Health Investment & Finance








The pharmaceutical industry comprises a cluster of companies that research, develop, produce, and sell chemical or biological substances for medical or veterinary use, including prescription, generic and over-the-counter (OTC) drugs.

Other products include: vitamins and nutritional supplements; drug delivery systems and diagnostic substances; and related products, equipment, and services, including distribution and wholesale.

There are three related industry groups: Pharmaceuticals Manufacturers; Pharmaceuticals Distribution & Wholesale; and Biotechnology. Global sales of prescription (including both branded and generic drugs) and over-the-counter (OTC) remedies top $600 billion annually.   Their R&D budget is grater than the GDP of the poorest 135 developing countries.

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The US leads the world, claiming both the largest market share and five of the ten largest druggernauts (Bristol-Myers Squibb, Johnson & Johnson, Merck & Co., Pfizer, and Abbott Laboratories).

The pharmaceutical industry has been doing well even during the recent financial crisis.

Combined growth of the sector during the last 4 years renains over 50% even though 182 of the top companies suffered a fall in their overall financial strength during the past few months.

Although one in six of the companies analysed recorded a fall in sales last year with an average fall of 13%, only 22% of companies reported a pre-tax loss.

The total market size increased by 13.8% in 2008.

The latest average pre-tax profit margin for the pharmaceutical industry was 10%. This is up from last year’s average of 8.6%.

Major Industrial Consolidation

Bloomberg: New York, January 24, 2009

The following analysis by Shannon Pettypiece and Tom Randall, (spettypiece@bloomberg.net and trandall6@bloomberg.net), provides an insight into the recent consolidation that the Big Pharma appears to be poised for in 2009.

Big PharmaPfizer Inc.’s potential purchase of Wyeth for more than $60 billion may set off a rush to consolidate in an industry buffeted by a thinner pipeline of new products and increasing generic competition.

Johnson & Johnson, Merck & Co., and Bristol-Myers Squibb Co. are among the companies that are most likely to strike a major deal, analysts said. The chief executives at these companies have said they are looking for acquisitions, and the three drugmakers have a combined $29 billion in cash and short- term investments to make purchases.

GlaxoSmithKline Plc, of London, and Bayer AG, based in Leverkusen, Germany, say they don’t see a large deal worth making or much value in getting bigger. Instead, they are focusing on smaller, targeted acquisitions to boost profits. Pfizer’s talks with Wyeth, along with Roche AG’s $43.7 billion bid last year for Genentech Inc., could change that as drug company executives watch their rivals grow, said Glaxo Chief Executive Officer Andrew Witty.

“If one big company makes a move, I can absolutely imagine that triggering off a series of moves,” Witty said in a Jan. 8 interview. “The industry has historically, habitually demonstrated its inability to sit on its hands when someone moves. The question is whether somebody big is going to finally pull the trigger.”

Replacing Lipitor

New York-based Pfizer, the world’s biggest drugmaker, and Wyeth, of Madison, New Jersey, have been negotiating for months, three people familiar with the talks said yesterday. The combined company would have annual sales of more than $70 billion, a 45 percent increase for Pfizer.

Pfizer Chief Executive Officer Jeffrey Kindler must replace more than $12 billion in revenue the company may lose within three years when its Lipitor cholesterol pill, the best-selling medicine in history, faces generic competition. With Wyeth in its fold, Pfizer’s earnings may fall as little as 10 percent, rather than the 23 percent expected drop when Lipitor loses patent protection in 2011, Deutsche Bank analyst Barbara Ryan said in a in a note to clients yesterday.

“Wyeth represents perhaps the best take-out play, if one assumes there will be at least some big pharma consolidation over the next one to three years,” said Tim Anderson, an analyst at Sanford Bernstein & Co., in a note. Wyeth could fetch $65 billion in such a deal, he wrote.

Securing Financing

In such a deal, Pfizer would gain Wyeth’s Prevnar vaccine, recommended by the U.S. government as a childhood shot against pneumonia, and dependable sales not threatened by generics. The goal for Pfizer would be to expand their revenue base with added products while trimming costs by cutting duplication among workers involved in sales and marketing.

Spokesmen from Pfizer and Wyeth declined to confirm the talks. Pfizer is close to securing $25 billion in financing for the deal, the Wall Street Journal reported today, citing unidentified people familiar with the matter. The company will pay two-thirds of the deal cost in cash and the remainder in stock, and an agreement could be reached by next week, the Journal wrote.

