Pharmaceutical Industry
Although most big pharmaceutical companies still have fairly healthy P&L profiles, there is currently unprecedented pressure on the industry from all sides: -
1.Governmental and general political downward price pressures and attacks over perceived excessive profits. This can manifest itself in enforced lower prices at product launch, arbitrary across-the-board price cuts (a Japanese speciality), extra taxes on deemed super profits (e.g. UK with PPRS - 'Pharmaceutical Profit Regulation Scheme' - Spain and France), imposing strict global drug budgets for doctors/hospital trusts etc.
2.Governments de-listing drugs deemed to be too expensive and only approving cheaper branded alternatives or generic equivalents.
3.Rigid controls on sales and marketing methods - no more junkets to the Caribbean, offers of expensive computer equipment etc.
4.Competitive pressure from within the industry itself. The rewards of success are high but the R&D costs of getting there are colossal. There is more and more focus on targeted discovery and research rather than blank cheques for general research into whatever takes a scientist's fancy. Researchers are increasingly being held accountable for their areas of research. Even if a lot of money has already been spent, but the work isn't going anywhere, then the 'plug' is pulled and historical expenditure written off. This tends to displease the affected scientists for whom their baby is more important than mere potential profitability. The downward pricing pressure is squeezing the money available for research but, without the latter, the long-term future for new discovery and drug therapies would be bleak indeed.
5. Media attacks on the 'profiteering' pharma industry - 'only interested in profit not people', 'why are all the companies researching into the same therapeutic areas rather than pooling resources?' (It's called COMPETITION!), 'why isn't the industry doing more charitable work for the third world?' etc.
6.Increasingly, even the general public is being turned against the industry through constant media and governmental criticism.
7.The constant attacks and the slowing of profits are having a marked effect on the investment community. The pharma industry is no longer seen as a rock solid haven for investors. Traditionally pharma stocks have traded at a significant price/earnings premium to the general market but this situation has been substantially eroded over the past two years. Analysts are increasingly warning of the potential downside due to the governmental and general public 'profiteering' press.
8.The ever increasing litigious environment. Drug side effects are seen as a bottomless pit of money for patients and lawyers alike. At a time when the industry is trying to slash R&D lead times and therefore costs, this all pervasive threat of legal action puts ever increasing pressure on the need for even more vigilance in the development and launch processes.
1. Accelerated R&D processes - use of computerised testing techniques, use of discovery/prior testing data banks to avoid unnecessary tests which are already a matter of record, parallel rather than sequential testing etc.
2. Rigorously targeted R&D with constant ongoing review for potential 'plug' pulling or accelerated investment if things look promising.
3. Streamlining of overheads - centralising administrative processes (in country, cross border, global), outsourcing where appropriate (IT, payroll, accounting processes, fleet management, cafeteria etc.), better systems, enhanced use of technology, streamlined processes etc.
4. Strategic mergers/take-overs/divestiture of non-core businesses in order to leverage R&D, eliminate duplicate R&D, leverage differing geographic sales and marketing strengths and streamline administrative support functions. This needs to be carefully handled since the acquisition of a slower growing/lower profit ratio organisation may well be dilutive to the parent growth and profit profile and further disenchant the investment community. Operating synergies need to be able to overcome any such dilution within a couple of years or so in order to protect the investment profile.
5. CEOs are upselling the industry at senior governmental and media levels all over the world and preaching the 'gospel' of the commitment to better healthcare through appropriate pricing and profit profiles and R&D. The 'gospel' also includes unequivocal warnings about the downside potential of enforced reduced prices and profit controls - slower development of solutions for therapeutic needs and lower investment into 'offending' countries. Arguments include inter alia:
- New and better drugs save lives and enhance the quality of life for countless others.
- Drugs form only about 10% of the healthcare budget and a good drug can accelerate the healing process and, in the case of hospitalisation, free up hospital beds earlier therefore benefiting both current and future patients and reducing overall treatment costs.
- Competition in R&D (as in most things) yields better results than a non-competitive pooling arrangement.
- The pharma industry contributes hugely to the host economy through corporation tax, employment, local peripheral economies etc. For example, it is estimated that the 5000 Pfizer employees and 2000 pensioners (private scheme) in the UK support a family and associated business community environment of between 30 and 40,000. The company is a huge net tax contributor to the nation, is a major exporter and generates large royalty incomes for the UK from it's R&D discovery programmes.
6. The industry leaders are in increasing contact with underdeveloped countries to provide healthcare education and free drug programmes for endemic third world diseases such as insect/bad water related eye disorders and peripheral fungal HIV symptoms.
7. Forging relationships with small, focussed pure research laboratories and universities i.e.'we will pay for your research for a given period and in return have the right to market any commercially viable outcomes and share the profits with you'. This is more economical that starting all over again and covering duplicate ground.
