H1N1 Vaccine Production and Update

USA Today’s headlines on Sunday, October 25 read: “Obama: Swine Flu a National Emergency”, bringing even more attention to a topic that has taken over media outlets for the past couple months. Whether the “Emergency” declaration is overkill or not is a political debate, but the vaccine shortage that has contributed to it affects GSK directly since they are a producer of the H1N1 vaccine. The government initially estimated that as many as 120 million vaccine doses would be available by mid-October, an optimistic prediction that has been met with a deliverance of only 11 million.

(source)

The production of a vaccine is a complicated process, both scientifically and due to regulatory restrictions. The process begins with the World Health Organization (WHO), who must identify the virus and provide production companies such as GSK with a ‘seed strain’. The ‘seed strain’ is a version of the virus that has been adapted so it no longer causes the disease, and is the starting point of production. GSK then develops its own ‘seed bank’ to draw from that is an optimized version of  the ‘seed strain’. There are several ways to proceed from here, GSK has reported that it will go the traditional route and use fertilized chicken eggs to produce the vaccine. Eleven days after the eggs are fertilized, the ‘seed bank’ virus is injected, incubated and harvested over the period of several days. After harvesting the virus is purified and broken down to separate out the antigen, the part used in the vaccine. It is then vialed, labeled, and ready for quality testing (source).

Between one and two eggs are needed to produce one dose of vaccine and the entire production process lasts about six months (source).

A visual summary of the vaccine production process can be viewed HERE.

GSK began production of the H1N1 vaccine in June after receiving the seed strain from the WHO. It is currently being manufactured at specific sites in Canada and Germany (source).

Although egg-based vaccine production (which GSK is using) is a tried and true method that has the double benefit of being cost effective. There are disadvantages, however, that have been magnified due to the demand this flu season. The extensive logistical planning required to produce the vaccine (think millions of eggs) could be a huge impedance on production with an exponentially increasing demand. Not only would GSK have to procure mass amounts of eggs, but also safely store them and validate them for use.  The inflexibility of supply caused by the egg production method has been strikingly apparent this flu season with the skyrocketing demand. Other risks to using the current production system include potential impurities in the eggs as well as patient allergy to egg albumin. The detection of impurities in one dose of the vaccine could void an entire batch, creating a substantial loss for the company(source).

An alternative, and less common, way to produce the vaccine would be to do so using cell or tissue cultures. This method is fairly new but all major companies in the vaccine industry have been involved in its development. The concept for the production process would be fairly similar to that using eggs: inject, incubate, harvest, purify,separate, and vial. The difference is that mammalian kidney cells would be used as the host instead of a fertilized egg.One major advantage culture based systems have over egg based systems  is the ability to rapidly scale production. However,  the cost of production equipment is much higher and the yield time may be slightly slower (source).

The video below shows an animation of culture cell production created by one of GSK’s competitors, Novartis.

The question of if and when GSK will shift vaccine production from egg based to culture based is one that will ultimately be answered by financial means. In lamens terms, the benefits will have to trump the costs. Although the statement is simple, the factors involved in validating it are incredibly complex. Analysts at GSK will first need to determine the amount of capital they are willing to invest in developing the project. These investments will include things like the purchase of specialized  equipment, research funding, and availability of inputs. They also must consider the opportunity costs of development such as dedication of production space and personnel resources at a time where the flu vaccine is in such heavy demand and these resources could be utilized in other parts of the company.

The short term investments GSK will have to make are important factors to consider, but equally so is the long term forecast for vaccine demand. For example, having an operating culture based production system at present would have given GSK a huge advantage over the competition. They would have been able to re-allocate resources toward production of the H1N1 vaccine much more quickly and therefore increased profits. The question is, will having a more scalable production system create a great enough future benefit to cover the up-front costs? This question has no concrete or verifiable answer, and must be based on current information and prediction of future trends. It would be a gamble, one that could either pay off big or create a substantial loss for the company.

Financial Snapshot 10/28/09

Previous Close: $40.87

Open: $40.70

Day’s Range: $40.6-$41.04

 

Financial Snapshot: 10/12/09

Prev. Close: 39.67

Open: 39.92

High:40.00

Low: 39.69

A Philanthropic Approach to Boosting Business

All the way back in Chapter 2 of Gitman’s textbook, The Future of Business, the term strategic giving was defined:  “the practice of tying philanthropy closely to the corporate mission or goals and targeting donations to regions where a company operates.” This trend is on the rise according to Gitman, and it seems that GSK is no exception to the list of companies who have made philanthropy a mutually beneficial act.