Pfizer had $25.5 billion in cash and short-term assets as of Sept. 30.

It will pay about $50 per Wyeth share, the Journal said.

Wyeth rose $4.91, or 12.7 percent, to $43.74 by 4:01 p.m. in New York Stock Exchange composite trading, the biggest gain since Jan. 20, 1998, giving it a market value of $58 billion. Pfizer rose 24 cents to $17.45, valuing it at $118 billion.

Another drugmaker seeking to pull the trigger on acquisitions may be Whitehouse Station, New Jersey-based Merck, the second biggest U.S. drugmaker.

Singulair Losses

Merck must offset more than $4 billion it will lose when generic copies of its Singulair asthma treatment come on the market by 2012. As a result, they may make a bid for Gilead Sciences Inc. of Forest City, California, said Deutsche Bank’s Ryan said in a research report last month.

Merck may also have an interest in Wyeth if the Pfizer deal doesn’t go through, Credit Suisse analyst Catherine Arnold said in a report today.

“There is no doubt many companies are looking at that deal that will transform their company,” Merck Chief Executive Officer Richard T. Clark said at an investor conference in New York Jan. 7. “I do think it can’t be business as usual, and certainly the consolidations aren’t over.”

Johnson & Johnson, the world’s largest health care company, also seems poised to be a buyer, given its need to replace revenue lost to generic competition for top-selling drugs such as Risperdal and Topamax, said Rick Wise, an analyst with Leerink Swann & Co., a New York investment bank.

J&J Deals

New Brunswick, New Jersey-based J&J, the world’s biggest health-products company, had $14.79 billion in cash and short- term securities as of Sept. 30 and announced two deals last month: the $438 million purchase of Omrix Biopharmaceuticals Inc., a manufacturer of bleeding control products, and a $1.07 billion agreement with breast implant-maker Mentor Corp.

“The sleeping M&A giant seems to be waking up,” Leerink Swann’s Wise said of Johnson & Johnson. “They have the means, the opportunity and the mindset.”

Abbott Laboratories Chief Executive Officer Miles White also said in a conference call with investors that he’s looking to buy companies beaten down by the recession.

“It’s a good time to be a buyer,” White said on Jan. 21. “A lot of values are depressed -- for good reasons in many cases and for not-good reasons in others. My priority is non- pharma, but I’m not going to pass up an attractive pharmaceutical deal if I see one.”

Access to Loans

Drug companies, rich in cash from medicines people still need in a recession, have access to loans while other companies struggle for financing, said Ryan.

“There are very few companies in the world that are going to get money in this environment, but these companies are going to get it,” Ryan, who is based in Greenwich, Connecticut, said in a conference call with clients Jan. 20. “When we have conversations in private with these CFOs, I am being told they have access to money.”

The health-care industry is proving a bright spot for mergers-and-acquisitions bankers whose fees are declining amid a 38 percent drop in transactions across all industries, from a record $4.06 trillion in 2007 to $2.5 trillion last year. Health- care deal making fell by only 19 percent over the same time frame, Bloomberg data show.

“Health care will probably have pockets of strength, because there are a lot of big pharma companies that have pipeline issues with [patent] cliffs in either 2011 or 2012, said Lee LeBrun, co- head of Americas M&A for UBS AG, who predicts that overall merger activity will continue to decline in 2009. “You’re already starting to see some deals being done to improve pipelines.”

Replacing Sales

LeBrun advised Osaka, Japan-based Takeda Pharmaceutical Co. on its $8.8 billion purchase of Cambridge, Massachusetts-based Millenium Pharmaceuticals Inc. last year, and his firm helped Eli Lilly & Co., of Indianapolis, win a bidding war with Bristol-Myers Squibb Co. to buy New York-based ImClone Systems Inc. for $6.5 billion. Both acquisitions helped the buyers replace sales from drugs whose patents are set to expire.

Wyeth ended regular trading on Jan. 23 with a market capitalization of about $58.2 billion and an enterprise value, which includes net debt, of $55.6 billion, according to Bloomberg data. A sale at that price would be the sixth-biggest health-care deal in history, according to Bloomberg data, and biggest since 2004, when Sanofi-Synthelabo SA bought Aventis SA for about $71 billion including net debt.

The transaction would also rank as the biggest transaction in any industry since InBev NV bought Anheuser-Busch Cos. last year for more than $60 billion including net debt.

History of Growth 

GuildsThe growth in the pharmaceutical industry date back to the Middle Ages.

