Global Pharma: Consolidation imminent... - Views on News from Equitymaster

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Global Pharma: Consolidation imminent...

Oct 14, 2002

The drop in market capitalization of pharma companies on the US bourses, gives one a clear indication of the unprecedented pressure on MNC pharma companies to sustain growth. The issues, which are giving a nightmare to these companies are wide ranging including patent expiration and dearth of new products.Further, intense competition from generic companies, especially from emerging countries like India is adding to the problems. The most immediate problem for these companies is the falling productiveness from their research labs. Despite a surge in R&D budgets, the number of new products coming out of research pipelines is getting squeezed. For an industry that attributes its high prices to the need to reinvest in R&D and boosting success ratio in research, productiveness becomes paramount. And judging by numbers, the days of price premiums seem poised to ebb out. Studies on R&D productivity show that a large portion of the R&D budget is absorbed into the clinical trials, which is the last stage of drug development. Ten years ago, for safety and efficacy 1,000 patients were enough. But now regulators are stressing on higher number of clinical trials to be done before a drug could be approved. This is not only increasing R&D budgets but also increasing the time to market for new drug discoveries, leaving a short period for them to cash in through patent exclusivity. The industry desperately is in need of a wonder drug, which just does not seem to be coming out from their pipelines.

While on one hand, the R&D / marketing budgets of these companies are soaring, there is increasing pressure from the governments all around the world on placing limits on pricing drugs. To large extent, the demand for drugs in developed markets has a strong relation with public health budgets, as healthcare is funded by states. Consequently, rising drug pricing is making governments and non-profit organizations stand up and raise their voice against the excessive pricing policy adopted by drug companies.

The problems of the Pharma industry do not stop there. Expiring patents and a rush of generic competitors are eating into the profitability of these companies. As patent expires, discoverers are at risk of losing volumes and revenues, as generic competition offers a cheaper alternative. The generic market is expected to approach double-digit growth over the next three years, compared to a mere 5% growth expected for branded formulations.

The most recent examples of generic threat to these companies are the patent challenge on Augmentin (antibiotic) and Norvasc (Cardiovascular) of Glaxo and Pfizer respectively. These are multi-billion dollar and strategically important patents for multinationals. Augmentin for example contributes to more than 8% of GSK's worldwide revenues. Domestic generic companies, Dr. Reddy's and Ranbaxy, are aggressively challenging the patents for these drugs. As the pharma industry tides through uncertain times, the solution seems to be in a new round of consolidation. Successful mergers to a large extent would help these companies introduce newer molecules to fuel growth and squeezing their marketing costs. Bigger companies with more products have more bargaining power with states and insurance companies, which to a large extent dictate pharmaceutical sales in the US.

The Pfizer deal to acquire Pharmacia has already kicked in another round of consolidation in the industry. More deals are likely to follow soon. The principal argument for striking merger deals is the cost cutting and leveraging of sales force in the short term, while waiting for new therapies to make their way out of their labs. However, it needs to be seen how successful can these mergers be in the long run, which are right now driven by dry spells in global pharma R&D labs.

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