Since GSK is a member of the health care industry, it only makes sense that they would direct their charitable efforts toward causes in that sector. In particular they aim to address global health care through four avenues (taken directly from their website):

• Improving affordability by preferential pricing of our medicines and tiered pricing of our vaccines in the world’s poorest countries, exploring new business models in middle-income countries, and providing discount cards in developed countries
• Investing in research and development that targets diseases affecting the developing world
• Working in partnerships to research new medicines and to help deliver healthcare services
• Undertaking community investment activities and partnerships that foster effective healthcare

GlaxoSmithKline has been offering preferential pricing since 1997, and began not-for-profit (revenues only cover the cost of drug sustainability), NFO,  pricing in 2001. NFO pricing currently applies to 64 of the world’s least developed countries and covers medicines such as anti-retrovirals and malaria treatments. In 2009 GSK announced that from April onward the price of patented medications in Least Developed Countries, LDC’s, would be reduced to no more than 25 percent of the price in developed countries. This price reduction covered 110 products and cut prices by an average of  45 percent (source).

(source)

Research and development for diseases primarily affecting the developing world is strikingly different from R & D for developed nations. Many of these diseases have treatments perfected for use in the developed world, but may be unsuitable for use in LDC’s because of factors such as heat and humidity resistance, ease of use constraints, and, of course, affordability.  GSK is currently conducting research on 12 vaccines and infectious disease treatments that will have a great impact on the people of these nations: bacterial meningitis, chlamydia, dengue fever, hepatitis E, HIV/AIDS, leishmaniasis, malaria, pandemic flu, pneumococcal disease, Chagas disease, human African trypanosomiasis and TB. R & D is a finance intensive and risky venture, for 5,000 to 10,000 compounds tested, an estimated five reach clinical trials and only one reaches the market. For medicines with a market in developed countries, such as HIV/AIDS treatments, GSK can apply its classic R & D business model. Other medicines that have no private market, however, require different business strategy to be successful. (source)

source

It is with regards to medicines like these that the Public-Private Partnership, PPP,  model comes into play. Collaboration between the public sector and private business has opened avenues that neither could have achieved alone. A current example is the Tres Cantos R & D site in Spain where the focus is on treatments for malaria and TB. Half of the scientists at the site are funded by the Medicines for Malaria venture and TB Alliance PPP’s. GSK is seeking to expand the site with further collaboration with governments, NGO’s, and other companies (source).

Below is a video featuring Andrew Witty, GSK’s CEO, speaking on the challenge of African health care and how his company’s work with AMREF is working toward a solution.

There is no doubt that those in LDC’s will benefit from GSK’s philanthropic efforts, but it would be naive to think that it is a purely selfless act on the company’s part. Adam Smith argued that the private search for profit advances the public interest, and GSK happens to be a prime example (source). At its core GlaxoSmithKline is a business with the  primary aim of turning a profit, and it has  found a way to meet this goal simultaneously while helping others.

The practice of corporate responsibility has become a bigger factor in business decisions as companies feel pressure from investors, employees, NGO’s, etc. to perform well financially while also contributing to the greater community. Such practice enhances a company’s reputation which will in turn attract positive attention, a loyal workforce, and new investors. For example, working alongside stakeholders such as the WHO and the UK ministries of health and education on worthy causes cannot hurt GSK’s chances at future collaboration on highly profitable drug contracts.  Justine Frain, who heads the global community programs, reinforces this notion by identifying GSK’s three primary motivators for philanthropy as:

1. The company’s business success gives it the ability to contribute beyond its core business.

2. It supports GSK’s reputation and helps build business relationships.

3. It motivates employees and helps them feel proud to work for the company.

(source)

Chantal Tregear provides a comprehensive analysis of GSK’s corporate responsibility practices in an article from the link here.

Bottom line is, as long as companies can use their socially responsible practices to make a profit, there is no reason for the trend of corporate responsibility and strategic giving to fade.

Pharmaceuticals: An Industry Overview

To fully understand a company, one has to look at it in the context of its industry and in comparison to similar companies. Deeper knowledge of the industry will prove useful in the future, especially as health care reform policies take shape, implementing changes to companies throughout the industry.

