Issue Date: June 8, 2009
Pharma Is For The Long Term
The drug industry is a key contributor to longer life expectancies and better quality of life. Without their products, realized through risky, costly, and lengthy R&D, life as we know it in the industrialized world would not be possible. The investor-based, for-profit industry faces tough challenges, and I don't know what, if anything, can replace it, but I hope the industry isn't sapped by quick-buck mentality.
For decades, the industry delivered stellar returns on investment as it commercialized blockbuster drug after blockbuster drug. But lately, companies have been missing earnings projections, prompting laments from stock analysts.
This reaction puzzles me because with pharma, even the misses would make other industries salivate. For first-quarter 2009, for example, earnings were down, but the overall profit margin of the world's 13 leading drug companies was a whopping 24.9%, although a mere 0.7% better than a year ago. For the top six biotechs, it was 32.4%, also up by only 0.7% from last year (C&EN, May 18, page 26). Compare those with the corresponding profit statistics for 20 U.S. chemical companies that C&EN tracks: 4.5%, down 4.3% from the year-ago period (C&EN, May 18, page 22).
Clearly, drug companies are extremely profitable, but perhaps not enough anymore for those focused on short-term results. The industry's earnings growth is no longer as stellar as before because the low-hanging fruits are exhausted, patents on best-selling products are expiring, and diseases that still lack treatment are more complicated.
Success is getting harder, but pharma's drive to deliver new treatments is fiercer than ever. The industry recently has reorganized, innovated even more, and taken severe measures—including, unfortunately, laying off thousands of employees—to cut costs and become more efficient, more productive, and more environmentally friendly.
Senior Correspondent Ann Thayer discusses recent examples of innovation impacting the pharmaceutical business in this week's cover story package. The first story (page 13) describes efforts to retool pharma's chemical processes so that they are safer, greener, and more sustainable. The second (page 23) describes academia-based training that promises a supply of industry-ready process chemists that should reduce industry's training costs.
And on page 10, Senior Editor Lisa Jarvis describes an innovative collaboration between Merck and AstraZeneca to test two investigational agents, one from each partner, as a combination treatment for cancer. It marks the first time that two big pharma firms have agreed to jointly test a combination of early-stage candidate compounds.
Drug companies are hardly altruists, however; profit is what motivates them. And in pursuit of profit, they do engage in practices that may disadvantage consumers, including deals to delay generics, which cost consumers far less than brand-name drugs. This practice may end if the Obama Administration has its way.
As Senior Editor Glenn Hess details on page 47, legislators have introduced bills that would outlaw agreements by which a brand-name manufacturer pays a generic-drug maker to postpone commercializing its version of a brand-name drug. In these agreements, it would appear that only the consumers lose, although Hess also gives the industry's side of the story.
Other ways to bring drugs to market also exist, such as those for neglected diseases. These efforts often are led or funded by nonprofit organizations. But it isn't clear how a not-for-profit model can discover, develop, and commercialize new drugs from scratch and make enough money to recoup the massive R&D investment to pay for subsequent discovery.
I hope current problems do not excessively diminish the luster of pharma/biotech companies as long-term investments because people will always need medicines and vaccines. For now, maybe investors should be satisfied with the already formidable profits drugmakers deliver, stick with them as long as they are profitable, free them from quarter-to-quarter earnings analysis, and let them concentrate on bringing us the medicines we need.
Views expressed on this page are those of the author and not necessarily those of ACS.
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