The Economist: A survey of the Pharmaceutical Industry
The Economist June 18th-24th, 2005 14page pull-out section starting on page 47
PRESCRIPTION FOR CHANGE
Jun 16th 2005
The pharmaceutical industry is ailing. Shereen El Feki (interviewed
here[1]) takes its pulse and predicts a partial recovery
AS A boy in the 1930s, your correspondent's father lived in fear of
pneumococcal pneumonia. With good reason: one of his young friends had
died of it. It caused coughing, chills and fever, leading to a crisis
in which the patient either suddenly expired or miraculously recovered.
Today, there are drugs to tip the balance in favour of survival, and a
vaccine to prevent the disease altogether. But the pharmaceutical
industry, which has been responsible for bringing such drugs to the
market, is passing through its own crisis. Research and development
(R&D) is spluttering, earnings have weakened, its public image is
tarnished.
This survey will examine the global drug industry, probe some of the
patient's sorer spots and offer a diagnosis. Treatment is far trickier,
but the following articles will suggest ways in which all those with an
interest in its success--pill-makers and pill-takers--can hasten the
recovery.
The global pharmaceutical industry consists of thousands of companies,
including biotech firms, generic drugmakers, contract research
organisations, wholesalers and retailers. On top of them all sits "Big
Pharma"--a dozen or so multinational firms with headquarters in Europe
or America (see table 1). Their sales account for roughly half of the
world's $550 billion retail drug market. But the pharmaceutical
industry is relatively fragmented, with the biggest company, Pfizer,
holding less than 10% of the global market.
On the face of it, Big Pharma firms are in a business to die for.
Populations in rich countries--and increasingly developing ones
too--are getting older, and many people suffer from chronic conditions.
Global drug sales have almost doubled since 1997, and will rise to more
than $700 billion by 2008. By the standards of other industries, most
big pharmaceutical companies are hugely profitable: operating margins
are more than 25%, against 15% or so for consumer goods.
TALES OF WOE
But behind the healthy glow, a more worrying picture emerges. In the
past few years large drug companies have had trouble getting new drugs
out of their pipelines and into the market. At the same time, several
high-profile medicines have been withdrawn because of safety concerns.
Recently a whole group of drugs, anti-inflammatory medicines both old
and new, have run into trouble. And several firms have suffered
manufacturing problems.
Moreover, many so-called "blockbuster" drugs--those with more than $1
billion in global annual sales--have had their patents, and their
market share, challenged by cheaper generic rivals. Over the next five
years, a record $70 billion-worth of drugs will face generic
competition in America alone. Drug-company sales, which increased by
10-15% a year for most of the 1990s, have slowed to single-digit
growth. As a result, investors have shifted their attentions away from
pharmaceutical firms, particularly in America, where drugmakers are
currently in a worse state than their European peers.
The internal travails of the world's leading drugmakers have been
compounded by a broader social debate about the purpose and practices
of the industry, again mostly in America. This is the world's largest
drug market, accounting for over 40% of global sales. American drug
prices are largely set by the market, which has prompted pharma firms
to invest there on a large scale. As a result, they have become a
highly visible target for criticism. Europeans are far less exercised
about the industry, in part because their drug bills are paid for
mainly by their governments, and in part because they are shielded from
pharmaceutical marketing.
Last year, health-care spending in America reached an estimated $1.8
trillion, more than 15% of GDP. Some $200 billion of that went on
prescription drugs. Despite this enormous expenditure, large numbers of
Americans are becoming increasingly frustrated about the state of
health care in their country. Many elderly people struggle to pay for
their drugs (although from next year they will get a helping hand from
the government), big companies complain about their medical bills, and
45m people lack health insurance. Over the years, this frustration has
in turn been vented on doctors, managed-care companies and hospitals;
now it is the drug companies' turn, their public standing having fallen
as precipitously (see chart 2) as their share price.
THE DRUGMAKERS' DILEMMA
Why this anger at companies in the business of making life-enhancing
medicines? The following excerpts from a report on congressional
hearings in America neatly summarise the case against and for Big
Pharma in turn:
How true. Pharma profits are both a blessing and a curse. Many people
feel uncomfortable with the idea of money being made from medicine,
even when it is the price to be paid for innovation and better health.
