Signs have begun to emerge suggesting that the pharmaceutical industry’s Lost Generation finally may be reaching an end.
The stagnant era of 2000 to c. 2014 was one the drugbiz might prefer to forget. It was a long, bleak period marked by diminished opportunities, few therapeutic breakthroughs, managerial inertia, added regulatory and legislative scrutiny and complexity, reticence on the part of payers to reimburse new products, and – most unforgivably, in the eyes of Wall Street – absolutely nothing to show for the sector’s extravagent use of investment capital.
(Regarding the last point, Pfizer’s share price on the first day of trading of the new millennium was $32.06. Fifteen years later, that is exactly the current price of the stock of the world’s largest drugmaker, nearly right to the penny. To compare: Apple, the IT giant, saw its value increase six-fold over the same period. During this identical time, McDonald’s restaurants increased its share-value by 250%, which only slightly lagged behind the performance of 3M, the conglomerate that divested its pharmaceutical holdings in 2006. All of which may explain why investment professionals lunge for the amyl nitrate jar every time the Pfizer name is mentioned.)
Now, however, evidence has begun to appear that the drugbiz may be shaking off its long spell of deep unconsciousness. As of this scribbling, roughly one trillion dollars worth of pharma industry mergers, acquisitions and product deals have been proposed during the past months, or are underway. Though this process of reawaking and reinvention is in its earliest stages, four trends have become evident, as the Life Sciences sector begins to reconstitute itself according to four very different designs.
Tribe #1: The value consolidators
Companies exercising this philosophy grow rapidly by acquiring traditional drugmakers, and by paying for the takeovers through quickly enacting cost-reducing efficiencies. Savings are found by clipping headcount, eliminating R&D programs, slashing tax-rates by relocating head offices to low-tax jurisdictions, and introducing rigidly parsimonious policies. Following thissuccessful playbook established by J. Michael Pearson for ICN/Valeant, adherents to this view (who are capable of becoming Valeant competitors) are Endo Health Solutions and Actavis. Among the familiar corporate names that have been subsumed by the insatiable three: Watson, Warner Chilcott, Forest Labs (Actavis); Paladin Labs, American Medical Systems (Endo); far too many to recall (Valeant.)
Tribe #2: The therapeutic-cluster rationalizers
Notwithstanding the Newtonian laws regarding uniform motion (“An object that is at rest will stay at rest unless an external force acts upon it”), the pharma sector has been frozen in the same spot for too long. This has made the drugbiz increasingly vulnerable to the demands of external forces, in the form of activist investors. Compelled to act, several drugmakers have taken steps to tighten their focus on specialty products within a defined category. This is the logic behind Merck’s decision to bail from the OTC arena, the just-announced product swaps involving GlaxoSmithKline, Eli Lilly and Novartis, as well as the thinking behind Pfizer’s $100-billion initiative to buy AstraZeneca. The diversification strategy Big Pharma persued for the past generation simply has not panned out. GSK, as one example, spread its efforts among absurd product lines such as the soft drink Ribena and the anti-flatulent Beano, before eventually wising up. The latest notion is that a focused approach to a selected number of specialty areas may offer a better success formula than attempting to allocate activities across a mismatched range of disparate fields.
Tribe #3: The bottom-dwellers
In a category where there is a glut of suppliers, no product differentiation, and price is the sole determinate of selection, generic drugs are now widely regarded as mere commodities, and this has upended the unbranded side of the business. Numerous suppliers based in the developing world continue to struggle with quality-control issues, but the impact of the U.S. Affordable Care Act, along with the rise of mega-retailers Wal-Mart and Walgreens as global retail pharmacy powerhouses, will ensure that only providers able to offer rock-bottom costs will continue to enjoy strong demand through the rest of this decade. What they may not enjoy is any sort of sustainable profit margin, as competition among foreign and domestic generic producers moves further into the realm of the cutthroat.
Tribe #4: The “dorm room” startups
Development-stage companies in the Life Sciences exist for the purpose of shepherding a compound from test-tube to bench, or early-stage trials, at which point Big Pharma has ritually stepped in, to sign in-licensing or product acquisition deals. Look for disruptive changes, as a result of economic and technological factors. The consolidators can only grow more ravenous for in-licensing deals, while the rationalizers have bet their future on dominating specific therapeutic areas. These circumstances will lead companies to chase collaborations with developers ever more fervently, with three elements fuelling the growth of a new generation of biopharma startup ventures: (1) The entrepreneurial spirit will be kindled among PhDs cast away from their comfortable Big Pharma employment; (2) The growing accessibility of sophisticated technology, and the advent of inexpensive new science tools and methods, and (3) The realization by venture capitalists of the potential of micro-startups. Investors remain transfixed by the simulacrum of Facebook founder Mark Zuckerberg (pictured above) single-handedly writing code in his Harvard University dorm room, and quickly converting his doodles into an enterprise worth $67.8 billion. Venture capital forces are keen to gamble that this bootstrap model of value creation will soon extend to the Life Sciences.