Jacky Law

Pfizer is no normal company. As recently as 2007 it was still the industry's largest player with $47.5 billion (€36.8 billion) coming in from pharma sales alone. Its rise to the top had been nothing short of spectacular; betting so confidently on Lipitor when it bought the drug's marketing partner Warner-Lambert in 2000 for a price most people at the time thought was way over the odds.

That confidence, which enabled Pfizer to trump all rival bids for Warner-Lambert by $20 billion (€15.5 billion), seems now to have evaporated as it undergoes an equally spectacular and well-documented decline. Despite spending around $7 billion (€5.4 billion) a year on R&D for years, the highest in the industry, the last major product to have emanated from its own research effort was Viagra in 1999.

Shares, which were trading at approximately $26 (€20) when CEO Jeff Kindler took over from Hank McKinnell in 2006, were worth $17.45 in January 2009 — and that's after the company had spent billions buying back stock (at prices far higher than $17.45 (€13.51) to stem the fall. Meanwhile, employee numbers, which stood at 122000 in 2003, have steadily fallen to approximately 86000 today, and the cull continues beyond the sales reps to managers and scientists.

In one sense, Pfizer's rise and fall simply exemplifies the weakness of Big Pharma's traditional business model based on big drugs, big sales forces and big profits. However, because its experience has been more extreme than its rivals, it attracts more attention. Indeed, the mere mention in a recent interview with the Financial Times that it wasn't ruling out the possibility of a major deal was enough to put the rumour mill into overdrive. Goldman Sachs even upgraded the stock from 'sell' to 'hold' regardless of what it might acquire.

A major deal is certainly possible. An analysis by EvaluatePharma back in August 2008, when Pfizer was still resisting the idea of a mega-merger, showed the company to be the only one of the global majors to have a decent cash position and no serious financing commitments.

Analysts, realizing this possibility, have responded to the prospect of a mega-merger with all the enthusiasm of gossip columnists speculating over the marriage prospects of A-list celebrities. They forget that all the evidence suggests mega-mergers tend to erode rather than create value. They forget that all the industry dynamics suggest downsizing is the order of the day. Instead they round up the companies that are possible targets and endlessly speculate about what a Pfizer–Amgen, a Pfizer–Gilead Sciences, a Pfizer–Bristol-Myers Squibb, or Pfizer–Wyeth might look like and how it might perform.

Arguably, the more interesting comments about what Pfizer should do come from the blogs, where you find vast numbers of former employees with time on their hands, insider knowledge about the company and nothing to lose by speaking their minds. Since the January announcements that Pfizer would cut up to 800 research jobs by the end of the year and that another 2400 sales reps and managers are threatened with redundancy, comments from these often disgruntled folk have also been in overdrive.

Unsurprisingly, and at the risk of oversimplifying the situation, they blame top management for decisions that have come too late (not buying Amgen when it was trading at around $40 (€31) in March 2008 rather than now when the price has soared to approximately $55 (€43), for example), for getting rid of older people with all the experience and who do all the work, for not doing nearly enough to dismantle the bureaucracy and for not recognizing the company is still too big and would be better off breaking itself down rather than bloating itself further with a large merger.

Who knows what Pfizer will do? It looks increasingly likely that it will buy itself out of trouble, if only because it can. It that sense, it is eminently normal. Who in their right minds likes to admit failure and start dismantling what once worked so very well?

Articles

Pfizer is no normal company. As recently as 2007 it was still the industry's largest player with $47.5 billion (36.8 billion euro) coming in from pharma sales alone.

How will Pfizer fight failure?

As an industry, biopharma is relatively well protected relying as it does on the collective, rather than individual, purse. But the winds of change are fairly fierce. Even those who have always considered they have a job and a house for life are feeling a lot less secure as they enter 2009 than they did going into 2008. Those who still have jobs may well be working for new owners. Those who no longer have a regular wage are doubtless plotting a whole new way of life. 

So, in an effort to restore some of the feel-good factor that traditionally accompanies New Year's Day, and as someone who hasn't had a regular wage for years, I want to offer some reasons for optimism:  					

Some big biotechs are doing well. MedImmune, which was bought by AstraZeneca in 2007, is doubling the size of its HQ in Gaithersburg (MD, USA), and hiring staff. Its payroll expanded by 800 in 2008 and will do the same in 2009. Biogen Idec also increased its workforce by 10% last year.

