drugs reaching the market has been stagnant for a decade. Second, aggressive generic makers like Dr. Reddy's Laboratories are shooting down patents earlier in a drug's life cycle through legal challenges, which could slow the flow of new medications for generics firms to copy.
Furthermore, because regulators are demanding longer trials, the average pharmaceutical compound only has a bit more than a decade on the market. This means a drug reaches peak sales for only about five years before cheaper competitors outpace it.[However, any attempt by Congress to lengthen drugs patents would surely be a non-starter.]
Finally, when a pill goes generic, insurers switch patients to the cheaper substitute. Pfizer predicts sales of Lipitor, the cholesterol reducer that accounted for more than a quarter of its sales last year, will fall up to 5% this year because a competing treatment from Merck lost patent protection.
On the bright side, the chemicals parallel suggests things aren't entirely bleak for those facing low-cost, overseas drug producers like India's Ranbaxy Laboratories. Mergers and cost cuts can help ameliorate the pain. And firms that focus on specialized markets, such as oncology, or the treatment of rarer maladies can thrive.[Ditto for firms that focus on new production technologies (#msg-24682767).]
Perhaps the most interesting lesson to be drawn from the chemicals debacle was that those companies who hived off their pharma divisions -- as ICI did to create AstraZeneca -- created value. Once freed from their masters, drug producers did a phenomenal job at discovering new cures. Under the threat posed by generics, Big Pharma should consider whether biotech and research-and-development departments ought to remain tethered to their mother ships. <<
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