European drug industry reconsiders its strategy
By Ben Hirschler
The once-vibrant pharmaceuticals sector is in a gloomy mood as sales growth flags because of competition from generic drugs, few new drugs under development and an investigation by the European Commission of possible industry misdeeds.
As the European Federation of Pharmaceutical Industries and Associations met in Paris last week to discuss solutions, the sector's average ratio of share prices to earnings had fallen to about 10 times from more than 30 in 2000.
"Our price/earning ratio as an industry has never been lower, which I believe signals the scant trust that the financial markets have in our business model," said Arthur Higgins, head of Bayer's health care division and the federation's president. "The outlook for the pharmaceutical industry in the medium term, the next five to seven years, isn't going to improve."
Much of the talk at the meetings centered on one question: How to stop a dire situation from getting worse?
Many executives are showing a willingness to re-examine how they operate in a way they have rarely done before. "Everybody is starting to look at what could be the future," said Jean-François Dehecq, the chairman of Sanofi-Aventis.
He pointed out that the industry had already evolved from a high level of diversification back in 1973 - when his group was founded - through increasing waves of concentration on core prescription pharmaceuticals.
Now the word on everybody's lips is, again, diversification.
Novartis of Switzerland has led the way by building a broad portfolio ranging across prescription drugs, generics, vaccines and consumer health.
Bayer, which aims to keep at least a third of its health care business outside the volatile pharmaceuticals arena, has a similar approach. GlaxoSmithKline's new chief executive, Andrew Witty, is also pushing for diversification.
But Roch Doliveux, chief executive of the midsize Belgian drug maker UCB, which makes biotechnology medicines, echoed the frustration of many in the industry by acknowledging that drug makers were struggling to introduce new products at a time of unrivaled scientific advances.
"There is clearly something that needs to change pretty dramatically with the current approach because there is a paradox - the need has never been so high, the means have never been so great and yet innovation is a problem," he said.
Executives complain that the industry's ability to innovate is hampered by soaring research costs, increasingly complex regulatory requirements and cost-cutting by governments, which often means that new drugs are not used even when they are licensed.
In a bid to win over politicians, the industry is keen to play the "wealth" as well as the "health" card.
The pharmaceutical industry accounts for 19 percent of the total spending on research and development by businesses in Europe, making it a major part of the so-called knowledge economy. Yet this spending is falling behind the levels elsewhere.
Between 1990 and 2007, pharmaceutical research and development investment in the United States increased 5.2 times while in Europe it rose 3.3 times, according to industry figures. At the same time, investment in China and India is growing exponentially.
Europe has taken some steps to try to raise R&D spending, notably with a €2 billion, or $3.1 billion, project designed to remove bottlenecks in the drug development process.
But executives are anxiously awaiting the outcome of the European Commission's investigation into their industry, which began with raids on several companies in January.
An interim report from the inquiry, which focuses on whether companies conspired to delay the introduction of low-cost generic medicines, is expected on Nov. 28.
International Herald Tribune
http://www.iht.com/articles/2008/06/22/business/drugs.php
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