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Industry Outlook 2001 -- Life Science

Drugs

Storm clouds hung over the pharmaceutical sector through 2000, in the form of election-year rhetoric about rocketing drug costs. Some companies feared the federal government might pass draconian new laws aimed at slashing drug prices. But an election that yielded an evenly split Congress and a Republican White House put an end to such talk. Meanwhile, pharmaceutical revenues were buoyed by a slew of fast-growing products that helped worldwide sales grow a healthy 11.7%, according to research firm IMS Health Inc.

Don't look for a repeat performance in 2001. While new product introductions are likely to pick up over 2000, most analysts say those rollouts still won't match the payoff from the string of blockbuster launches in the late 1990s. At the same time, U.S. patents on a number of major drugs are set to expire. An expected wave of generic versions will be a boon for consumers, but a bane to the industry's growth. Buffeted by these crosscurrents, the drug industry, which has already seen a series of megamergers, could face even more consolidation.

None of these anticipated setbacks has sent drug execs reaching for mood-boosters. Amid all the turmoil, IMS Health expects global drug sales to grow 8.8%, to $385 billion in 2001. "It is still a very good outlook," says Norman M. Fidel, healthcare portfolio manager at Alliance Capital Management LP. But that's to be expected, he says: "We've had a period of unprecedented prosperity."GENERIC INROADS. So which are the most likely roadblocks? Certainly, the biggest source of alarm is the expiration of key drug patents. SG Cowen Securities predicts that between 2000 and 2005, U.S. patents and other protections will expire on products with annual domestic sales of roughly $34.6 billion. Last fall, Bristol-Myers Squibb Co. (BMY) saw the arrival of generic competitors to its $1.6 billion cancer drug, Taxol. Sales of Merck & Co.'s (MRK) Vasotec--an antihypertension drug worth $1.7 billion in annual sales--slipped in late 2000, in part due to inroads by generics. This year, analysts warn that generic versions of Eli Lilly & Co.'s (LLY) $2.5 billion antidepressant Prozac and AstraZeneca PLC's (AZN) $6 billion Prilosec, a treatment for a stomach acid condition, could hit the market.

Naturally, many patients and health-care companies are cheering the arrival of cheaper generics, which could help curb rising costs at managed-care operators. "We are talking about some state-of-the-art drugs going off patent," says Dr. James E. Hartert, chief medical officer for HMO United Wisconsin Services (UWZ).

On the flip side, dwindling revenues could force drug manufacturers into a fresh round of dealmaking. After the recent combinations of big players such as Pfizer Inc. (PFE) with Warner-Lambert Co. (WLA) and the merger of Glaxo Wellcome (GLX) and SmithKline Beecham (SBH), other drugmakers who find themselves dwarfed by these giants may look to bulk up.

Patent expirations only heighten the pressure to merge. Postmerger cost savings are one obvious lure. In addition, increased scale brings grander research and development possibilities. Analysts point to the benefits of a linkup, for example, between Merck and Schering-Plough Corp. (SGP), which could face generic versions of its flagship allergy medicine Claritin in a few years. The two companies grew closer in 2000, announcing they would create two new products that are combinations of existing drugs or developmental compounds already in their portfolios.

Bristol-Myers could also make a run on one of its competitors. The company suffered a major setback in 2000 when questions about side effects delayed the approval of its widely anticipated hypertension drug, Vanlev. With that product not expected until at least 2002, Bristol might prefer not to go it alone.

Pharmaceutical companies will also be faced with the challenge of jazzing up their product pipelines. To that end, they are likely to enlist the biotech industry. With biotech stocks still pricey relative to the rest of the tech sector, Big Pharma probably will consider partnerships rather than outright takeovers. But if these companies take a dive, the drug giants are sure to come calling.

In the meantime, drugmakers will continue to license biotechnology products. Such deals will be especially appealing to smaller biotech outfits that lack the cash for their own flashy marketing campaigns. But not all biotechs will jump at the first licensing opportunity. Ernst & Young estimates that the biotech sector attracted some $40 billion in capital last year--and companies that participated in the binge can afford to hold out for higher prices. One way or another, says Larry N. Feinberg, managing partner of health-care hedge fund Oracle Partners LP, "2001 will be a year of pipeline building, and the pipeline is clearly in the genomics and biotech companies."

By the close of 2001, a few new products will likely have rocked the industry. For example, investors are eagerly awaiting the launch of Eli Lilly's Zovant, a potentially revolutionary treatment for sepsis, a life-threatening response to infection that often occurs in hospitalized patients. Because there are no approved treatments now for sepsis, Cowen analyst Stephen M. Scala figures Zovant sales could hit $1.2 billion in 2004. And biotech player Amgen Inc. (AMGN) is expected to launch its new anemia drug Aranesp, which Deutsche Banc Alex. Brown Inc. projects will reach $1.4 billion in annual sales within three years.

Investors will also be watching the expected launches of follow-on products to two blockbusters, Prilosec and Claritin. Prilosec maker AstraZeneca is expected to launch Nexium, a similar stomach acid treatment, while Schering-Plough hopes to launch a new allergy drug closely related to Claritin. The hope is that these new products will become big sellers before the older drugs get wiped out by generics.

Further out, the drug industry is counting on the scientific revolution known as genomics. The term refers to efforts to exploit the oceans of scientific information now pouring into gene databases around the world. Though every Big Pharma company has genomics expertise, some like SmithKline have made it central to their discovery and development efforts. Others have been relying on external partnerships with upstarts such as Millennium Pharmaceuticals (MLNM) and Celera Genomics Group (CRA). "We have 10,000 to 15,000 genes that could be relevant targets," says Henry A. McKinnell, Pfizer chief operating officer, who becomes CEO on Jan. 1. "The scale of the opportunity is enormous."SHIFTING LANDSCAPE. While drug companies wait for the big genomics payoff--which is likely several years away--they may have to cope with a shifting landscape in Washington. The push will continue in 2001 to pass a Medicare prescription-drug benefit. The government plan right now provides reimbursement only for pharmaceuticals taken while in the hospital, not for the growing number of drugs seniors take on a regular basis. Still, industry watchers say such a plan is unlikely to pass in the next 12 months--and the even split between Republicans and Democrats in Congress makes it unlikely that Washington would ever impose the sort of price controls the industry has fought.

However Congress tackles this issue, it is likely to involve the participation of massive drug purchasers, whether they are private insurers or the federal government. And that has some downside for drugmakers. "As more volume moves through bigger buyers you'll see more price pressure," warns Pharmacia Corp. (PHA) CEO Fred Hassan. Another reason the drug industry will find growth in the years ahead a bit tougher than in the late 1990s.By Amy Barrett in PhiladelphiaReturn to top


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