After enjoying a period of consistent growth in the decade preceding 2001,  the pharmaceutical industry has seen  decreased growth rates across the board, along with rapid changes in its business environment.  With an era of blockbuster drugs behind them, companies are facing challenges such as heavy generic competition, fading product pipelines, patent expiration, declining R&D productivity, and escalating costs. All the while, the global push to slow the rising cost of health care has never been so intense.  source

Revenue

Add Bookmark | View Bookmarks 32541 – Pharmaceutical & Medicine Manufacturing in the US – Industry Report Industry Performance Published Date May 15 2009 CURRENT PERFORMANCE Having enjoyed a period of sustained growth in the decade to 2001, the US Pharmaceutical and Medicine Manufacturing Industry is now undergoing a period of transformation as it adapts to its changing operating environment. One variable driving change within the pharmaceutical marketplace has been the growth of managed care organizations (MCOs) including medial insurance companies, health maintenance organizations, medical plan administrators and Medicare Part D formularies. With half of the US population now participating in some version of managed care, MCOs are yielding ever increasing powers within the marketplace, particularly as they seek to contain pharmaceutical costs. At the same time, a number of key industry participants have also faced the effects of intensifying generic competition as well as the demise of the blockbuster era at a time when product pipelines are thinning and R&D productivity is declining while costs are escalating. Despite the fact that the industry is currently spending double what it did one decade earlier on research and development (R&D), it is producing less than half the drugs. In the case of industry giant Pfizer, who spends $7 billion a year on R&D, the group has not introduced a blockbuster drug since Viagra in 1998. At the same time, it has already been adversely impacted by patent expirations with further expected to the extent that it could lose roughly half of its sales by 2015. These variables combined (along with others outlined below) have served to stimulate dramatic change within the industry. Slowing Revenue Growth In comparison to the strong growth experienced in the previous five year period, the US Pharmaceutical and Medicine Manufacturing industry is expected to enjoy just moderate growth over the five year period to 2009. By year end 2009, revenue levels are expected to reach $213.5 billion, up from $179.5 billion (in constant 2009 prices) in 2004, representing an average increase of 3.5% per annum. Driving this growth was increasing demand, reflecting higher standards of health care; a greater emphasis on prevention and a healthy life style, resulting in increasing demand for an expanding range of OTC (over the counter) pharmaceuticals and other health related products (such as herbal and botanical products). Increasing life expectancies and an aging population also served to increase the demand for drugs, particularly for degenerative diseases such as cardiovascular, cardiopulmonary, cancers and arthritis. The development of new and more sophisticated diagnostic processes and drugs also stimulated demand as did the January 2006 launch of the new Medicare Part D outpatient prescription drug plan (part of the Medicare Prescription Drug Improvement and Modernization Act of 2003). At the same time, growth in industry revenue was constrained by safety concerns with regards to high profile drugs (such as Merck’s blockbuster arthritis drug Vioxx, as well as Pfizer’s Celebrex drug, another COX-2 inhibitor), patent expirations, the effects of generic competition and growing expenditure constraints. In 2009 the industry will be characterized by the flow on effects associated with continuing patent expirations including intensifying generics competition, increased scrutiny from regulators and limited new product launches. At the same time it may also have to contend with health care reforms under the new Obama led government. While volume growth is expected to be marginally higher than in the previous year, price increases may be lower than the 6% achieved in 2008. In view of the above, industry growth is estimated at 1.7%, the lowest level since 2004. This compares with a high of 5.7% recorded in 2006, which was the strongest growth rate since 2002. In 2008 the industry had to contend with a dry pipeline, heightened regulatory scrutiny, the impact of lower generics pricing, and a leveling off of growth arising from the Medicare Part D program which contributed to a slowdown in growth in retail pharmaceutical dollar sales. While 24 brand new medicines were approved by the FDA, the highest number in 3 years, actual sales produced by these products were lower with a number of them being targeted at small specialist areas. Industry growth was an estimated 2.6% (down from 3.8% in the previous year), with price being the main growth driver helping to compensate for weak volume growth; dispensed prescription volumes were up by just 0.9% relative to the previous year. In 2007, the performance of the industry had again been influenced by volume and drug pricing trends associated with the Medicare Part D programs as well as the effects of generic substitution rates. Downstream, total dispensed prescription growth for the year was considerably lower (2.8%) relative to the strong growth incurred in 2006 while overall sales growth in the prescription product segment was also considerably lower. Despite this at the manufacturing level total production volume growth was thought to have been higher in 2007 relative to 2006, although price increases were marginally lower at 3.6% as opposed to 4.3% in the