The loss poses a daunting challenge for Pfizer, one shared by nearly every major pharmaceutical company. This year alone, because of patent expirations, the drug industry will lose control over more than 10 megamedicines whose combined annual sales have neared $50 billion.

This is a sobering reversal for an industry that just a few years ago was the world’s most profitable business sector but is now under pressure to reinvent itself and shed its dependence on blockbuster drugs. And it casts a spotlight on the problems drug companies now face: a drought of big drug breakthroughs and research discoveries; pressure from insurers and the government to hold down prices; regulatory vigilance and government investigations; and thousands of layoffs in research and development.

Morgan Stanley recently downgraded the entire group of multinational pharmaceutical companies based in Europe — AstraZeneca, Bayer, GlaxoSmithKline, Novartis, Novo Nordisk and Roche — in a report titled, “An Avalanche of Risk? Downgrading to Cautious.” The analysts wrote, “The operating environment for pharma is worsening rapidly.”

The same concerns apply to drug giants in the United States. They are all struggling with research failures as they scramble to replace their cash cows, like Pfizer’s multimillion-dollar gamble on a replacement for the cholesterol-lowering drug Lipitor, which failed miserably in clinical trials. Drug companies cut 53,000 jobs last year and 61,000 in 2009, far more than most other sectors, according to the outplacement company Challenger, Gray & Christmas.

“This is panic time, this is truly panic time for the industry,” said Medford, Massachusetts-based Tufts University’s Centre for the Study of Drug Development director Kenneth I Kaitin. “I don’t think there’s a company out there that doesn’t realise they don’t have enough products in the pipeline or the portfolio, don’t have enough revenue to sustain their research and development.”

R&D investment

While industrywide research and development spending has nearly doubled to $45 billion a year over the last decade, the Food and Drug Administration has approved fewer and fewer new drugs. Pfizer and Eli Lilly had major setbacks last year in once-promising Alzheimer’s drug experiments. Merck discontinued one of two major clinical trials testing its top acquisition from its merger with Schering Plough, a blood thinner that caused dangerous amounts of bleeding in some patients.

Drug company executives have begun addressing the calls for reinvention.
“We have to fix our innovative core,” Pfizer’s new president, Ian C Read, said in an interview recently. To do that, the company is refocusing on smaller niches in cancer, inflammation, neuroscience and branded generics — and slashing as much as 30 percent of its own research and development spending in the next two years as its scientists work on only the most potentially profitable prospects.

Consumers should see a financial benefit as lower-cost generics replace the expensive elite drugs, but may suffer in the long term if companies reduce research and do not produce new drugs that meet the public’s needs.

“You don’t lay off R&D if it’s just a cycle,” says University of Michigan business school clinical assistant professor Erik Gordon, who follows the pharmaceutical industry. “That kills progress.”

The federal government is also concerned about the slowing pace of new drugs coming from the industry. National Institutes of Health director Francis S Collins recently proposed a billion-dollar drug development center at the agency.

“We seem to have a systemic problem here,” Dr Collins said, adding that government research efforts were intended to feed the private sector, not compete with it.
Read of Pfizer says new products can replace some but not all of the patent losses.
“The hurricane is making landfall,” said Charles Stanley Securities analyst Jeremy Batstone-Carr, but he added that Pfizer is among several drug companies giving solace to shareholders by returning money through stock buybacks and dividends. Pfizer’s best asset, he said, is its $20 billion stockpile of cash. Yet since 2000, Pfizer’s and Merck’s share prices dropped about 60 per cent, while the Dow rose 19 per cent.

Several of the drug titans have bought competitors with newer products to fill their own sales gaps, essentially paying cash for future revenue as their own research was flagging. In the last two years, Pfizer paid $68 billion for Wyeth, Merck paid $41 billion for Schering-Plough, Roche paid $46 billion for Genentech, and Sanofi-Aventis paid $20 billion for Genzyme.

Duke University pharmaceutical health economics director Henry G Grabowski likened the recent pharmaceutical megamergers to those that occurred in the banking and telecommunications industries when they were hit by financial shocks in the 1990s.

But he warned that this wave would not guarantee significant research developments in the long term. “It’s never been shown that these big horizontal mergers are good for R&D productivity,” Grabowski said. “I’m in a show-me mode that they get you any real advances other than some short-term cost efficiencies that wear out.”

As they move beyond the blockbuster model, companies are refining their approach toward personalized medicines and forming more partnerships. Using genetic or other tests, the plan is to sell new drugs not to millions and millions of people, but to those who would most clearly benefit.

Still, the industry faces intense pressure from generic competition and has tried every tactic to ward it off, including extended-release versions of the same medicine and new pills that combine two ingredients. But 75 per cent of all prescriptions in the United States are now low-price, low-profit generic drugs.

At the same time, pharmaceutical companies are being urged by managed care and government health programs to cut prices and improve reimbursement terms for their most profitable pills. That follows similar practices in Europe, where Germany and the Britain, among other countries, are all increasing pressure for lower drug prices.

“Europe is an ugly place to do business today and will be in five years’ time,” said French drug giant SanofAventis chief executive Christopher A Viehbacher.

In the United States, Viehbacher said generic drugs were taking over the primary care market, leaving the best growth potential in specialty markets and in emerging nations like China, Brazil and Indonesia.

Even in those markets, health systems will not be the profit centers that the United States has been. China, emerging this year as the third-largest pharmaceutical market behind the United States and Japan, plans to cut hundreds of drug prices by an average of 40 per cent.

The drug industry has long said that Americans fueled the research engine, spending much more per capita on prescriptions than in any other nation, and paying the highest prices for prescribed medicines.

Drug industry lobbyists have beaten back Democratic proposals to set prices at the lower levels of nations like Canada or to allow Medicare to directly negotiate prices. The industry, by supporting President Obama’s health care overhaul, capped its contribution at $90 billion over 10 years in return for the promise of up to 32 million newly insured customers starting in 2014.