Pharmaceutical firms are not the only ones to make a handsome living
out of health care, but they do so more conspicuously than others. Few
patients know how much their doctor earns, or what a hospital is
charging. But Americans blame high drug prices on Big Pharma's appetite
for profits. Senator Edward Kennedy, a long-time critic of the
industry, has a simple formula for categorising drug firms: he reckons
that a third of them have the public interest at heart, a third are
motivated by greed, and a third are somewhere in-between.
This is nothing new. Indeed, the congressional hearings quoted above
took place back in 1960. The debate over pharma profits and practices
has waxed and waned ever since. In the 1960s and 1970s, the first wave
of blockbuster drugs for ulcers and high blood pressure came to market,
drugs that treat--or even prevent--chronic conditions and are therefore
taken for years. This was a fundamental change from an earlier
generation of drugs that tackled acute ailments such as bacterial
infections. The 1980s brought more new pharmaceuticals, for depression,
cancer and nasty viruses, such as HIV.
By the early 1990s, the prospect of health-care reform and price
controls in America brought gloomy predictions for the industry, but
they turned out to be spectacularly wrong. Drugs that had been seen as
modest earners, such as the cholesterol-lowering statins, became
multi-billion-dollar blockbusters. Massive marketing campaigns lifted
sales, and investors piled in as share prices rose ever higher. Firms
flirted with all sorts of businesses before homing in on patented
pharmaceuticals as the model for modern big drugmakers. The launch of a
few high-profile drugs, such as Viagra and Lipitor, created the sense
of an industry always on the verge of great scientific breakthroughs.
And the growth of employer-sponsored health insurance provided a lot
more money to pay for it all.
At the same time, white coats started to give way to dark suits in the
boardroom as a new generation of CEOs from the commercial side of the
business took over from scientists and doctors. Firms started to
concentrate on hitting quarterly earnings forecasts, and mergers became
a popular way to cut costs. Drugmakers began to spin out patents to
stretch their sales, and became staunch advocates of strong
intellectual-property rights at home and abroad. Existing drugs were
tried out on different diseases, and more drugs of the same
feather--so-called "me-too" medicines--poured out of the pipelines.
Much of the mess some of the big pharmaceutical companies have found
themselves in over the past few years is a consequence of those heady
days. The fruits of new science, such as bioinformatics and genomics,
are only now starting to appear, later, as usual, than scientists had
hoped for, and size has not helped the big pharmaceutical firms to
excel at discovering new drugs.
Marketing practices are now under scrutiny, and drug companies stand
accused of rushing drugs to market on the back of inadequate studies
and withholding information about their drawbacks from patients and
physicians. Drug companies have been slow to recognise that the
traditional relationship between experts and the public has changed.
Much of the public trust drugmakers enjoyed derived from the
doctor-patient relationship, which is central to medicine. Yet that
relationship too has changed over the past decade. If patients are
prepared to question their doctors--sometimes prompted by
pharmaceutical advertising--they are bound to start questioning the
suppliers of their medicines too.
The cycle will in all likelihood turn again, and the bad press and
gloomy investor sentiment will improve for a while. But drugmakers'
essential dilemma will remain. As businesses, they are expected to
innovate, take risks, compete vigorously and reap the rewards. But when
they try to maximise shareholder returns, they run into trouble. If
Kellogg wants to flood the airwaves with commercials to promote
cornflakes for dinner, best of luck; but when Pfizer was trying Viagra
for female sexual dysfunction, it was accused of inventing diseases to
match its drugs.
A DIFFERENT KIND OF MARKET
This illustrates the essential difficulty of bringing market forces
into medicine. Health care does not work like a normal market, although
there are ways of making it more market-like, such as shifting more
purchasing power to patients and providing them with more information.
But buying health care will never be like buying, say, a sports car,
because a sick consumer is more constrained in his choice than a
healthy one.
Some critics of the drug industry argue that drugmaking should be taken
out of private hands and put in the public domain; after all, many of
the basic discoveries that drug companies develop and profit from came
from universities and government institutes in the first place. But
there is little evidence that governments or universities are any
better than the private sector at bringing new drugs to market. The
public may not like the way drug firms choose to spend their R&D
dollars, or how they go about promoting their wares, but at least they
have a record of bringing them to market in the first place.