previous year. The Food and Drug Administration (FDA) approved just 17 NMEs and vaccines as industry participants continued to battle with thin pipelines and tighter regulatory controls. This is thought to be one of the lowest number of new product launches in nearly three decades (1983). One of the key features of the industry during the year was the number of restructuring plans announced by key patent/branded manufacturers. The year also witnessed further safety concerns with a number of black box warnings with nearly 70 new or updated black box warnings on previously approved drugs, double 2004 levels. In 2006, a number of industry players had benefited from a boost in sales volumes arising from the January 2006 launch of the new Medicare Part D outpatient prescription drug plan (part of the Medicare Prescription Drug Improvement and Modernization Act of 2003). According to IMS Health, the program expanded the market by nearly 1% in 2006 with the total number of dispensed prescription volumes increasing by nearly 5% while dispensed prescription sales increased by 8%. Increased prices (up 4%) were another predominant growth driver. At the same time, the year also witnessed a wave of brand-name pharmaceutical patent expirations (worth roughly $10 billion) which would have had implications for both patent and generic manufacturers alike. Higher prices can also help explain the growth achieved in 2005 and 2004. In both instances these were higher than growth in production volumes. Declining Profitability The global pharmaceutical industry is a highly profitable one; according to IMS, no major pharmaceutical company has gone bankrupt over the last quarter of a century. In 2007, Fortune found it to be the second most profitable industry in the world, with a return on revenue of 17.7% and a return on assets of 10.9%. This high level of return reflects in part, the high levels of risk associated with product development. Comparative figures for the US pharmaceutical industry in 2008 were 19.3% return on revenue (giving it a ranking of third place) and 11.5% return on assets. However in recent years, the US pharmaceutical industry has seen profitability levels slip amid increasing competitive and pricing pressures and the loss of patent protection on former blockbuster drugs. The costs associated with counterfeiting combined with increased litigation costs have also undermined industry profitability in recent years. This in turn has seen a number of players implement cost-cutting initiatives designed to streamline their manufacturing processes while simultaneously improving their R&D efforts as well as strategic programs to “rightsize” their businesses. Such players include the likes of Pfizer, Merck, GlaxoSmithKline, Schering-Plough, Bristol-Myers Squibb and Wyeth. With a number of new initiatives put into place during 2007 and 2008, cost cutting exercises amongst the larger pharmaceutical companies are expected to continue throughout 2009 as the major players remain in cost control mode and as they seek to refocus business units and/or adopt new business models in order to transform themselves and adjust to the new challenges now facing them. Falling Employment Having experienced a marginal increase in the late 1990s and at the start of the decade, industry employment levels then commenced a downward trend as a number of key players sought to rationalize their operations in line with the effects of lost patent protection on top selling drugs. Key players to have undertaken such moves include the likes of Merck, Bristol Myers Squibbs, Bayer, Schering Plough, Astra Zeneca, King Pharmaceuticals, Novartis, Abbott Laboratories and Pfizer. In the case of Merck, it is now to cut a further 7,200 jobs worldwide by the end of 2011, on top of the 10,400 jobs already cut as part of its 2005 restructuring plan. Also of note are trends favoring CMOs (contact manufacturing organizations) and outsourcing. For example Pfizer is thought to be looking at outsourcing as much as 30% of its manufacturing (double its current levels) as part of its recent cost cutting measures, while Merck has already outsourced 30% of its manufacturing. In contrast, real industry wages trended slightly upwards. By year end 2009, wages will cost the industry an estimated $21.50 billion, up marginally on real 2004 levels of $21.16 billion. Thus gains in labor productivity over the period were thought to have been marginal. Growing Importance of International Trade In recent years the US Pharmaceutical and Medicine Manufacturing industry has witnessed consistently strong growth in its exports, with real growth rates averaging 10.0% per annum over the period 2003 to 2008. Aiding this growth in part was the elimination of most pharmaceutical tariffs under various free trade agreements. However a good proportion of the industry’s exports is in fact intra-company trade. Over the same time frame, exports as a percentage of sales revenue increased from 15.2% in 2003, to an estimated 20.7% in 2008. By year end 2009, industry exports are expected to be worth an estimated $4.30 billion, up from $31.75 billion (in constant 2009 dollar terms) in 2004. Imports also increased strongly over the performance period, both in dollar terms and as a percentage of domestic demand. In constant (2009) dollar terms, import growth averaged 6.8% per year over the five years to 2008 to reach $81.4 billion. During this period imports as a percentage of domestic demand increased from 27.7% to an estimated 32.8%. More subdued growth in import levels is expected in 2009 (just 4.4%) although they are still expected to account for 33.4% of domestic demand by the end of the period. Other Trends & Variables A number of other variables influenced the performance of the US Pharmaceutical and Medicine