Q: What has been the impact of the current recessionary trends that the market is facing? How deep is the trouble for big pharma?

The most obvious impact of the current recessionary trends is the lack of easy availability of ‘cheap’ debt.  Many companies in the pharmaceutical and biotechnology sectors have used external sources of financing to fund their research efforts and to enhance or support their claims to being ‘profitable’. However, with banks and financial institutions collapsing and the need for liquidity to manage their own businesses being amplified; the lending process has come to an abrupt halt or is being managed at much higher interest rates. Thus, those companies that have already worked up large debts are under pressure to return these as quickly as possible or have to sustain these debts at much higher interest rates – this situation is threatening the very existence of these companies. But what type of companies are these?

 

Big pharma companies have traditionally been cash-rich and therefore relatively debt-free over the years. The past few decades have been the era of blockbusters and these have left many big pharmas comfortably placed in terms of cash reserves. This is borne out by the fact that for the top 20 pharmaceutical companies the average net debt, as percentage of

capital employed is just 6%. Further, on an average, any of the top 20 pharmas have access to $ 7.5 billion in cash, equivalents and short-term investments. This clearly indicates that the Big pharma are well prepared to tide over the current recessionary trends.

 

However, while Big pharmas are fairly safe currently, the scene is a bit worrying for the smaller biotechnology companies. As the problems facing the pharmaceutical sector intensified - in terms of lack of innovative drugs; more stringent regulatory requirements related to safety; and increasing pressure from payers to lower prices – the pharmaceutical industry had begun to rely on the biotech companies to provide the much-needed novel drugs. As this interest in biotech firms made them more attractive to pharma, they were able to leverage this by obtaining external sources of financial assistance and hence reduce their Big pharma dependence. This tilted the balance of power towards the biotech firms who now had funds to support their research and who could now afford to wait until later stages of development to strike licensing deals with Big pharma. This phenomenon has however, made these smaller biotech firms more vulnerable since these sources of funding are now beginning to dry up.

 

What this means is that the smaller biotech firms are now good acquisition targets for Big pharma – even in the current recessionary period.

Q: What measures are the companies taking to reduce the impact?

 

One of the measures to counter the impact of the slow down in the healthcare market, which is adopted by most companies across the globe is to reduce head count or make salary cuts which in turn will reduce costs and therefore protect their bottom lines.

 

Especially on:

Jobs: Which departments are getting impacted with job cuts? R&D pipeline: Is there a transition from mass markets to niche sector? Are the companies suspending smaller trials to support their main drug?

 

While most of the lay-offs are made on the sales side of the business, there have been many job cuts on the research side as well. For example, in September 2008, GlaxoSmithKline had announced 850 job cuts in the US and the UK and an undisclosed number of them in Research Triangle Park.

 

Big pharma’s research efforts have been narrowed down from dozen or more areas to 2-3 key areas where significant progress has already been made. For instance companies like Pfizer, Bristol Meyers Squibb and Wyeth are now focusing on just two or three disease areas and are particularly enhancing their biotechnology-based research.

Drug Pricing: Is the current recessionary trend impacting the drug pricing also? In what way?

 

Drug prices have long been under pressure – one of the problems faced by the Big pharmas for close to a decade now. Many developed countries are now trying to put in place laws that will limit the prices charged by pharma companies for ‘new’ drugs that do not have enough innovation over the existing generic versions. Large buyers like governments and hospital chains are looking at bulk purchases and large volume-based discounts from Big pharmas in an attempt to reduce their drug spends.

 

The current recessionary trends are likely to increase the pressure on Big pharmas to lower prices or to offer greater discounts and rebates to bulk purchasers. In the past, Big pharmas have been able to sustain higher prices through heavy spending on media advertisements and patient-based programs. However, with the current recession, these aggressive promotional spends will be cut down and thus higher prices may no longer be supported by eloquent messages. Lower prices may also be resorted to in order to gain access to patients with chronic diseases who have stopped buying drugs due to low or no insurance cover.

 

Although the economic slow down is likely to impact the ability of patients to pay for their healthcare, especially those that have been laid-off and were dependent on employer-paid health insurance, the need for emergency healthcare cannot be denied. Thus, companies dealing with life-saving drugs and other medical supplies are likely to remain afloat. For example Becton, Dickinson, which specializes in syringes and surgical tools and Baxter International, which specializes in drugs for treatment of blood and immune disorders have announced high profit gains for the last quarter and they even increased their full-year earnings estimates. Also, companies like Genzyme and Celgene along with Amgen Biogen Idec and Gilead Sciences (companies dealing with life-saving drugs; particularly biotech drugs) have been given a rating of “Outperform” by the healthcare investment firm Leerink Swann.

 

Another segment that is likely to gain from this scenario is ‘preventive medicine’. With rapidly escalating healthcare costs and increasing rates of chronic diseases keeping pace with the costs, preventive medicine has emerged as a great savior that will not only save costs but will ensure reduced healthcare costs on an already burdened healthcare scenario in the developed markets. This fact is supported by the recent announcement of a company named US Preventive Medicine (a privately owned global prevention services company with clients in the US and the UK) of 100% revenue growth per year in the years 2008-2010. This company provides primary, secondary and tertiary clinical prevention services to government, employers and consumers.

 

With respect to countries like India and some other South East Asian countries, medical tourism is another segment that may see continued growth despite the global economic downturn

 

One would expect that medical tourism would slow down because people have either been laid-off or are now drawing lower salaries. However, while this fact may slow down the growth of medical tourism in many countries, it will not cause a decline because the lower costs of medical care and the superior quality of the healthcare professionals while that may affect the growth rate by 1 or 2 percentage points, the sheer advantage of low-cost healthcare still remains attractive to many.

 

This robust growth is based on the lower costs of medical care and medications combined with superior quality care at the hands of experienced healthcare professionals using some of the latest, state-of-the-art equipment.

 

With Western Insurance players and even employers being affected by the economic downturn, they are increasingly encouraging the employees to seek healthcare options in countries like India, even if they have to pay the airfare. That is because the payout is much smaller when the services are performed in India rather than in the US or UK.

Thus the overall impact of the economic meltdown on the tourism industry may be a slight reduction in its growth, but there is no indication that this influx of medical tourists is about to abate.

 

Jumana Barnagarwala is the Principal Consultant, Healthcare Consulting, DataMonitor, Hyderabad, India.