The Macro View

The weak global economy adds to the challenges of bio/pharma companies and their suppliers.
Sep 01, 2012

Jim Miller
The global economy and financial system is not in great shape. The European debt crisis rolls on and on, driving European economies into recession. China's growth has slowed to "only" 7%, but that slowdown is enough to reduce growth prospects of countries that export to China. India's economy is feeling the effects of institutional problems, such as corruption and poor infrastructure. The US economy is growing, but at a rate too slow to bring down unemployment.

The apparent incompetence of political leaders has not improved the mood. The inability of the US Congress to address the nation's debt and economic issues and uncertainty surrounding the upcoming national elections have created great uncertainty and caused business executives to scale back investment and employment plans. The failure of European political leaders to resolve their problems has undermined investor confidence and created volatility in financial markets. Even in China, where the Communist party maintains a strong grip, the impending change in leadership has added an element of uncertainty.

In the not-so-distant past, such macroeconomic developments would have had little impact on the bio/pharmaceutical industry. Global bio/pharmaceutical companies were generating large profits from patented blockbuster medications and pouring them back into expansive R&D programmes and investments in new laboratory and manufacturing facilities. People had to take their medicine and the effectiveness of drugs, such as Lipitor and Plavix, ensured that governments and private insurers would continue to pay for them regardless of price. Attracted by the returns on successful new pipeline candidates and flush with cash, investors poured record amounts of capital into early- and mid-stage companies.

Fully exposed

Today, having fallen over the patent cliff, the bio/pharmaceutical industry finds itself fully exposed to the vagaries of the macro-economy at a very inopportune time. Not only have companies lost the big profits from blockbuster drugs, but they also face increased pressure from governments and private payers who are desperate to reduce healthcare expenditures. Drug prices are being forced down, generic substitution is accelerating and it is increasingly difficult to get coverage for expensive new drugs.

Smaller companies are being buffeted by the uncertainty in financial markets. Venture-capital funds have less money to invest as their traditional investors have become more risk-averse, and venture capitalists themselves have focused on less-risky investments with faster payoffs, such as social-media companies. In instances where they are still investing in bio/pharmaceutical start-ups, they are favouring companies with later-phase candidates with strong near-term prospects for out-licensing. Funding by way of initial public offerings is scarce. The number of bio/pharmaceutical initial public offerings is way down, and most have lost value since they were launched.

These pressures could not come at a worse time for an industry desperately trying to maintain profitability in order to fund new product development. Pipelines at many bio/pharmaceutical companies are sparse and R&D operations have been notably unproductive despite significant cost-cutting. High profile drugs continue to fail at Phase III despite the "kill-it-early" philosophy that guides decision-making at most bio/pharmaceutical companies.

So, instead of a stable macro-environment in which to transition to the next generation of products, bio/pharmaceutical companies must fight fierce headwinds to make progress. They have been forced to remake their business models not just to address the new scientific and clinical realities, but also to reflect their closer connection to a world that cannot afford to maintain the rapid growth in healthcare expenditures.

The business model changes thus far have been dramatic. Global bio/pharmaceutical companies now pursue growth opportunities in niche products, generic drugs and emerging markets instead of traditional blockbusters. They are downsizing their remote R&D campuses while building their presence in urban centres of medical research where their researchers can be continuously exposed to new ideas and technologies (a model that other knowledge-based industries have long subscribed to). They are rebuilding R&D processes to more thoroughly assess new candidates before graduating them to expensive clinical development stages. They are re-engineering supply chains to reduce costs and increase security. Although still dependent on physicians to prescribe their medications, they are looking for ways to interact more directly with patients.

lorem ipsum