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BusinessWeek: January 10, 2000 |
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Industry Outlook 2000 -- Life Sciences
Drugs
The coming year may mark a return to less ebullient times. While 2000 will probably be a decent year for the industry, it's unlikely to match the spectacular growth of the past year. According to market research firm IMS Health Inc., global pharmaceutical sales should be up 8% in 2000, to $363.8 billion, a slip from 1999's sales growth of nearly 10%. One reason for the slide is that there seem to be fewer new drugs with blockbuster potential in the 2000 lineup. At the same time, government debate over various plans, including one from President Clinton, to add a prescription-drug benefit to Medicare will help keep a spotlight on drug prices--and make it more difficult for companies to make major hikes. Those pressures will probably contribute to a wave of consolidation in the industry, presaged by the recent battle for Warner-Lambert Co. "There's much more uncertainty now than there was a couple of years ago," says Linda I. Miller, portfolio manager of the John Hancock Global Health Sciences Fund. STILL YOUNG. Certainly, the industry will benefit from the strong product launches of recent years. According to Lehman Brothers Inc. analyst C. Anthony Butler, over 130 medicines rolled out in the U.S. since 1996 are still in their early, hot-growth phase. Among them are the cholesterol-lowering agent Lipitor, launched in 1997, and the arthritis drugs Celebrex and Vioxx, which hit the market in 1999. And while 2000 is likely to be quieter in terms of hot new drugs, there are a few products to watch. Glaxo Wellcome PLC will introduce a drug for irritable bowel syndrome that SG Cowen Securities analyst Stephen M. Scala says will reach close to $1 billion in annual sales in four years. And in the same time frame, Scala says that Vanlev, a hypertension drug from Bristol-Myers Squibb Co., slated for a 2000 launch, may rack up $2 billion in annual sales. "That could be bad news for Merck & Co. and Pfizer Inc.," warns Brown Brothers Harriman & Co. analyst Michael Krensavage, since both of them have important hypertension drugs. More bad news looms for the industry in the form of patent expirations. Between 2000 and 2004, drugs generating $43 billion in U.S. revenue will see their U.S. patents expire or lose market exclusivity under certain FDA rules. That could trigger a wave of cheaper, generic versions of the drugs. Among the drugs going off patent or losing exclusivity next year are Merck's $2.3 billion hypertension drug Vasotec and Bristol-Myers Squibb's $1.3 billion diabetes treatment Glucophage. While some companies have savvy strategies for battling their generic competitors (box), others, including Merck & Co., could see generics eat into sales growth after the patents end. Patent headaches are just one reason 2000 is likely to be a year of dealmaking. As drug development and marketing costs continue to soar, some pharmaceutical companies are likely to link up. A big merger, after all, offers cost savings that can drive earnings for years. Pfizer's hostile bid for Warner-Lambert Co., which came after Warner struck a tentative agreement to merge with American Home Products Corp., could signal the beginning of a deal frenzy. Already, midsize players Pharmacia & Upjohn and Monsanto Co. have followed suit with a planned merger of equals. And some analysts figure that the recently announced plan by SmithKline Beecham PLC Chief Executive Officer Jan Leschly to retire in April will pave the way for renewed merger discussions with Glaxo Wellcome. "The stars may be aligned for a couple big deals," says J.P. Morgan Securities Inc. analyst Carl Seiden. Dealmaking won't be the only high priority for drug company chiefs in 2000. World Trade Organization rules require that all the member countries put intellectual-property laws on their books by 2000. That is crucial to protecting drug company patents in important emerging markets such as India and Argentina. But about half of those member countries have yet to draft such rules. Schering-Plough Corp. Chief Executive Officer Richard J. Kogan says the pharmaceutical industry will press hard for passage of those laws. "We have to have staying power" on this, Kogan says. The industry has even more at stake in the heated debate about proposals to add prescription drug coverage to Medicare. With the Presidential election race under way, Medicare reform is fast becoming a political football. Industry leaders will fight any change that takes decisions about the purchasing or use of drugs away from the private sector, since any sort of government involvement is seen as a step toward price controls. But Merck CEO Raymond V. Gilmartin says passage of a major overhaul is unlikely this year. "It's likely there will be more rhetoric than action," he says. Even without a new law, the furor