Drugs & BiotechAmy Barrett
Looking at the performance of the pharmaceutical industry in 1998, you might forget it was a year of global financial panic. Because most of the world's huge drug companies garner about 11% of their sales from Asia, the industry has remained largely insulated from the region's economic woes. And the stars are likely to be aligned for another record year in 1999. Industry laboratories continue to churn out hot new products, pricing has strengthened, and managed care's attempts to rein in soaring drug costs has had little impact. "It just doesn't get any better than this," says SG Cowen analyst Stephen M. Scala.
How good is 1999 likely to be? Scala figures sales of the top 10 U.S. and British pharmaceutical players will increase 13% in 1999, to $150 billion, topping a 9% climb last year. The biggest drivers of that growth are popular--and usually expensive--new drugs. Continuing to ramp up will be the blockbusters launched in recent years, including cholesterol-lowering drug Lipitor from Warner-Lambert Co. and Eli Lilly & Co.'s Zyprexa for schizophrenia. The most eagerly awaited launches in 1999 will be two painkillers targeted at arthritis sufferers: the Cox-2 inhibitors Celebrex from Monsanto Co. and Vioxx from Merck & Co. And SmithKline Beecham is expected to roll out Avandia, a treatment for adult-onset diabetes. That product, which will compete with Warner-Lambert's successful Rezulin and is critical to SmithKline's future growth, could generate more than $700 million in sales in 2002, analysts estimate.
SLOW CREEP. Then there are price hikes. While recent price increases are still much lower than the markups of the late 1980s, they still rose by 3.4% in the third quarter of 1998, vs. 2.9% during the same period in 1997, estimates market researcher IMS Health Inc. in Plymouth Meeting, Penn. Contributing to the uptick are sharp increases in the prices of some generic products--a sector that more typically sees steady cuts. Rising prices are "slowly creeping back into the system," says HSBC Securities Inc. analyst Jack Lamberton.
The higher cost of medicine is gaining the industry the enmity of a powerful interest group: managed-care operators. HMOs and other health-care insurers have seen their prescription-drug costs soar in recent years, largely because of increased volumes and the popularity of expensive new therapies. That's triggering renewed efforts to trim the drug bill where possible. In January, for example, Tufts Health Plan will stop reimbursing for certain popular--and profitable--drugs, including Merck's hypertension drug Vasotec and its cholesterol reducer Zocor, encouraging patients to use similar but less expensive alternatives. Despite such moves, however, most pharmaceutical executives think it is unlikely that managed care will be able to restrict access to new drugs significantly. "At the end of the day," says Karen L. Katen, president of Pfizer Inc.'s U.S. Pharmaceuticals, "these products offer such value and benefit that it will be very hard to keep them away from people."
Even if managed care's efforts don't dampen the drug industry's hot performance, there is another potential threat: the federal government. A debate is likely to start next year on whether Medicare should pay directly for prescription-drug benefits. Norman M. Fidel, a health-care analyst at Alliance Capital Management, warns that while such a change would increase the demand for prescription drugs, it would also give the federal government a more direct role in the pricing of those medicines. "That would be a real negative," says Fidel, who thinks any legislation on the issue in 1999 is a long shot.
It would also be a real change. The U.S. pharmaceutical market has long been free of the sort of price restrictions found in Europe, where governments are the largest customer and frequently set prices. C. Anthony Butler, a drug analyst at Lehman Brothers Inc., points out that the spate of recent deals--including the $34.6 billion Astra-Zeneca Group PLC merger and the planned consolidation of Hoechst's and Rhone-Poulenc's drug and agrochemical businesses, with $20 billion in sales--have involved European players with relatively weak positions in North America. With the U.S.'s unrestricted pricing and higher margins, many big American companies have enjoyed greater returns and, as a result, have felt less pressure to merge. But as those midsize European companies pair up, Lehman Brothers Vice-Chairman Frederick Frank figures the pressure builds on others. "Those deals raise the bar as to what is competitive mass," he contends.
So look for 1999 to likely hold more dealmaking in the drug business. Stephen S. Tang, national director for the health-care industry practice at A.T. Kearney Inc., figures some midsize companies, including Bayer, Pharmacia & Upjohn, and Schering-Plough, may look to find partners in the coming year. Others say it wouldn't be surprising to see American Home Products Corp.--which saw potential deals with Smith-Kline and Monsanto fall apart--go on the prowl again. And there is always the possibility of a resumption of the merger discussions between Glaxo Wellcome PLC and SmithKline. But Tang doesn't expect the major U.S. players to rush into big deals anytime soon. "They have double-digit growth across the board," says Tang. "The incentive clearly isn't there."
There is one glitch threatening that growth outlook, though--the looming threat of patent expirations. SG Cowen's Scala figures that from 1999 through 2002, drugs that generated $14 billion in U.S. sales in 1997, including Schering-Plough's Claritin and Astra Pharmaceuticals' Prilosec, will go off patent. That could trigger the rollout of cheaper generic versions of those drugs that could quickly erode the branded product's market share.
PATENT REPRIEVE. Big Pharma companies aren't going to take that hit without a fight. Drugmakers will likely try to tie up generic competitors in court while they search for ways to protect their franchise. Lilly, for example, will be fighting a challenge from Barr Laboratories to its patent on the blockbuster antidepressant Prozac next year. At the same time, the company has struck a deal with small Massachusetts drugmaker Sepracor Inc. to develop a newer, purified version of Prozac. That version may have some benefits over the original--including potentially fewer bad interactions with other drugs--but the big payoff for Lilly is that the new Prozac could enjoy patent protection as far out as 2015.
For the biotech industry, 1999 will be a year when the promise of that sector comes closer to reality. A number of new biotech products will be ramping up, including Enbrel, the potential blockbuster rheumatoid arthritis drug from Immunex Corp. that hit the market in late 1998. Salomon Smith Barney analyst MeiravChovav figures that the drug, which will be co-marketed by American Home Products, could generate sales of $900 million in 2001. This year will also mark the first full year of sales for Herceptin, the innovative breast-cancer drug from Genentech Inc. that was approved in September and is estimated to bring in $200 million in revenues in 2000, and the expected approval and launch of a new AIDS protease inhibitor from Vertex Pharmaceuticals Inc. that could generate sales as high as $250 million in 2000.
Biotech profits as well as sales will likely get a boost this year. Samuel D. Isaly, a Partner at biotech research firm OrbiMed Advisors, figures that 21 biotech companies will be in the black this year, generating $2 billion in net profits, up from $1.5 billion in 1998. "It's harvest time in biotech," says Isaly. Unless managed care really bites back, biotechnology companies and big drugmakers will find 1999 to be a healthy year indeed.