Saturday, October 16, 2004

Big Pharma's crisis   A recent Wall Street Journal article (“R&D Deficiency Afflicts Drug Industry”, 10/12/04) points out, as we have before, how the big drug oligopolies find it harder and harder to come up with original drugs. These innovation gaps come even after drug companies claimed that big mergers would make their labs even more efficient thanks to pooling of resources.   The whole issue takes on more importance in the wake of Merck’s Vioxx disaster, where the company is being forced to withdraw one of its most successful drugs due to concerns about side-effects. Merck is particularly vulnerable because it has an even more dismal track record than competitors in developing new products.   The WSJ article sees that the big drug companies are in particular trouble because they “followed the imperatives of Wall Street,” that is, put an undue emphasis on immediate results, which the companies managed to get from raising prices and extending brands. R&D on the truly new has suffered. Aversion from financial risk is strongest in the big companies with so much to lose, and the result has been fewer breakthrough drugs as some older winners are approaching the end of their patents.   The article points out some rethinking going on: Investors are slowly realizing that pharmaceutical companies should stay as small as they can, avoid distracting megamergers, invest large amounts in R&D, partner aggressively across the tech spectrum and strive for novel, breakthrough medicines that add value. Indeed, the article catalogues a number of deals that the big drug companies are making with smaller innovative companies, showing that realization that it is better to keep innovators independent rather than try to buy them out as make them lose their edge. It may be that the big pharma companies in the end will become marketing, testing, and distribution companies, and give up any serious idea of doing original R&D.   But for that to be a safe strategy there need to be fewer competitors among the Big Pharma oligopoly. As it stands, there are too many bidders for the best ideas of the small developers. In fact, the article points out that smaller Big Pharma companies like Eli Lilly do a better job at acquiring third-party drugs than giants like Pfizer and Merck.   In short, I believe that the Big Pharma companies are not going to get smaller. But some will fail and there will be even more mergers, as the industry tries to set up an oligonomy, where a few companies acts as an oligopoly to consumers and health plans and as am oligopsony to developers. In this way they can control prices and costs while they lower their own internal expenses.   1:46:52 PM

comment []