in Washington may still affect the industry. According to IMS Health, drug prices rose about 4.4% in 1999, up from the 1.7% rate in 1994. But most observers figure pharmaceutical prices won't climb quite as fast in 2000, as the industry takes care not to make itself a bigger target in Washington. In addition, managed care companies may be able to exert more pressure on prices as they expand the use of drug-coverage programs known as three-tiered formularies. Under those systems, consumers typically pay higher co-payments for more expensive drugs that the managed-care operator doesn't believe are better than cheaper therapies. At the same time, drug prices could be affected by a different but equally powerful force: the Internet. Stephen S. Tang, national director of consulting firm A.T. Kearney Inc.'s health-care industry practice, figures the online sale of pharmaceuticals will balloon from $585 million in 1999 to $1.4 billion in 2000. As those sales surge, more consumers will find it easier to compare the prices and benefits of products. "The Internet will be used by consumers to ferret out information and will have a deflationary impact," says Per G.H. Lofberg, president of pharmacy benefits management company Merck-Medco Managed Care LLC. THE DEAL OPTION. For the biotechnology industry, 2000 is likely to be a year of improving health. Samuel D. Isaly, a partner with the research firm OrbiMed Advisors, figures that of the 500 biotechnology companies he tracks, 30 will make a profit this year, up from 16 in 1999. And the biotech dealmaking spree of 1999 is likely to continue. Last year, a number of biotechnology players were scooped up by big pharmaceutical companies. Highlights included Warner-Lambert's acquisition of Agouron Pharmaceuticals Inc. and Johnson & Johnson's purchase of Centocor Inc. Isaly says a number of biotech companies, including Vertex Pharmaceuticals Inc., which developed the HIV drug Agenerase, and genomics leader Human Genome Sciences Inc., could link up with or be acquired by big drug companies. For the pharmaceutical industry, dealmaking may be the most popular response to a more challenging year ahead. Return to top | |
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  Return to top  Return to top TABLE Positives and Negatives POSITIVES -- Solid revenue growth is on tap as drugs marketed over the past few years continue to make gains. -- Consolidation frenzy in the industry should help drive stock performance for many possible takeover targets. NEGATIVES -- For many companies, the new-product pipeline is not as rich as it has been in recent years. Megamergers may not solve this problem. -- Patents on a number of big drugs start expiring in 2000. This will lead to heavy competition from generic drugs. Return to top The Making of a Blockbuster, Part 2 Looks as if the pharmaceutical industry is taking a page from Hollywood. Two of the highest-profile launches in 2000 should be the drug industry equivalents of a sequel to a movie blockbuster. AstraZeneca PLC is expected to roll out Nexium, a drug derived from its $6 billion anti-ulcer drug Prilosec, while Schering-Plough Corp. is on track to launch what's been dubbed "Son of Claritin," a new form of its blockbuster $2.7 billion allergy medicine. Why the sequels? These products are a way to preserve billion-dollar franchises long after the patents on those drugs run out. The plan is to get as many people as possible to switch from the older drug to the newer one. So when the patent on the original drug expires, there are fewer patients to be switched from that older drug to the cheaper generic. The key to this tactic is finding a way to tweak the original molecule. Schering-Plough's "Son of Claritin"--which hasn't yet been named--is based on the molecule formed in the body as Claritin is broken down. A key patent ties to that molecule runs through 2014. AstraZeneca, in developing its sequel to Prilosec, has taken a different approach. Prilosec, like many drugs, is a mix of two similar molecules called isomers, each the mirror image of the other. But only one is responsible for the drug's effects. By eliminating the other, AstraZeneca says it has come up with what seems to be a more effective compound. "It'll be an interesting year for marketing," says Lehman Brothers Inc. analyst C. Anthony Butler. Others will try this maneuver as well. Eli Lilly & Co., for example, is developing the single-isomer form of the antidepressant Prozac through a licensing deal that it has with Sepracor Inc., a company that specializes in developing single-isomer drugs. While the Federal Trade Commission, which can review certain licensing transactions, is taking a close look at the agreement, Lilly doesn't expect the government to block the arrangement. If that's the case, Lilly, like AstraZeneca and Schering-Plough, may have found a way to protect its blockbuster. Return to top |
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