The current economic downturn has been described as the worst since the Great Depression and no industry has been left unaffected.
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.
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 author says...
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.
It is more likely that the select areas originally being targeted for growth by senior management will become even more attractive as costs continue to be pushed down by the economic crisis. This is why large pharma companies are showing a renewed interest in mergers and acquisitions — especially as many smaller companies have low valuations and little cash, placing them in a weak position to resist a takeover. Johnson & Johnson's acquisition of Omrix (NJ, USA) in late 2008, for example, took place following an approximately 40% fall in the smaller company's shares during the course of that year.5
Another area that will benefit from the economic crisis is outsourcing; areas that companies believe are too expensive to maintain internally or do not represent a core part of their activities will be prioritized for outsourcing, especially as pharmaceutical companies have already seen that outsourcing can reduce operational costs without impeding production of new drugs.
The ability of outsourcing to offer a development speed advantage at comparable quality was highlighted in a 2006 industry report, where 83 new drug applications and biologic license applications submitted to the FDA between 2000 and 2005 were analysed.6 In this study, those company projects that involved high CRO use were shown to perform better than those that did not; high CRO usage projects were found to be submitted more than 30 days closer to their projected submission date than the low CRO usage projects assessed.
The drive to obtain even more value from outsourcing is likely to intensify, which should give companies in the outsourcing sector the confidence to expand the services they offer. Certainly, recent information suggests that a wave of expansion is currently underway in the CRO sector, with companies particularly eager to move into emerging markets.7 Pharmaceutical industry collaborations with companies beyond the life sciences sector, such as logistics firms, are also on the rise.
For smaller companies, such as those in the biotech sector, the economic climate is more difficult to weather, as they have always needed support from the investment community to continue operating. The only way in which they attracted investment and the interest of larger companies was to demonstrate their ability to innovate and develop new technologies. If these companies change this strategic approach now then they will lose their appeal to outside parties, so they have no choice but to continue down the road of innovation. However, they will need to be more selective about where they target their efforts — many have already reluctantly made redundancies and abandoned some research projects. To continue attracting investment, they must redouble efforts and show how the current conditions offer even more promising opportunities to investors. Attracting new investment may be difficult, but the investment community has not disappeared; while venture capitalist funding has dropped through 2009, biotech has reportedly remained one of the most popular technology areas in which to invest.8
For small biotech companies whose funding remains critically low, their best chances of survival lay in a merger or joint venture with other players in the sector. If that fails then there is only the hope that a large company might show an interest in acquiring them, but this will be for a bargain price and the small company will still be required to demonstrate value.
A number of large companies are waiting for such opportunities to supplement their pipelines at relatively little cost and risk. According to some media reports, a number of major companies, such as Merck and Bristol-Myers Squibb, have openly expressed their interest in acquisitions at conferences, but have also made it clear that such deals would be negotiated from a position of strength.9 As the larger companies are re-evaluating their own operations, they will only choose to go after targets that are aligned with the areas in which they see potential growth.
Unfortunately, some biotech companies will not survive, but attrition has always characterized the evolution of the biotech sector — even at the best of times. The outcome of today's global events will be a valuable lesson in realism for the future biotech sector and will enable smaller companies to remain resilient even when faced with the most trying circumstances. This is the way in which the US biotech sector originally evolved and governments promoting the sector in other countries will get a timely reminder that many companies fail on the pathway to a mature biotech sector.
Overall, the pharma and biotech sectors have more to be optimistic about than other industrial sectors; there will always be a need for their products. Additionally, many pharma and biotech companies had already explored cost-effective strategies, such as outsourcing, before the arrival of the economic crisis because of the move towards cost containment in healthcare and the costs of R&D that rise year on year.
Experienced senior managers should know how best to tailor their core business strategies to keep their companies on course while the financial uncertainties persist, and the companies that emerge successfully at the other end of this crisis will be well-placed to capitalize on the new opportunities that will undoubtedly exist in global healthcare.
Faiz Kermani is a freelance consultant and President of the Global Health Education Foundation, a charity that supports medical education and medical research projects in developing countries. He is a member of Pharmaceutical Technology Europe's Editorial Advisory Board. email@example.com
1. Reuters, "World Bank sees steeper global economy contraction" (2009). www.reuters.com
2. Bloomberg, "US Stocks Gain as Data Boost Optimism Economy Is Recovering" (2009). www.bloomberg.com
3. FiercePharma, "Execs talk deals, diversification and downturn" (2008). www.fiercepharma.com,
4. Drugs.com "S&P: Europe's Pharmaceutical Firms Buck The Recession With Strong Sales Growth In 2009, Says Report" (2009). www.drugs.com
5. P. Mitchell, Nature Biotechnology, 27(1), 3–5 (2009).
6. Tufts Center for the Study of Drug Development, "CROs Usage Associated with Faster Drug Development Speed at Comparable Quality" (2006). http://csdd.tufts.edu
7. Outsourcing-Pharma.com, "CROs pursue international expansion" (2009). www.outsourcing-pharma.com
8. EBD Group, "VC Investment 2009: Challenges, Hope, and a Guide for Finding Money" (2009). www.ebdgroup.com
9. FierceBiotech, "Drop in biotech valuations driving pharma deals" (2009). www.fiercebiotech.com