Monday, May 22, 2006

Drug Companies in Pain

The U.K. newspaper The Independent has written an excellent article about the pharma industry and I have selected a few sections to quote.

"The pharmaceutical industry is not fighting for its life. But it is definitely sick. "Gruesome" is how Mike Ward, an analyst at Nomura Code Securities, describes the state of the world's biggest drug makers in recent years."

Fits well with my comments in earlier blogs.

"Over the past five years, the world's top five drug makers have shed more than £60bn in market value"

Right, and over the next five years they will lose even more.

"The number of new drugs that major pharmaceutical companies are bringing to market, meanwhile, has stagnated"

Stagnated? That's too kind. The number of new drug approvals have dropped from 50 each year to just 20 in the last ten years.

"Meanwhile, the industry's image is still in the gutter. A recent report in the Public Library of Science journal alleged that the sector was populated by "disease mongers" that exaggerate ailments or conditions to inflate the markets for the drugs they invent. "

The Harris Poll in the U.S. shows the same trend. Less than 10% of U.S. population thinks the drug industry is generally honest and trustworthy.

"The [drugs giants] recognise that a lot of the innovation coming out of biotech companies is not something they are necessarily good at," says a director at one biotechnology company. "That is changing the model."

That's pretty tough. If you're not good at doing what you're supposed to do--invent new drugs--what are you good at?

"They are so fat, it's unbelievable," says the biotech director. "There are enormous costs that have to be stripped out of these companies."

An area to cut: Executive pay, anyone agrees? Check out Pfizer CEO's $83 million retirement package after he presided over stock drop of 40%.

"Growth in America, so long the engine of the industry as the world's largest medicines market, has dropped dramatically in recent years amid rising public scrutiny of prices and perceptions of pharmaceutical company "profiteering"."

So finally, judgment day is coming.

"But the drugs giants themselves have contributed to the stagnation, becoming more conservative in new development. This resulted in fewer truly novel drugs, just as governments cooled to "me-too" treatments that are only incrementally better than those already available."

Are these the same companies in need of high drug prices for "research?"

"Companies have woken up to the changed world and refocused on internal research and development . . . The problem, however, is that developing new drugs takes years - so the suffering, it seems, is still far from over for the big pharmaceutical companies."

And that is true for Big Pharma shareholders as well.

I suggest dumping drug stocks before the bottom falls out over the next five years. And no, I don't know which ones will be bought up, buck the trend, and soar short-term.

Full story here.

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