Third-quarter results highlight big pharma's ills

Big pharma looks sick. A host of third-quarter earnings figures this week confirms the mounting pressures faced by many drug makers on both sides of the Atlantic as prices are squeezed, sales growth in major markets slows and research productivity falls.

It comes on top of the withdrawal of Merck's blockbuster pain drug Vioxx and the US rejection of AstraZeneca's anti-clotting pill Exanta, both stark reminders of the risks facing the industry.

Adding to the unhealthy mix is persistent pressure from generic competitors.

Some firms, like GlaxoSmithKline are grappling with the arrival of cheap copycat medicines. For others, like Pfizer and Eli Lilly, the threat is looming on the horizon.

Pfizer, the world's leading drugs firm, warned this week that 2005 results were likely to be hurt by generic versions of four popular drugs while Lilly faces a ruling soon on the patent protecting its top-selling schizophrenia treatment Zyprexa.

Meanwhile, the industry's past double-digit sales growth is gone as governments and healthcare providers take an increasingly tough line on costs.

Sales for the top 13 markets were up just 8 per cent in the 12 months to August, according to IMS Healthcare.

Election blues

Looming over the sector is the spectre of a change of administration in Washington, with Democratic presidential candidate John Kerry saying he wants government health plans to negotiate lower prices direct with drug makers.

Analysts say drug companies would prefer a Republican win. But whatever the outcome life will not be easy for the industry, according to AstraZeneca, whose Chief Executive Tom McKillop said recently that it faced "a class margin squeeze".

Lilly Chief Executive Sidney Taurel said his company was cutting costs, partly in reaction to the looming threat of US price controls and the import of cheaper medicines from abroad.

Cost savings have been a theme across the sector this reporting season, helping many companies meet their earnings targets despite the tough environment.

Swiss firms Novartis and Roche Holding are rare bright spots while GSK's sharp discount to other shares may now offer value, they said.

M&A ahead?

One way out of the squeeze might be through mergers and acquisitions, a route used in the past to reduce risk and accelerate savings. But Jonathan de Pass, chief executive of independent consultancy Evaluate, is sceptical.

Industry consolidation since 1988 has increased the market share of the top 10 pharmaceutical companies to 47 per cent of sales from 26 pe rcent.

Yet mega-mergers have failed to live up to expectations in terms of boosting productivity in research laboratories, while the sheer scale of behemoths such as GSK and Pfizer makes it increasingly difficult for any new drug to move the earnings dial.

"If R&D productivity is not a function of scale, which it certainly doesn't seem to be, then the arithmetic of growth becomes absolutely impossible," said de Pass.