Pressure from investors, buyers, regulators, doctors and patients is
already forcing the world's leading drugmakers to question the way they
do business. "The industry was living a little fat and happy," says
Sidney Taurel, Eli Lilly's boss. Many firms are now busy cutting costs.
Some are diversifying away from primary care to specialist drugs,
vaccines, generics or diagnostics. Some smaller companies may find
themselves in mergers over the next few years. Some of the biggest
firms might get smaller as they spin off some of their operations,
perhaps even their core R&D. It will become harder to tar the whole
industry with a Big Pharma brush.
Whatever the individual prospects of today's big drugmakers, there is
no doubt that their products as a whole have a bright future. The next
decade will see the emergence of many more drugs of many more kinds to
treat many more ailments. Some of these drugs will come from unexpected
sources. Most of them will offer small but steady improvements over
what went before, and will enhance the quality of life for some but not
all patients. But there will also be a few breakthrough products that
will tackle disease in fundamentally different ways. For all this to
happen, though, better ways will have to be found of valuing these
medicines, not only in terms of what they cost but also of the savings
they bring elsewhere.
-----
[1] http://www.economist.com/displayStory.cfm?story_ID=4077199
See this article with graphics and related items at
Go to http://www.economist.com for more global news, views and analysis from the Economist Group.
- ABOUT ECONOMIST.COM -
Economist.com is the online version of The Economist newspaper, an independent weekly international news and business publication offering clear reporting, commentary and analysis on world politics, business, finance, science & technology, culture, society and the arts.
Economist.com also offers exclusive content online, including additional articles throughout the week in the Global Agenda section.
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- COPYRIGHT -
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PRESCRIPTION FOR CHANGE
Jun 16th 2005
The pharmaceutical industry is ailing. Shereen El Feki (interviewed
here[1]) takes its pulse and predicts a partial recovery
AS A boy in the 1930s, your correspondent's father lived in fear of
pneumococcal pneumonia. With good reason: one of his young friends had
died of it. It caused coughing, chills and fever, leading to a crisis
in which the patient either suddenly expired or miraculously recovered.
Today, there are drugs to tip the balance in favour of survival, and a
vaccine to prevent the disease altogether. But the pharmaceutical
industry, which has been responsible for bringing such drugs to the
market, is passing through its own crisis. Research and development
(R&D) is spluttering, earnings have weakened, its public image is
tarnished.
This survey will examine the global drug industry, probe some of the
patient's sorer spots and offer a diagnosis. Treatment is far trickier,
but the following articles will suggest ways in which all those with an
interest in its success--pill-makers and pill-takers--can hasten the
recovery.
The global pharmaceutical industry consists of thousands of companies,
including biotech firms, generic drugmakers, contract research
organisations, wholesalers and retailers. On top of them all sits "Big
Pharma"--a dozen or so multinational firms with headquarters in Europe
or America (see table 1). Their sales account for roughly half of the
world's $550 billion retail drug market. But the pharmaceutical
industry is relatively fragmented, with the biggest company, Pfizer,
holding less than 10% of the global market.
On the face of it, Big Pharma firms are in a business to die for.
Populations in rich countries--and increasingly developing ones
too--are getting older, and many people suffer from chronic conditions.
Global drug sales have almost doubled since 1997, and will rise to more
than $700 billion by 2008. By the standards of other industries, most
big pharmaceutical companies are hugely profitable: operating margins
are more than 25%, against 15% or so for consumer goods.
TALES OF WOE
But behind the healthy glow, a more worrying picture emerges. In the
past few years large drug companies have had trouble getting new drugs
out of their pipelines and into the market. At the same time, several
high-profile medicines have been withdrawn because of safety concerns.
Recently a whole group of drugs, anti-inflammatory medicines both old
and new, have run into trouble. And several firms have suffered
manufacturing problems.