Manufacturing Industry in recent years. These are outlined briefly below. Rising Pricing Pressures: Recent years have seen drug manufacturers come under pressure from government and health care organizations keen to curb escalating health care expenditure. Of particular importance has been the cost-containment strategies employed by managed care organizations (MCOs), many of which have merged into even larger entities in line with the consolidation trends also occurring within the general health care industry. With half of the US population participating in some form of managed care program, the downward pricing pressure exerted by MCOs (which have significant purchasing power) has had a substantial impact on the revenue earned by various industry participants. A number of the cost containment strategies employed by MCOs have focused on the use of co-payments and generic substitution (i.e. a brand-name drug is replaced with a cheaper generic copy). According to Bristol-Myers Squibb, the growth of MCOs has been a major factor in the competitive make up of the health care marketplace as it stands today. The Medicare Prescription Drug Improvement and Modernization Act of 2003 was another cause for concern to the industry given its pricing pressure ramifications. The Act provided for a voluntary discount card for Medicare beneficiaries from June 2004 onwards and added prescription drug coverage to Medicare from 2006 onwards. While these developments have resulted in increased usage of pharmaceuticals, concerns still exist with regards to increased downward pressure on prices in view of the stronger purchasing power of private sector providers. By year end 2007 prescriptions dispensed through the Medicare Part D program accounted for 19% of retail prescriptions, up from 17% in the previous year and 1% in 2004. Changing Product Profile: The performance period witnessed a gradual change in the product profile of the industry reflecting in part the introduction of new drugs as well as the growth in OTC/complimentary products. It also saw further growth in the relative importance of generic products as key innovator products began to lose patent protection. According to data produced by PhRMA, generic products accounted for 67% of the pharmaceutical market (by volume) in 2007 (up from 47% in 2000) although significantly less on the basis of value. Data by the National Association of National Chain Drug stores puts the value of generic sales at $58.5 billion in 2007 compared with branded prescription sales of $228 billion. In the same year a number of key brand name products with combined sales of roughly $17 billion faced the effects of patent expirations to the benefit of the generic segment of the industry. This follows on from a “bumper year” in 2006, in which $19 billion worth of products lost patent exclusivity. Another $13 billion worth of brand drugs went generic in 2008. Thus recent years have seen generics occupy an increasingly important role within the pharmaceutical landscape. One of the main factors contributing to the increased importance of generics revolves around practices by MCOs which favor generic substitution combined with moves by the FDA to expedite the introduction of generics. In fiscal 2007 a record 682 generic drugs were approved by the FDA with a backlog of 1,300 applications. It is now seeking to expedite its review process using an updated electronic format. At the same time however the overall generics segment is also starting to mature, causing it to undergo significant change as competitive forces continue to intensify and become more aggressive; the entry of new global players including the likes of the Israeli based Teva as well as the low cost Indian based producers Ranxaby and Dr Reddy has aided this process as has the move by branded pharma players moving into the generic segment either via subsidiaries (such as Novartis through its subsidiary Sandoz) or via authorized generic agreements. This in turn has seen a wave of mergers and acquisitions as this particular product segment also succumbs to the pressures of consolidation. Increasing globalization forces have also served to change the profile of this particular product segment over the performance period. In the immediate future, the gradual emergence of biosimilars will serve to stimulate further change within this particular product segment. The effects of a depletion in the industry’s general product pipeline as R&D productivity continued to decline has also had a significant impact upon the industry. The thin pipelines currently characterizing the industry are proving to be one important impetus for the various acquisitions that have recently occurred, especially between the big pharma players and the small to mid sized biotechnology companies. This is certainly the case with the likes of AstraZeneca, who has recently acquired a number of companies with promising products in order to boost its thin pipeline. Similar deals are expected to continue as big pharma look to small private development drug companies to boost their own development pipelines. There have also been a number of acquisitions revolving around the need to acquire scale within a particular field (such as generics), or a particular product or technology. The proposed $64 billion mega merger between Pfizer and Wyeth announced in early 2009 will strengthen Pfizer’s position in both biotech drugs and vaccines, two areas in which it is currently deemed to be relatively weak. Another key development has been the move by a number of the larger players to either divest their brand tail or limit their activities to a number of targeted therapeutic groups as they attempted to streamline their operations and improve both operating efficiencies as well as long term profitability. For example