Global generic sales should continue to grow, especially after governments start to repair the devastation inflicted from massive spending to bolster the economy. Generics may not be as sexy as the innovative sector, but they still need to be packaged, marketed, distributed and sold, which all translates into jobs. According to Deutsche Bank analyst, Barbar Ryan, twothirds of prescriptions worldwide are now for generic drugs. Two years ago, the figure was approximately 50%. 

The blockbuster is not dead. When drugs work in areas such as cancer people want them. The EvaluatePharma forecast database shows Roche/Genentech's Avastin will be the number one drug in 2014, with global sales of more than US$12 billion. Moreover, the EvaluatePharma news service, EP Vantage, reports: "Last year [2007], 121 products attained the magical US$1 billion in sales level, while forecasts for 2014 expect 149 drugs to be accorded the same status. Meanwhile, the average annual sales of the top ten drugs in 2007 of US$6.23 billion is set to rise to an average of US$7.04 billion by 2014." 

The multiblockbuster sales that Avastin is expected to earn are some vindication of Genentech's flexible working policies regarding its researchers. The urgent quest for new breakthroughs may make such thinking more widespread. Companies may be restructuring their R&D effort to be more focused on growth areas, but it is the restructuring of the creative mindset that is arguably more important. Napoleone Ferrara, Avastin's originating scientist, has famously said he was only able to discover how new blood vessels grow to feed a tumour — Avastin's central selling point — because he had been given the time to do so. A policy then in operation at Genentech said that a quarter of a researcher's time should be spent on projects of their own choosing.  

The high costs accompanying drugs that people actually want should mean the public becomes more engaged in what biopharma companies do. This is already happening with the cancer and Alzheimer's drugs, and it will doubtless continue as other medicines are not reimbursed. Dialogue with the public is, of course, double-edged but, in the UK at least, it is a question of so far, so good with public pressure largely responsible for a recent decision by the National Institute of healthcare and Clinical Excellence (NICE) to reverse a negative finding on four cancer drugs. What public pressure essentially did was raise the bar by which NICE decides if a drug represents value for money for the NHS. 

Which brings us back to the subject of new beginnings at the start of 2009. A keen survival instinct latches onto anything that offers hope and works with that to create the new beginnings for themselves and their families. That hope may come from operating in a growth area or in a company large enough to withstand the storm. But it may also come from something much more fundamental that applies even to the most dispensable: that necessity is the mother of invention, no one or nothing changes unless it has to. I know; I have been freelance for years. I also know that not having a job is not the same as being idle.

A new year, all things being equal, is a time of looking to the future with positive intent and traditional bonhomie. At the very least, it suggests new beginnings. As we enter 2009, however, the world is moving into a major recession and things are far from equal.

New beginnings

Last month, I discussed the good fortune of biopharmaceutical companies being something of a shelter in the current financial storm. They may be over-sized, over-paid, bleeding R&D resources and desperately seeking new directions, but at least people around the world continue to get ill without having to pay the full cost of their drugs.

This month, I focus on another benefit bestowed by the financial storm, this time stemming from the Obama effect. The new president-elect has made no secret of the fact he wants to reform how healthcare is delivered in the industry's flagship market. His white paper on healthcare says, "[pharma] companies are exploiting Americans by dramatically overcharging US customers." Given the economic turmoil surrounding his first term in office, the industry may have more breathing space as healthcare, and specifically drug, costs fall down the priority chain. 

As it happens, no one can know the Obama effect, as his extraordinary popularity, pulling in the highest voter turnout in US history, will also strengthen his mandate. Nevertheless, people have been doing their sums. The Boston Consulting Group, for example, estimates that Barack Obama's plans to provide healthcare coverage for 47 million uninsured Americans will boost the healthcare industry by $17 billion (€13.5 billion) a year.  