Moreover, many so-called "blockbuster" drugs--those with more than $1
billion in global annual sales--have had their patents, and their
market share, challenged by cheaper generic rivals. Over the next five
years, a record $70 billion-worth of drugs will face generic
competition in America alone. Drug-company sales, which increased by
10-15% a year for most of the 1990s, have slowed to single-digit
growth. As a result, investors have shifted their attentions away from
pharmaceutical firms, particularly in America, where drugmakers are
currently in a worse state than their European peers.
The internal travails of the world's leading drugmakers have been
compounded by a broader social debate about the purpose and practices
of the industry, again mostly in America. This is the world's largest
drug market, accounting for over 40% of global sales. American drug
prices are largely set by the market, which has prompted pharma firms
to invest there on a large scale. As a result, they have become a
highly visible target for criticism. Europeans are far less exercised
about the industry, in part because their drug bills are paid for
mainly by their governments, and in part because they are shielded from
pharmaceutical marketing.
Last year, health-care spending in America reached an estimated $1.8
trillion, more than 15% of GDP. Some $200 billion of that went on
prescription drugs. Despite this enormous expenditure, large numbers of
Americans are becoming increasingly frustrated about the state of
health care in their country. Many elderly people struggle to pay for
their drugs (although from next year they will get a helping hand from
the government), big companies complain about their medical bills, and
45m people lack health insurance. Over the years, this frustration has
in turn been vented on doctors, managed-care companies and hospitals;
now it is the drug companies' turn, their public standing having fallen
as precipitously (see chart 2) as their share price.
THE DRUGMAKERS' DILEMMA
Why this anger at companies in the business of making life-enhancing
medicines? The following excerpts from a report on congressional
hearings in America neatly summarise the case against and for Big
Pharma in turn:
How true. Pharma profits are both a blessing and a curse. Many people
feel uncomfortable with the idea of money being made from medicine,
even when it is the price to be paid for innovation and better health.
Pharmaceutical firms are not the only ones to make a handsome living
out of health care, but they do so more conspicuously than others. Few
patients know how much their doctor earns, or what a hospital is
charging. But Americans blame high drug prices on Big Pharma's appetite
for profits. Senator Edward Kennedy, a long-time critic of the
industry, has a simple formula for categorising drug firms: he reckons
that a third of them have the public interest at heart, a third are
motivated by greed, and a third are somewhere in-between.
This is nothing new. Indeed, the congressional hearings quoted above
took place back in 1960. The debate over pharma profits and practices
has waxed and waned ever since. In the 1960s and 1970s, the first wave
of blockbuster drugs for ulcers and high blood pressure came to market,
drugs that treat--or even prevent--chronic conditions and are therefore
taken for years. This was a fundamental change from an earlier
generation of drugs that tackled acute ailments such as bacterial
infections. The 1980s brought more new pharmaceuticals, for depression,
cancer and nasty viruses, such as HIV.
By the early 1990s, the prospect of health-care reform and price
controls in America brought gloomy predictions for the industry, but
they turned out to be spectacularly wrong. Drugs that had been seen as
modest earners, such as the cholesterol-lowering statins, became
multi-billion-dollar blockbusters. Massive marketing campaigns lifted
sales, and investors piled in as share prices rose ever higher. Firms
flirted with all sorts of businesses before homing in on patented
pharmaceuticals as the model for modern big drugmakers. The launch of a
few high-profile drugs, such as Viagra and Lipitor, created the sense
of an industry always on the verge of great scientific breakthroughs.
And the growth of employer-sponsored health insurance provided a lot
more money to pay for it all.
At the same time, white coats started to give way to dark suits in the
boardroom as a new generation of CEOs from the commercial side of the
business took over from scientists and doctors. Firms started to
concentrate on hitting quarterly earnings forecasts, and mergers became
a popular way to cut costs. Drugmakers began to spin out patents to
stretch their sales, and became staunch advocates of strong
intellectual-property rights at home and abroad. Existing drugs were
tried out on different diseases, and more drugs of the same
feather--so-called "me-too" medicines--poured out of the pipelines.
Much of the mess some of the big pharmaceutical companies have found
themselves in over the past few years is a consequence of those heady
days. The fruits of new science, such as bioinformatics and genomics,
are only now starting to appear, later, as usual, than scientists had
hoped for, and size has not helped the big pharmaceutical firms to
excel at discovering new drugs.
