The best medicine?

Feb 22nd 2005
From The Economist Global Agenda

Novartis has made two acquisitions that propel it to the top position among the world's generic drugmakers. Has the Swiss pharmaceutical giant found the best way to hedge against the problems that beset makers of branded drugs? Or should it stick to making patented blockbusters?

THE world’s big pharmaceutical companies are not generally fans of generic drugmakers. These firms wait around for patents to expire on money-spinning blockbuster drugs and manufacture copies that sell at a fraction of the price of the originals, unburdened as they are with the huge costs of research and development (R&D) borne by the makers of branded drugs. Novartis, the world's sixth-largest drug company, is not so stand-offish. On Monday February 21st, the Swiss drug giant announced that it would pay $8.3 billion to acquire Germany's second-largest generic drug firm, Hexal, and a 67.7% stake in Eon Laboratories, an affiliate that is one of America's biggest generic suppliers. The deal moves Novartis above Teva Pharmaceutical Industries, an Israeli firm, to become the world's leading maker of generic drugs through its Sandoz division. Novartis hopes that its foray into generics will insulate it from the problems faced by the rest of the world's leading drug companies.

Recent results suggest that most big drug companies are in relatively good shape at the moment, though this disguises looming problems. Big Pharma relies on blockbuster drugs for its profits but the supply is dwindling. Drug pipelines everywhere are looking near-empty. In 2002, America's Food and Drug Administration approved just 18 new drugs, though in 2004 the number increased to 34. This compares with an average of 59 new drugs a year launched by big companies between 1998 and 2002. These firms spend up to 20% of their revenues on R&D but the time needed to develop drugs is getting longer—and 40% of products do not progress all the way through the development process. Moreover, less than a third of new drugs these days are first or second in their class and it is hard to charge blockbuster prices for the mediocre medications and line extensions that make up the rest of the new products.

Adding to the gloom is the risk that blockbuster drugs sometimes cause more harm than good to both patient and drug company. Merck, an American drug giant, suffered terribly after the withdrawal last September of Vioxx. It faces the prospect of billions of dollars of claims after studies concluded that taking the painkiller increased the risk of heart problems in some patients. In June, Eliot Spitzer, New York's business-bashing attorney-general, launched a lawsuit against GlaxoSmithKline (GSK) for allegedly suppressing data that linked one of its antidepressants to heightened suicide risks for children. Pfizer's Celebrex, which uses the same COX-2 inhibitors as Vioxx, was last week criticised by American regulators for increasing the risk of heart problems. But the drug will stay on the market as it was concluded that the product did more good than harm.

Since 1990, 14 drugs have been withdrawn from the American market, which accounts for 45% of the world’s $378 billion retail drug sales per year, according to Public Citizen, a consumer group. Of those, only Lotronex, a treatment for irritable-bowel syndrome in women, has been re-introduced.

As patents expire, pharmaceutical giants can find themselves in a vulnerable position. In August 2000, a ruling cut three years off the patent for Prozac, Eli Lilly's hugely successful antidepressant, causing the company's shares to drop by 30% in one day. Another patent ruling on Zyprexa, the firm's current bestseller with sales of over $4 billion last year, is expected shortly. Some drug companies have struck back through the courts. In America, the lapsing of patents can be delayed automatically if drugmakers sue rival generic firms. Patent rules can be bent in a variety of ways to delay generic drugmakers from bringing previously patent-protected products to market. Some big drug firms are also suspected of colluding with generic rivals—ie, paying them—to delay bringing non-branded products to market. A Department of Justice investigation is currently under way.

Novartis is embracing a generic-drug market that has ballooned in the past few years as health-care providers have sought to put a brake on the ever-rising costs of treatment. The generic market will be worth some $100 billion a year by 2010, according to Daniel Vasella, Novartis's chief executive, and he has said that he wants a 10% slice. Mr Vasella claims that big buyers, such as Wal-Mart in America and health-care providers in emerging markets, want to be able to buy a full range of patented and generic products from one supplier.

Novartis is not the only big firm making moves into generic drugmaking. Last year, Pfizer launched a generic version of one of its epilepsy medicines to take some sales from non-branded competition. Sanofi-Aventis has said that it will move further into the generic business, and GSK has licensed some products with expiring patents to generic companies for a share of the profits. On the other hand, Roche, a Swiss rival to Novartis, has said that it sees no future in entering the generics market.

The business is certainly a tough one. If several firms choose to copy a drug, prices soon tumble. The best-placed firms are those with the lowest costs, and at present these are mainly in India. After this week’s deal, some 15% of Novartis's revenues will come from generics but profits from that segment could be slender compared with those from blockbusters. Novartis may be wise to seek a measure of stability in an industry beset with ups and downs, but it could experience some unwelcome side-effects.

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