But medicines only constitute a small proportion of this. Overall, the drugs industry stands to lose significantly more — up to £30 billion (€35.1 billion) a year — from Obama's intention to restore the government's right to negotiate Medicare drug prices. Medicaid is the government health insurance for the elderly that, until a couple of years ago, excluded drugs from its coverage. In January 2006, however, following an industry masterstroke, drugs were not only reimbursed by the government, but at non-negotiable prices. Since then, the federal agency has become a truly massive player, assuming no less than 45% of US industry sales and making it the world's single-biggest payer by an extremely wide margin. 

It also charges high prices. Data from another bulk purchaser, the US Department of Veterans Affairs (VA), shows the VA price for the top 20 drugs prescribed to senior citizens is 25–91% lower than the lowest Medicaid prices. Based on these figures, the Boston Consulting Group estimates industry revenues could nosedive by $14.7 million–30 million (€11.7 million–23.9 million) a year if the government rescinds the law preventing it from negotiating prices. 

The practical significance of the economic crisis then is that it gives industry more time to work out a robust defence. Already it argues that the private insurers operating within the Medicare programme strike pricing deals of their own that drive down the levels of reimbursement the government must pay. Indeed, Medicare figures show that in the year to 30 September, it spent $44 billion (€35 billion) on drug reimbursement, 12% down on 2007 and a third less than the original estimates for 2008.  

However, there is more to do and more fronts to fight on. Obama has also said he wants to eliminate the ban on importing drugs from countries that have good safety records, such as Europe and Canada, and where prices are considerably less than in the US. His plan also mentions getting generic drugs to market faster and conducting more comparative studies to see if patients are getting value for money from their drugs. 

Being protected from all this by a financial tsunami may seem like cold comfort. According to the EvaluatePharma database and despite years of price pressure on the US market, it still contributed 45.7% of global pharmaceutical sales in 2007, which is a pretty sizeable chunk. At some point, industry chiefs will have to address the US wrath at being charged so much more than everyone else in the world. They will have to do more to downsize, reinvent themselves and, most importantly, find a few decent drugs. 

The uncomfortable truth is that just as the banks are suffering the effects of a massive depletion in capital, so Big Pharma is feeling the effects of an equally massive depletion in innovation. The only crumbs of real comfort come from Obama's expected boost to stem cell research. Being in favour of more federal funding in this area suggests the new administration is not anti-science or even anti-industry. It just wants lower prices. From pharma's point of view there can be very little comfort in that and the stronger the mandate of the administration the bolder the moves are likely to be. Long live the storm!

...the new administration is not anti-science or even anti-industry. It just wants lower prices.

The Obama effect

I  confess I am no financial expert. My knowledge about the current credit crisis can be summed up in six words: 'debt is bad; cash is good', which was pretty much the limit of my understanding about money before it all began. But you don't have to be a financial expert to recognise the panic sweeping through the financial system, petrifying investors, CEOs and employees alike — nor to know that the paralytic effect it is currently exerting on global commerce must eventually pass. The banks will lend money again. Normality will return. 

Meanwhile, however, a major recession seems inevitable. The good news is that it couldn't have come at a better time for pharma — at least, that is, for those companies that aren't dangerously reliant on borrowing. As one pharmaceutical analyst from a leading investment bank told EvaluatePharma's news service, EP Vantage: "It's a sector not without problems, but still a safe haven, as pharma is clearly less exposed to the macro environment. Go back three recessions and downward revisions in earnings for pharma are half of what you see for the rest of the market."  

In the so-called crash of 2008, pharma is performing well or, more accurately, less badly than anyone else. Since the beginning of June, the Dow Jones STOXX Healthcare Index had lost 4.5% by mid-October. The Dow Jones STOXX 50 Index, meanwhile, went down 26% during the same period. The largest companies have done particularly well, outperforming the FTSE index by 32% since early June. Stocks in AstraZeneca have actually risen 4% since June, flaunting advice from Goldman Sachs a week or so before the Lehman Brothers crash. On 11 September, the US investment bank was advising people to sell shares in the company. 

Pharma's problems (patent expiries, few new drugs, and so on) may not have vanished, but companies have two things going for them they didn't have before the crash: they are a better bet for investors than the consumer sector and, unsettled times tend to work in their interests by raising the general level of demand for medicines. 