Marketing practices are now under scrutiny, and drug companies stand
accused of rushing drugs to market on the back of inadequate studies
and withholding information about their drawbacks from patients and
physicians. Drug companies have been slow to recognise that the
traditional relationship between experts and the public has changed.
Much of the public trust drugmakers enjoyed derived from the
doctor-patient relationship, which is central to medicine. Yet that
relationship too has changed over the past decade. If patients are
prepared to question their doctors--sometimes prompted by
pharmaceutical advertising--they are bound to start questioning the
suppliers of their medicines too.
The cycle will in all likelihood turn again, and the bad press and
gloomy investor sentiment will improve for a while. But drugmakers'
essential dilemma will remain. As businesses, they are expected to
innovate, take risks, compete vigorously and reap the rewards. But when
they try to maximise shareholder returns, they run into trouble. If
Kellogg wants to flood the airwaves with commercials to promote
cornflakes for dinner, best of luck; but when Pfizer was trying Viagra
for female sexual dysfunction, it was accused of inventing diseases to
match its drugs.
A DIFFERENT KIND OF MARKET
This illustrates the essential difficulty of bringing market forces
into medicine. Health care does not work like a normal market, although
there are ways of making it more market-like, such as shifting more
purchasing power to patients and providing them with more information.
But buying health care will never be like buying, say, a sports car,
because a sick consumer is more constrained in his choice than a
healthy one.
Some critics of the drug industry argue that drugmaking should be taken
out of private hands and put in the public domain; after all, many of
the basic discoveries that drug companies develop and profit from came
from universities and government institutes in the first place. But
there is little evidence that governments or universities are any
better than the private sector at bringing new drugs to market. The
public may not like the way drug firms choose to spend their R&D
dollars, or how they go about promoting their wares, but at least they
have a record of bringing them to market in the first place.
Pressure from investors, buyers, regulators, doctors and patients is
already forcing the world's leading drugmakers to question the way they
do business. "The industry was living a little fat and happy," says
Sidney Taurel, Eli Lilly's boss. Many firms are now busy cutting costs.
Some are diversifying away from primary care to specialist drugs,
vaccines, generics or diagnostics. Some smaller companies may find
themselves in mergers over the next few years. Some of the biggest
firms might get smaller as they spin off some of their operations,
perhaps even their core R&D. It will become harder to tar the whole
industry with a Big Pharma brush.
Whatever the individual prospects of today's big drugmakers, there is
no doubt that their products as a whole have a bright future. The next
decade will see the emergence of many more drugs of many more kinds to
treat many more ailments. Some of these drugs will come from unexpected
sources. Most of them will offer small but steady improvements over
what went before, and will enhance the quality of life for some but not
all patients. But there will also be a few breakthrough products that
will tackle disease in fundamentally different ways. For all this to
happen, though, better ways will have to be found of valuing these
medicines, not only in terms of what they cost but also of the savings
they bring elsewhere.
-----
[1] http://www.economist.com/displayStory.cfm?story_ID=4077199
See this article with graphics and related items at
Go to http://www.economist.com for more global news, views and analysis from the Economist Group.
- ABOUT ECONOMIST.COM -
Economist.com is the online version of The Economist newspaper, an independent weekly international news and business publication offering clear reporting, commentary and analysis on world politics, business, finance, science & technology, culture, society and the arts.
Economist.com also offers exclusive content online, including additional articles throughout the week in the Global Agenda section.
- SUBSCRIBE NOW AND 25% -
Click here: http://www.economist.com/subscriptions/offer.cfm?campaign=168-XLMT
Subscribe now with 25% off and receive full access to:
* all the articles published in The Economist newspaper
* the online archive - allowing you to search and retrieve over 33,000 articles published in The Economist since 1997
* The World in - The Economist's outlook on the year
* Business encyclopedia - allows you to find a definition and explanation for any business term
- COPYRIGHT -
This e-mail message and Economist articles linked from it are copyright
(c) 2005 The Economist Newspaper Group Limited. All rights reserved.
http://www.economist.com/help/copy_general.cfm
Economist.com privacy policy: http://www.economist.com/about/privacy.cfm
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