in June 2008 GlaxoSmithKline, the world’s second largest drugmaker, sold four of its older drugs to South Africa’s Aspen PharmaCare Holdings for $339 million. A number of the larger players operating in both the prescription pharmaceutical and the over the counter product segments have also chosen to divest their consumer care operations. Recent times have seen Bayer acquire Roche’s OTC division, Reckitt Benckiser purchase Boots Healthcare International unit (which was followed by its $2.3 billion purchase of US drugs group Adams Respiratory Therapeutics Inc. in late 2007 giving it entry into the US OTC market) and Novartis acquire Bristol-Myer Squibb’s North American consumer health business. In a noteworthy development, Pfizer sold its Consumer Healthcare business to Johnson & Johnson for $16.6 billion in late 2006 while in early 2007 Novartis sold its Gerber food business to Nestle as well as its medical nutrition business. This trend may continue as players attempt to reinvent themselves and shed assets no longer deemed to be core businesses. Continued Consolidation: In view of the maturing nature of the industry, recent years have thus seen a number of mergers and acquisitions among the major players, including global players with operations in the United States. On a global scale, the number of major pharmaceutical firms in the world has fallen from around 80 in the 1980s to less than 30 while the top ten players now account for over 45% of the global pharmaceutical market, compared to 28% one decade earlier. Indeed since 1985 there have been over 40 mergers and acquisitions among the major players culminating in the creation of an industry behemoth in the form of Pfizer (with 2008 revenue of $48 billion), followed by GlaxoSmithKline (2007 revenue of $45 billion). 2004 saw the creation of a new number three player (Sanofi-Aventis with 2007 revenue of $43 billion) following Sanofi-Synthelabo’s hostile bid for French based Aventis which saw the creation of a new number three player, displacing Merck & Co ($24 billion in 2007). In 2007 an interesting development was the sale of Organon BioSciences, the human and animal health business of Dutch chemical giant Akzo Nobel to US based Schering Plough for $14.4 billion in cash. Representing the break up of one of Europe’s last hybrid chemical-pharmaceutical companies, the deal was thought to represent a turnaround for Schering Plough who has been hard hit by patent expirations and its lack of size. However in the latest twist Schering Plough is now to be acquired by US rival Merck with the latter offering $41 billion in early 2009. The new entity is expected to generate annual sales of $48 billion, in line with Pfizer’s current figures. Consolidation trends are also now a characteristic of the generic segment of the industry as it contends with trends favoring commoditization and the growing need for scale. Of note was Israel’s Teva Pharmaceuticals Industries Ltd acquisition of rival Ivax Corp. for roughly $7.9 billion in cash and stock in January 2006 which saw the creation of the world’s largest generic drug company. This was followed by the acquisition of US rival Barr Pharmaceuticals Inc for $7.46 billion in late 2008 as it seeks to expand its position within the US market; Teva has also set the goal of doubling its revenue to $20 billion by 2012. Further consolidation is also expected within this particular segment despite its relatively stronger growth prospects and it is possible that this particular segment will also eventually be dominated by just a few global players. Consolidation has also been occurring within the smaller biotechnology segment where a number of players are struggling in view of product failures. Of note is the report in October 2007 that US based biotech company Biogen Idec Inc., had put itself up for sale and had hoped to receive bids as high as $25 billion to $30 billion with possible bidders including the likes of Pfizer, Johnson & Johnson and Sanofi-Aventis, all of whom are keen to extend their bio-tech platform although at the time it was believed that some may consider that this price tag too hefty. In the latest twist however it was reported that after two months of being on the sale blocks, Biogen had not found a bidder and has since given up on the idea of selling itself. The number of major players is expected to continue its downward trend in the immediate to medium term future. In the immediate future it will be interesting to note the fall out effects associated with Pfizer’s proposed $68 billion acquisition of Wyeth, the first mega merger in eight years though Pfizer’s third mega merger. Reinstating its size as a pharmaceutical behemoth, the move will see the creation of a new diversified company with annual sales in excess of $70 billion derived from the sale of prescription drugs, consumer products and animal health. The merger is to be completed in the third or fourth quarter of 2009. It will also lead to yet further cost cutting exercises including the elimination of 15% of the companies’ combined workforce of roughly 128,000 as well as the closure of at least five manufacturing sites. This announcement was quickly followed by the news that Merck and Schering Plough were to merge in a reverse $41 billion merger which will see Schering-Plough emerge as the surviving corporation but with the Merck name. While catapulting Merck back up to second place, what is interesting about this particular merger is that Merck had until then been ascertaining that it could grow/survive purely through its own drug discovery efforts. In another interesting development Roche has also since announced that it is to finally acquire the remaining stake (44%) in its US partner Genetech for $47 billion, in a takeover which is thought to be the largest