The bad news, as EvaluatePharma CEO Jonathan de Pass points out, is that governments have less money to spend. "We are in uncharted territory, but one thing we do know is that government finances are shot to pieces," he says. "And that will affect health budgets. The ramifications of the banking crisis extend everywhere. No one can escape unscathed." 

State-run health services will have to make their limited funds go further. Fred Hassan, CEO of Schering-Plough, told the 

 healthblog last month (2 October) just what this means in Europe, where his company sells more Remicade (J&J's rheumatoid arthritis drug that Schering-Plough sells outside the US) in Sweden, with a population of just 9 million, than in Italy, which has a population of 58 million. "When it comes to health budgets, a nation's doctors, hospitals and pharmacists have political pull," he said. "That means there's a tendency to squeeze drugs a little harder." 

The good news of the credit squeeze (timing and greater demand for drugs), in short, could ultimately be overwhelmed by the bad news (less money to pay for drugs) and greater public approval of government regulation. Amidst all this uncertainty, it is hardly surprising that most commentators concentrate their thoughts on advising the companies with decent balance sheets to start snapping up all those debt-ridden biotechs with decent products and little bargaining power because they are in danger of folding. The trouble is that no one can say which companies they are exactly. Where confidence is the real casualty, only companies that have proven success, such as ImClone, seem remotely attractive. 

Finally, anyone feeling sorry for Sir Tom McKillop, former CEO of AstraZeneca whose banking career ended abruptly on 13 October, may be interested to know that he is not on the scrap heap. Far from it. Although forced to resign as Chairman of the Royal Bank of Scotland after shares fell to a quarter of their value in early 2007, he remains, according to Wikipedia, a Non-Executive Director at BP, Chairman of the British Pharma Group, Pro-Chancellor of the University of Leicester, Vice President of the European Federation of Pharmaceutical Industries and Associations, Chairman of the North West Science Council and, since January 2007, President of the Science Council. One wonders how he found the time to run a bank. 

I confess I am no financial expert. My knowledge about the current credit crisis can be summed up in six words: 'debt is bad; cash is good', which was pretty much the limit of my understanding about money before it all began.

Is Pharma recession-proof?

The most public argument against direct-to-consumer advertising in Europe is essentially paternalistic: to protect people from companies who are considered unable to present an objective account of their drugs. The other, perhaps more convincing case, is that cash-strapped public healthcare administrators know they would face rising costs. Why, they ask, would companies bother to produce advertisements if they didn't increase demand for drugs?

In the US, where prescription drug advertisements have been around since the 1980s, the former argument is now being actively put to the test. Last month, FDA's Center for Drug Evaluation and Research (CDER) started enlisting the public's help in determining whether a drug advertisement violates laws that say the information provided should be truthful, balanced and accurately described. Working in conjunction with the nonprofit and fiercely independent charity, EthicAid, the idea is to inform the public about how drug advertising can be misleading and to help people shop the culprits.

It should also work to make companies more accountable for what they do and say, thus avoiding debacles such as the one earlier this year when Pfizer pulled its Lipitor advertisements after the 

 challenged the authority of the doctor they featured by pointing out he had never actually practised medicine.

The US, by permitting a stronger pharma presence in society through advertising, helps to create a stronger public voice, something healthcare administrators, governments and companies the world over say they want. The US experience also shows, however, that an informed public can make life considerably tougher for pharma — and not just in terms of their advertising.

Consider another FDA initiative, which was also initiated last month, that enables public awareness of drug safety issues earlier than ever before. Under the FDA Amendments Act, the agency is now legally obliged to post, every 3 months, a list of drugs that are being investigated because of complaints from drug companies, doctors and patients. The first quarterly list, covering adverse effects reported from 1 January to 31 March 2008, contained 20 drugs, only four of which had safety concerns that had previously been made public. Some of the others being investigated involve names or packaging issues rather than new side-effects; for example, a cream called Carac to treat precancerous skin conditions is being investigated because it has been confused with Kuric, for fungal infections. Whichever way you look at it, the list will pose a greater degree of uncertainty for both patients and investors, neither of which is good for the pharma companies involved.

In consumerist times, however, such moves are almost inevitable. "I think the public has told us in recent years that 'we want to know what you're working on'," Gerald Dal Pan of CDER told the 

. "We are telling the public at pretty much the earliest stage what we are working on."

