Drugs Just Keep Getting HealthierJane H. Cutaia
Recession blues in 1991? You would never know it by looking at the U. S. pharmaceuticals industry. Last year, its sales soared about 12%, to $57 billion, and its average net profit margin was a comfortable 18%. In 1991, worldwide sales could top $63 billion, analysts think, and the industry's profit margin could improve to at least 19%. It's enough to prompt the question: How can one industry be so insulated from a recession that will drag down so many others this year?
Pharmaceutical experts say the most important reason is the steady flow of new drugs pouring out of company laboratories. Ethical, or prescription, drugs command high profits, especially in their first few years on the market. And close to a dozen new ones are expected to be approved early this year by the Food & Drug Administration. Those include Bristol-Myers Squibb Co.'s lipid-lowering Pravachol, which some think could have worldwide sales of $200 million in 1991. Pravachol will join Merck & Co.'s Mevacor, the pioneer in this class of cholesterol-lowering drugs. Mevacor already has worldwide sales of close to $1.5 billion a year, and sales of Warner-Lambert Co.'s Lopid, also a lipid controller, could reach $425 million this year. Such drugs will probably have the highest growth rate of all new prescription products in the early 1990s, experts think. Prescriptions for them rose from 4.2 million in 1986 to about 16.5 million last year. And their revenues could one day approach the $4 billion that antihypertension drugs pull in yearly, if studies confirm that they help people lead longer and healthier lives.
Such new products are enly part of the explanation for the pharmaceutical industry's good health. Some of the credit also goes to continuing weakness in the dollar, especially against European and Japanese currencies. Most U. S.-based pharmaceutical makers sell 30% to 50% of their prescription drugs overseas these days. Thus, currency translations can work wonders for both their sales and earnings.
AGING POPULATION. Beyond that, various restructurings and a gradual but steady divestiture of low-margin, nonprescription products over the past few years is showing up in profits of the largest drug companies. In the third quarter of 1990, for instance, Schering-Plough Corp. cut its employment by roughly 5%, or nearly 1,000 workers, says Chairman Robert P. Luciano. The savings from this, along with the sale of businesses such as Maybelline cosmetics and the company's introduction of several new drugs, boosted Schering-Plough's earnings by some 20%, to about $565 million last year, on revenues of about $3.6 billion. Luciano expects a similar increase in profits this year.
An aging population in Western countries and the opening of new markets in Eastern Europe is also stimulating U. S. drug sales. "The more we do to extend and save lives, the larger our market potential becomes," says one company CEO. "The pharmaceutical business is the perfect business to be in. The better you do it, the more customers there are."
The industry faces some problems and challenges, of course. A recent Tufts University study pegged the cost of developing a new drug, testing it, and bringing it to market in the U. S. at $231 million. To cover such costs, research-and-development budgets are rising rapidly. The Pharmaceutical Manufacturers Assn. (PMA) figures that domestic drugmakers spent $8.2 billion on R&D last year, or 16.8% of their total sales, double the money they spent in 1985. This explains why many companies have pulled back recently to a few specific areas of research.
The high cost of R&D also is a major reason for an increase in mergers and joint marketing arrangements. "It's not that the people at Marion Laboratories love Merrell Dow so much," says Mark R. Knowles, president of National Pharmaceutical Council Inc. in Washington, referring to the merger of those two companies last year. Like Smith Kline and Beecham before them, Marion and Merrell both needed greater R&D clout to stay competitive. Knowles thinks that within 10 years, the roster of major U. S. pharmaceutical companies will dwindle to about 15 from 28 and that there will be a host of new co-marketing agreements and joint ventures between U. S. companies and those in Europe and Japan. Consolidation will sharpen new drug-development efforts by reducing overlapping or duplicate work.
At least for the time being, concentration in the U. S. pharmaceutical industry doesn't worry Robert E. Allnutt, executive vice-president of the 100-plus-member PMA. Despite its estimated $7.5 billion in revenues last year, for example, Merck has about 4.5% of the U. S. pharmaceutical business, he says. "We still see small companies able to compete."
Allnutt is much more concerned about a number of issues that will be thrashed out in Washington early this year. At the top of the list: how the new rules involving pharmaceutical sales to medicaid patients will be drafted. In effect, manufacturers are supposed to offer such patients the "best" price that they often offer volume buyers such as the Veterans Administration, or a minimum 12.5% discount. So-called orphan-drug legislation may crop up again, even though President Bush vetoed it in 1990. Such a measure would encourage, with more incentives, research into drugs for rare diseases, even though profits from these would be elusive. And in Europe, a U. S.-led fight for tighter patent rules is sure to heat up.
Those are minor annoyances, however, for an industry that will sail through in robust good health.