in Swiss corporate history and finally ends the lengthy corporate struggle between the two companies. HISTORICAL PERFORMANCE The origins of the US pharmaceutical industry can in part be traced back to the establishment of various apothecaries during the mid 19th century many of which had or went on to involve themselves in the wholesale production for drugs such as morphine or quinine amongst others. Key names even back then (and which are still recognizable today) included the likes of Warner (1856), Squibb (1858), Parke-Davis (1866), Eli Lilly (1876), Upjohn (1886) and Abbott (1888). Other early participants involved organic chemical companies including the likes of industry giant Pfizer which can trace its roots back to 1849 when it was established as a fine chemicals company. However it was not until the 1930s that the industry began to really take off, aided in part by government funded wartime research which focused on the production of penicillin amongst other drugs. Indeed the 1940′s and 50′s have been dubbed the “Age of Antibiotics” given the focus on life saving drugs. After WWII, US pharmaceutical firms (as well as their European rivals) continued to expand, pouring ever increasing resources into R&D and marketing activities. The 1950s then saw rapid growth in the pharmaceutical industry worldwide, prompted in part by the development of a number of new drugs, a trend which continued in the 1960s before slowing throughout most of the 1970s. These later decades saw a change in focus with the development of new drugs and technologies, many of which focused on chronic and degenerative diseases and new therapeutic classes. The industry then began to gradually change, reflecting its changing operating environment as well as its more mature status. Thus the 1980s saw the industry undergo a period of significant divestment and restructuring, prompted in part by the emergence of the biotechnology sector as well as increasing competition levels from generic manufacturers who were gradually becoming a force to be reckoned with; indeed the decade witnessed the first real growth experienced by generic pharmaceutical manufacturers who had benefited tremendously from the passing of the 1984 Drug Price Competition & Patent Term Restoration Act (Hact-Waxman) which allowed for the approval of generics without additional preclinical or clinical testing. During the 1990s the industry continued to consolidate and restructure as the larger players intensified their focus on the development of “blockbuster” drugs which meant that smaller, non-core businesses such as chemicals, cosmetics or even consumer goods were divested. Even the “life-science” concept was soon divested as it was found to be irrelevant in the new operating environment encompassing the industry. On a global scale it is interesting to note the number of diversified chemical conglomerates which chose to spin off their pharmaceutical operations during the 1990s in a process known as “de-coupling”. These included the likes of ICI Plc, which spun off its pharmaceutical operations as Zeneca in 1993 (now part of AstraZeneca Plc) as well as BASF which sold its pharmaceutical business (Knoll Pharmaceutical) in 2001 to Abbott Laboratories and DuPont who sold DuPont Pharma to Bristol-Myers Squibb in the same year. Also of note is the merger of Ciba-Geigy AG and Sandoz AG which combined their drug operations to form Novartis in 1997 while spinning off their chemical business as Ciba Specialty Chemicals AG. Other chemical conglomerates to have gone down the same route include TotalFinaElf SA and L’Oreal SA which merged their pharmaceutical businesses in 1999 to form Sanofi-Synthelabo SA (now Sanofi-Aventis) and Hoechst AG and Rhone-Poulenc SA which again merged their pharmaceutical operations into Aventis SA (also in 1999) with Hoechst spinning off its chemical operations into Celanese AG. The latest player to do so is Akzo Nobel which in March 2007 announced that it was to sell Organon BioSciences, its human and animal health business to Schering-Plough for $14.4 billion cash. Another key variable shaping the performance of the industry in the 1990s was attempts by various health organizations as well as by the Government to curb their healthcare/pharmaceutical expenditure bills which had risen dramatically in recent years. According to the Centers for Medicare and Medicaid (previously known as the Health Care Financing Administration), total national health expenditure for 2003 was worth an estimated $1.7 trillion or 15.3% of GDP, up from $1.3 trillion or 13.1% of GDP in 1999. Pharmaceutical expenditure levels had been on the rise in the 1990s, the result in part of increased usage of pharmaceuticals in line with changing doctor’s prescribing patterns and increased consumer acceptance; changes in the mix of pharmaceuticals and medicinal products used, aided in part by a steady increase of new, innovative products and product formulations and price increases. According to the NIHCM Foundation’s report “Prescription Drug Expenditures in 2001: Another year of escalating costs”, increases in the number of prescriptions dispensed accounted for 39% of the rise in prescription drug expenditure in 2001. Price increases accounted for a further 37% of the $22.5 billion one year increase in expenditure (the average price of a prescription rose 10.1% in 2001 alone to $49.84) while the shift to higher cost drugs accounted for 24% of the increased expenditure incurred. Revenue (constant prices) Revenue $ Million Growth % 1997 121,411.1 N/A 1998 133,684.1 10.1 1999 140,552.6 5.1 2000 150,487.5 7.1 2001 158,278.5 5.2 2002 171,063.4 8.1 2003 177,983.4 4.0 2004 179,482.5 0.8 2005 186,620.9 4.0 2006 197,259.6 5.7 2007 204,775.0 3.8 2008 210,000.0 2.6 2009 213,500.0 1.7 Revenue Revenue Growth Rate