The first known drugstore was opened by Arabian pharmacists in Baghdad in 754, and many more soon began operating throughout the medieval Islamic world and eventually medieval Europe. By the 19th century, many of the drug stores in Europe and North America had eventually developed into larger pharmaceutical companies.

Most of today's major pharmaceutical companies were founded in the late 19th and early 20th centuries. Key discoveries of the 1920s and 1930s, such as insulin and penicillin, became mass-manufactured and distributed. Switzerland, Germany and Italy had particularly strong industries, with the UK, US, Belgium and the Netherlands following suit.

Legislation was enacted to test and approve drugs and to require appropriate labeling. Prescription and nonprescription drugs became legally distinguished from one another as the pharmaceutical industry matured. The industry got underway in earnest from the 1950s, due to the development of systematic scientific approaches, understanding of human biology (including DNA) and sophisticated manufacturing techniques.

Numerous new drugs were developed during the 1950s and mass-produced and marketed through the 1960s. These included the first oral contraceptive, "The Pill", Cortisone, blood-pressure drugs and other heart medications. MAO Inhibitors, chlorpromazine (Thorazine), Haldol (Haloperidol) and the tranquilizers ushered in the age of psychiatric medication. Valium (diazepam), discovered in 1960, was marketed from 1963 and rapidly became the most prescribed drug in history, prior to controversy over dependency and habituation.

Attempts were made to increase regulation and to limit financial links between companies and prescribing physicians, including by the relatively new US FDA. Such calls increased in the 1960s after the thalidomide tragedy came to light, in which the use of a new tranquilizer in pregnant women caused severe birth defects. In 1964, the World Medical Association issued its Declaration of Helsinki, which set standards for clinical research and demanded that subjects give their informed consent before enrolling in an experiment. Phamaceutical companies became required to prove efficacy in clinical trials before marketing drugs.

Cancer drugs were a feature of the 1970s. From 1978, India took over as the primary center of pharmaceutical production without patent protection.

Industrial Tansformation in the 1970s

ConstructionThe industry remained relatively small scale until the 1970s when it began to expand at a greater rate.  Legislation allowing for strong patents, to cover both the process of manufacture and the specific products, came in to force in most countries.

By the mid-1980s, small biotechnology firms were struggling for survival, which led to the formation of mutually beneficial partnerships with large pharmaceutical companies and a host of corporate buyouts of the smaller firms. Pharmaceutical manufacturing became concentrated, with a few large companies holding a dominant position throughout the world and with a few companies producing medicines within each country.

The pharmaceutical industry entered the 1980s pressured by economics and a host of new regulations, both safety and environmental, but also transformed by new DNA chemistries and new technologies for analysis and computation.[citation needed] Drugs for heart disease and for AIDS were a feature of the 1980s, involving challenges to regulatory bodies and a faster approval process.

Managed care and Health maintenance organizations (HMOs) spread during the 1980s as part of an effort to contain rising medical costs, and the development of preventative and maintenance medications became more important. A new business atmosphere became institutionalized in the 1990s, characterized by mergers and takeovers, and by a dramatic increase in the use of contract research organizations for clinical development and even for basic R&D.

The pharmaceutical industry confronted a new business climate and new regulations, born in part from dealing with world market forces and protests by activists in developing countries. Animal Rights activism was also a problem.

Marketing changed dramatically in the 1990s, partly because of a new consumerism.[citation needed] The Internet made possible the direct purchase of medicines by drug consumers and of raw materials by drug producers, transforming the nature of business.

In the US, Direct-to-consumer advertising proliferated on radio and TV because of new FDA regulations in 1997 that liberalized requirements for the presentation of risks. The new antidepressants, the SSRIs, notably Fluoxetine (Prozac), rapidly became bestsellers and marketed for additional disorders.

Drug development progressed from a hit-and-miss approach to rational drug discovery in both laboratory design and natural-product surveys. Demand for nutritional supplements and so-called alternative medicines created new opportunities and increased competition in the industry. Controversies emerged around adverse effects, notably regarding Vioxx in the US, and marketing tactics. Pharmaceutical companies became increasingly accused of disease mongering or over-medicalizing personal or social problems.

There are now more than 200 major pharmaceutical companies, jointly said to be more profitable than almost any other industry, and employing more political lobbyists than any other industry. Advances in biotechnology and the human genome project promise ever more sophisticated, and possibly more individualized, medications.  It is this industrial base that is not consolidating.

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