I have previously discussed some of the problems of the pharmaceutical industry (see: Big Pharma Reacts to Its Drug Pipeline Problems; CROs Continue to Prosper; Benefits of Big Pharma Outsourcing). Unfortunately, the industry's prospects continue to look bad according to a recent article (see: Drug Firms Face Billions in Losses in ’11 as Patents End). Below is an excerpt from the story:
Pfizer could lose $10 billion in annual revenue when the patent on Lipitor, the cholesterol-cutting drug, expires in November. The loss poses a daunting challenge for Pfizer, one shared by nearly every major pharmaceutical company. This year alone, because of patent expirations, the drug industry will lose control over more than 10 megamedicines whose combined annual sales have neared $50 billion. This is a sobering reversal for an industry that just a few years ago was the world’s most profitable business sector but is now under pressure to reinvent itself and shed its dependence on blockbuster drugs. And it casts a spotlight on the problems drug companies now face: a drought of big drug breakthroughs and research discoveries; pressure from insurers and the government to hold down prices; regulatory vigilance and government investigations; and thousands of layoffs in research and development....The same concerns apply to drug giants in the United States. They are all struggling with research failures as they scramble to replace their cash cows, like Pfizer’s multimillion-dollar gamble on a replacement for the cholesterol-lowering drug Lipitor, which failed miserably in clinical trials. Drug companies cut 53,000 jobs last year and 61,000 in 2009, far more than most other sectors....“This is panic time, this is truly panic time for the industry,” said [an analyst who studies the industry]. “I don’t think there’s a company out there that doesn’t realize they don’t have enough products in the pipeline or the portfolio, don’t have enough revenue to sustain their research and development.”....Drug company executives have begun addressing the calls for reinvention....The federal government is also concerned about the slowing pace of new drugs coming from the industry. Francis S. Collins, director of the National Institutes of Health, recently proposed a billion-dollar drug development center at the agency.
I have been trying to understand how the pharmaceutical industry, on a global basis and with almost unlimited resources, could come to this state. Part of the reason, I think, is supplied by a short book by Tyler Cowen entitled The Great Stagnation. It's available for $3.99 as a downloadable e-book. His primary conclusion is that we lost our ability to innovate a few decades ago. He suggests further that our recent prosperity has been based on the fact that we have been taking advantage of ideas that were previously developed (i.e., picking the low lying fruit). In his analysis of Cowen's thesis, Arnold Kling emphasizes that Europe is suffering from the same malaise as the U.S. (see: Ideology and Tyler Cowen's Stagnation Thesis). This concept is borne out by the fact that many of the major pharmaceutical companies are based in Europe.
Here are a few specific reasons why I think that Big Pharma has been faring so poorly:
- The companies are spending an increasing share of their budget on governmental regulatory processes; the large staff devoted to this area provides large companies with a competitive advantage over smaller ones but is useless when their drug pipeline dries up.
- Big Pharma, as the name implies, is comprised of large bureaucratic organizations that tend to stifle innovation. The managers in such an organizational structure protect their budgets dedicated to established products and tend not to favor new, risky drugs.
- Big Pharma try to sustain the earnings and growth demands of the stock market by merger, which may not prove to be an effective strategy in the long-run (see: Mega Mergers. Are They Turning Pharma Companies into Zombies; PDF)
- The companies have also developed broad expertise in marketing and become increasingly eager to sell consumer products with predictable profits and less risk than prescription drugs (see: Why Drug Companies Want to Sell You Foot Powder; Some Evidence that Big Pharma Has Lost Its Innovation Mojo).