Revenue

Revenue Growth

source

Despite the overwhelming challenges pharmaceutical companies face, profitability and modest growth are still prevalent. In 2008 the U.S. pharmaceutical industry had a 19.3% return on revenue and an 11.5% return on assets; considering the economic situation last year, these numbers demonstrate great resiliency.  To further illustrate this point, no major pharmaceutical company has gone out of business in the last 25 years. And while 10% growth rates may be a thing of the past, US Pharmaceutical industry revenues increased from $179.5 billion in 2004 to an expected $213.5 billion at year end 2009 for an average increase of 3.5% per year.

source

So what can be expected from the pharmaceutical industry in the future? Current forecasts reflect similar statistics to those of the last five years. Industry revenue is expected to increase from $213.50 billion in 2009 to $246.15 billion by 2014. This gives an average growth rate of 2.9% per year, moderately lower than the last five years.

Revenue (constant prices) Revenue $ Million Growth % 2010 219,000.0 2.6 2011 226,000.0 3.2 2012 232,150.0 2.7 2013 239,000.0 3.0 2014 246,150.0 3.0 2015 252,300.0 2.5 Revenue

Revenue Growth

source

While some may view the industry as inelastic to economic downturns, these predictions clearly suggest otherwise. The United States’ economic slump has changed the way the American public views medication, a huge impact considering that they make up  approximately one third of the global pharmaceutical market. Recent trends show  consumer bent toward cheaper, generic versions of drugs and cutbacks on non-essential medications.

The question then remains, what can companies in the pharmaceutical industry do to adapt to the new dynamics of their environment? As the old adage goes, “If you can’t beat ‘em, join ‘em.”

On the product side, it  seems wise for companies to diversify their product lines with a focus on generics and essential prescription drugs (think oncology or cardiovascular therapies) .  The expiration of blockbuster drug patents is something companies can capitalize on by expanding their product base to include more generic drugs. With about $130 million worth of products loosing patent protection in 2011 and 2012, this event has huge implications for the companies who currently own these patents and those looking to diversify their product base through generics. One company who has already done an excellent job of this is Novartis. In the past few years they have spent $8 billion on generic acquisitions which now generate annual sales in excess of $5 billion (source). GSK does not have near the involvement in generics that Novartis does, but made a sizable step in that direction in March 2009 by entering a marketing and distribution agreement with Prasco ( an authorized generics distributor) , choosing FLONASE Nasal Spray as the the first product (source).

In terms of branded products, GSK has been very successful in the essential drugs category. In December 2006 they entered a worldwide agreement with Genmab of Denmark for the co-development of an antibody for lymphocytic leukemia and non-Hodgkins’s lymphoma called HuMax-CD20 that is estimated to be the most expensive licensing deal in pharmaceutical history. They have also acquired Reliant pharmaceuticals in the last few years for $1.65 billion, which will give them cardiovascular drugs such as Lovaza(source).

source

In addition, GSK is heavily involved in the production of the H1N1 Influenza vaccine which has the potential to greatly increase revenues this flu season.

The current pharmaceutical environment is not one for thriving, but one of adaptation and ultimately survival. It is a time of evolving business strategy and structure, and it will be interesting to see which companies are most adept to coping with the change.