The positive side to the public being encouraged into the pharma arena is that it should go some way to ensure that the industry's reputation, as well as everything that flows from that, is kept in better check. If nothing else, companies should feel less tempted to cut corners as the economic environment worsens. The European industry, in contrast, will continue to be subject to allegations of paternalism for some time to come.

The most public argument against direct-to-consumer advertising in Europe is essentially paternalistic: to protect people from companies who are considered unable to present an objective account of their drugs.

Power to the people

Pharmaceuticals used to be such a simple business when everyone knew their place. The giants dominated and the smaller players either developed markets the giants weren't interested in or concentrated on supplying new science for those they were. 

Now, the picture could hardly be more different. A report published this summer entitled 

 shows that during 2000–2006, companies with annual revenues of more than $10 billion (Big Pharma) have been losing out to companies with revenues of $1 billion–$10 billion (Middle Pharma) on virtually every financial yardstick. 

In terms of performance, Big Pharma revenues and net income grew by 9 and 11% during this period, while the mid-tier grew by 12 and 25%, respectively. In terms of valuation, the collective market cap of the big companies fell by 2%, while that of the mid-tier climbed to 12%. As far as investor confidence is concerned, the price–earnings ratios of the big players fell by 9.5% while the mid-tier saw a rise of 6.2%. 

The reasons for this turnaround are well documented, and revolve around the unsustainability of the Big Pharma model at a time when healthcare budgets are tight, patents are expiring before pipelines can be replenished, the industry's reputation has plummeted —particularly in the heartland US market — and regulators are becoming more cautious. Moreover, Big Pharma companies can no longer merge themselves out of trouble and are being forced to downsize, apply a much keener focus to what they do, and usher in new and younger CEOs to apply new thinking to what is a very new situation. 

How companies shape up is being closely watched. Some are buying back their shares in the largely forlorn hope of propping up falling share prices. The 

 shows, for example, that the UK giant GlaxoSmithKline had net debts of $12.2 billion in 2007.

  Those of Germany's Bayer were even higher at $16.5 billion, while Abbott Laboratories was $9.4 billion in the red and AstraZeneca $9.1 billion. This is a major change in strategy for companies that, in the past, have tended to hoard their cash. 

Another turnaround stems from the strong euro. The EvaluatePharma database shows that European companies are buying into the US market at an unprecedented rate. Of the 66 company acquisitions that took place worldwide in the first 7 months of 2008, 22 came from EU companies snapping up their US counterparts.

Radically new market conditions are forcing companies to think differently. The June announcement made by Daiichi Sankyo (Japan) that it would acquire a majority shareholding in Indian generics company Ranbaxy for $3.4 billion provides a good example of this new landscape. The deal, expected to close in March 2009, brings together two mid-tier companies with complementary strengths to create a significant presence in the relatively underdeveloped Asian markets. Whether it will prove a good investment remains to be seen.

It is clear that new business models are urgently being sought by the major players. The winners in all this will be those who are realistic, and the signs aren't good. While researching the new pricing rules in the UK, I spoke to the UK subsidiaries of several major pharma companies on the new Pharmaceutical Pricing Regulation Scheme (PPRS), the salient points of which are that it still allows companies to set prices at the time of a drug's launch and to modulate all their prices to maximize what they can earn from the UK's National Health Service. The PPRS is an important contract because UK prices have a significant bearing on what can be charged throughout Europe. 

Last year, the UK Office of Fair Trading produced a report that said the government wasn't getting a fair deal from the pharma industry and, as a result, the whole deal was to be renegotiated earlier than planned, with the real possibility that its founding principles — to freely set prices at the time of launch — would be reformed. This didn't happen. Instead, an across-the-board price cut of 5% was introduced. However, when you can modulate prices within an overall profit-capped framework, this is of little significance.  

I was surprised, therefore, to learn some major companies, rather than being grateful for this piece of good fortune, chose to bemoan the fact the PPRS was being renegotiated at all. It will be interesting to see how long it takes for realism to take hold. 

Pharmaceuticals used to be such a simple business when everyone knew their place.