Where will the economic crisis leave pharma and biotech?

Sep 01, 2009

Faiz Kermani
The World Bank has predicted that the global economy will shrink by nearly 3% in 2009.1 Despite comparisons with the Great Depression, however, there is a belief that better policy mechanisms now exist to deal with a downturn. Although governments have struggled to react to the pace of events brought about by the economic crisis, this pressure has resulted in an unprecedented level of international cooperation. If the slowly improving performance of the US stock market is anything to go by, these efforts are beginning to have an effect and the worst of the recession may soon be over.2

A variety of predictions are circulating the media about how the situation is affecting pharma and biotech companies. Some observers believe the current conditions have had a negative effect on companies,3 while others believe the opposite.4 It is impossible to predict the course of action for every company, but even considering the inevitability of generalizations, the background attitudes of companies are very relevant to anticipating company strategies in the future. In extreme conditions, few companies would dare to completely change their strategic approach to business; most are likely to hold firmer to their core strategies and move away from less mainstream projects.

The industry has always been characterized by large, pipeline-rich, companies with a conservative approach to drug development, and smaller, risk-taking players with limited portfolios. For most small companies, the problem is how to survive until the economy recovers; the Biotechnology Industry Organization has estimated that 180 listed biotech companies in the US have less than a year of cash at their current spending rates.5 As the US biotech sector is considered the world leader, this scenario does not bode well for similar companies in other countries.

For ambitious companies, on the other hand, the current conditions may offer opportunities to prosper. In particular, many large pharmaceutical companies are expected to be on the look out for potential takeover targets that can be acquired cheaply.

Companies should stick to core strategy

The author says...
Historically, the pharmaceutical industry has tended to be cautious in how it operates, but this has led to accusations that it lacks the desire to remain innovative. Most large companies are extremely careful when investing in new technologies and approaches, preferring to evaluate the outcome of select projects before venturing further in an innovative direction. For example, despite the achievements of the Human Genome Project a decade ago, the large-scale impact of genomics on new drug output has yet to be realized. Although there is a need for new thinking in the industry to boost drug development and output, it is unlikely that many companies will alter their strategies in the current economic climate.

The situation has also created doubts for pharmaceutical managers about where to best invest resources. Although the prices for new R&D technologies have dropped and many pharma companies are relatively cash-rich, there are never guarantees about which technology will add value to ongoing R&D projects or how they can be best incorporated. Also, it is not yet known when the global economy will recover or what impact recent events will have on healthcare policy and consumer attitudes in different countries. It makes financial sense for ambitious large companies to hold out for a bit longer until the economic situation has stabilized before embarking on any revolutionary approaches to drug development.

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