Is Big Pharma onboard the Titanic?

If you want to predict what you should be worrying about tomorrow, find out what insiders are worried about today. For example, it’s ever-so-enlightening to eavesdrop on the internal reports that Big Pharma stakeholders are reading, where the lowly, uninformed patient can find intriguing musings from pundits, those who are paid to stay one step ahead of the prescription pad.

At the Pharma Chem Outsourcing conference this month in New Jersey, speaker Stefan Loren of the investment firm Westwicke Partners revealed a sobering view of Big Pharma in his talk, “The Pharma Titanic: It’s Time To Root For the Iceberg”.

Mr. Loren opened his presentation with an overview of the U.S. national health care debate. He said that mandatory health insurance will be good for Big Pharma. But he also believes that there will be strong pressure for mandatory comparative effectiveness testing between drugs – not good for Big Pharma.

He sees global pharmaceutical sales declining, except for future growth coming in Asia and Latin America. He also sees evidence of “health care avoidance” – practices like unfilled prescriptions, unfinished courses of prescriptions, and people just not visiting medical and dental practitioners, also not a good trend for Big Pharma.

“The coming wave of patent expirations of the top 10 drugs will hit Big Pharma hard. Generics will grow: in 5-10 years, 80% of all prescriptions will be generic.  That means trouble ahead. For investors, the return on investment for Big Pharma is largely negative. It’s a “death spiral.”

“Big Pharma pipelines are seen as very poorly run and wasteful. Poor projects linger far longer than they should. Too much emphasis is placed on me-too drugs and line extensions. Too much emphasis is placed on acquisitions and licensing rather than innovation.

“I have never seen a drug company merger that worked. For example, you would not be a happy camper if you had put your retirement account in Pfizer Pharmaceuticals management’s hands and their merger mania.

“Wall Street has a saying, “Two dogs don’t make a kennel.” Drug company mergers can work if the two companies merging are small, but large mergers just don’t work, and large companies get paralyzed by bureaucratic inertia.

The solution? Break up Big Pharma into therapeutic areas and build shared networks between distinct entities. Small organizations can operate far more efficiently in decision-making about research directions.  Use the network to maintain manufacturing efficiencies. Small focused companies can revitalize the industry and offer opportunities for scientists coming out of academia.

“The heparin, glycerin, and melamine disasters* have awakened people, and the cost of securing global supply chains is going to make U.S. industry much more competitive. It also will focus serious scrutiny on Big Pharma. The next heparin case will have serious personal consequences for Big Pharma managers.”

(* Translation: the “heparin, glycerin and melamine disasters” mentioned by Mr. Loren refer to blood thinning drugs, cough syrup and dairy products respectively that were contaminated by lethal ingredients, all outsourced from China to save money. The heparin scandal involved the deaths of patients who were prescribed toxic blood thinning drugs; a deadly glycerin substitute in cough syrup accounted for “tens of thousands of overseas deaths” according to Dr. Michael Bennish, an American pediatrician working overseas who smuggled U.S. government-supplied tainted cough syrup back into America for independent lab testing after he suspected the syrup was linked to an alarming number of children’s deaths; the melamine scandal involved the deaths of at least six children and hundreds of thousands made ill by Chinese melamine added to dairy products in order to fraudulently boost their protein content). See also:Do You Want To Take Medications Made In China?

Researcher Business Monitor International is also predicting a dip in the North American pharmaceutical market. One of the reasons cited for the projected dip is what ‘s called the patent cliff of 2011, when many best-selling drugs will lose their patent protection to permit a flood of cheaper generic drugs onto the market.

However, iceberg-spotters are predicting that U.S. health care reform “may allow wider access to medical services due to mandatory insurance cover,” according to the report. Researchers say they expect that generic drugs will see a positive growth rate due to sales increase as the government tackles both health care reform and its drug procurement policy, and begins to look more favourably on the generic knockoffs.

Business analyst Derek Lowe agrees with Mr. Loren’s negative take on the strategy of drug company mergers. He writes:

“I’ve been saying nasty things about Big Pharma mergers for seven years. And I certainly hope that his idea of smaller companies coming along to revitalize the industry is on target, because it’s sure not going to be revitalized by (for example) Pfizer buying more people.  Pfizer stock had a wonderful time of it in the 1990s, but it’s been an awful place to invest your money for the past decade.”

And speaking of Pfizer, the world’s largest drugmaker has been on a wild merger and acquisition ride for the past nine years.  In 2000, Pfizer merged with Warner Lambert (thus acquiring full rights to the blockbuster statin drug, Lipitor).  Two years later, Pfizer merged with Pharmacia & Upjohn (which landed them the rights to the arthritis pain reliever Celebrex).  After picking up some smaller companies since then, the avalanche continued when Pfizer acquired Wyeth Pharmaceuticals this year for $68 billion, the second biggest corporate merger in North American history.

But Harvard Business School’s Gary Pisano warns in a Wall Street Journal interview:

“The record of big mergers and acquisitions in Big Pharma has just not been good. There’s been an enormous amount of shareholder wealth destroyed.”

 See also:  Johnson & Johnson Recalls Extra-Stinky Tylenol

4 thoughts on “Is Big Pharma onboard the Titanic?

  1. Okay, I’m officially rooting for the iceberg now… This has inspired me to do more of my own research on all my retirement investments to minimize risk with the pharma stocks I own. WSJ has been reporting the same “gloom and doom”, as has my stock broker. Better start paying attention. Not a good time to be investing in pharmaceutical companies.

    Thanks for this. I’ve just become a subscriber to your “Nag”, as I appreciate the mix of your marketing insider perspective plus these occasional valuable insights from the investment world. Well done!

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