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Shankar N
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Independent Consultant and Freelance Writer. Part time options trader. Bachelor of Engineering from MK University, India and MBA from Kent State University, Ohio.
  • A Pill For Every Ill: Big Pharma SWOT Analysis (Part 1) 1 comment
    Jan 28, 2013 8:36 AM

    Every industry has its ups and downs, and many have been riding on the crest of the success wave for so many years that they've all but forgotten what it means to take stock of the situation and regroup their efforts to address the future. The housing industry was forced to go through that phase over the last few years. Will it be pharmaceuticals that face the next big crisis? Is there a crisis in the first place, or is it exaggerated? And more importantly, what are the opportunities for big pharma to recoup the billions of dollars lost over the patent cliff? Exploring the Strengths, Weaknesses, Opportunities and Threats (SWOT) of a particular situation has always helped put things in perspective. The ship may still be afloat but it's taking on water at a tremendous rate; hopefully, we can derive a clear picture of major pharma companies struggling to keep their bodies out of the water.


    Market Dominance- Market dominance is probably their key global advantage. Big pharma has so many millions of doctors all over the world eating out of their hands that they won't think twice about crushing the competition anyway they can. This isn't a colorful description of their dominant position - it's merely calling it a spade. Why have so many flagship drugs been doing so well the past few years? Could it be that the 'incentive' programs offered to doctors to prescribe one brand over another competitor has something to do with it? While it wouldn't be proper to make accusations, everyone is free to have an opinion. But unlike opinions, doctors don't help pharma companies achieve their targets for free. There's the first spade.

    Eradicate? They drive the medical profession in whatever direction they want. Treatment is more profitable than curing, so that's the direction they've always taken doctors in. Insider after insider will tell you that this is true. Most doctors know this, but because it's profitable for them too, the majority won't squeal on big pharma. Theoretically, there should be fewer diseases today than there were 200 years ago because disease can't possibly proliferate faster than the speed of research. Or can it? Consider this statistic: there have been eight attempts at eradicating diseases in the last 200 or so years. Only one has been successful - Smallpox - in terms of human diseases. Why? Could it be because pharma hasn't driven their research in that direction? Of course, there's government intervention required to implement eradication programs, but where are the drugs for it? But credit is due where credit is due - there are zero cases of polio in the U.S., Europe and China; Merck and GlaxoSmithKline have done their part in donating medicines (ivermectin and albendazole, respectively) for treating lymphatic filariasis; Pfizer, Eli Lilly and Johnson and Johnson have all spent millions pursuing treatments for Alzheimer's - until investor pressure made them back down. There's your second spade.

    Its Money Honey! Their third strength lies in their monetary power. The amount of money they have for research, acquisitions and everything else has come from their first strength of dominance. With that money, they rule the pharma roost. They may not be able to control drug legislation or regulation, but they can certainly decide what they send for approval - and that decision is primarily made to improve their bottom line; this strength is not derived from their altruistic motives to cure the world of disease, but to profit from it - and handsomely. At the end of the day, money is what matters to a company, and this is something they have managed to accrue brilliantly. This is the reason there are fewer new drugs coming out of their labs - variations on existing (approved) ones are much cheaper to produce and put on the market, as are same drugs profiled for new indications, called drug repositioning. With the use of monetary muscle, they are also able to fill gaps in their drug portfolios by acquiring smaller companies; this is something that smaller companies are also looking at now as an investment avenue.

    The Brand -The fourth pillar of the major players in this industry is their reputation. While this may be an intangible quality, for a drug company it's a matter of patient confidence in the efficacy of their medicines. This is something that has withstood erosion for the most part despite controversy with drug trials and product roll-backs. But reputation isn't as intangible as most people think. A 2012 study by APCO Worldwide showed that a single percentage point increase in an average company's reputation could account for a 3.33% growth in sales. Naturally, for a large pharma brand that might be considerably less, but it still equates to millions of dollars, if not billions. Though big pharma's reputation has come under the scanner many times over the last few decades, there has never been any doubt as to the efficacy of the drugs they put out regularly. Their practices may be subject to criticism, but their financial performance is a direct measure of the success of their products.

    This is where we explore the nerve points of big pharma; the areas where they need more focus; essentially, the things they haven't accomplished with their strengths, or the conditions that have come about despite them.

    Complacency -The first weak point of any big corporation is complacency. While this is not by far a universal phenomenon, the trend in the drug industry that has led to weakened drug pipelines in recent years shows that many top pharma companies have been riding the crest of waves generated by their top-selling patented formulations. Pfizer's Lipitor may have made headlines, but several other drugs have and will come under the patent axe in the years between 2010 and 2015. The fact remains that these patent losses have left them in compromising positions, specifically but not limited to the issue of neurosciences research in European markets. Despite their monetary clout and resource-rich culture, they have not been able to address this adequately. However, as we will see later in this piece, this opens up several opportunities for filling the revenue gaps left by the patent cliff.

    You Really Know the FDA? The second weak point is their lack of control over regulatory approvals, especially in the United States. It takes about 15 years and $1-1.7 billion (2002 data) to conduct research, test and then submit a New Molecular Entity (NME) for approval as a branded drug; even at that stage, only 3 out of 10 drugs ever make it to the market and cover their cost of development and marketing. With stats like this, it is no wonder that the pipelines are running on fumes. The high-risk undertaking of drug development is one of the main reasons that new and revolutionary drugs are few and far between. There are currently 1002 prescription drugs that have FDA approval. Pfizer has 30 FDA approved drugs; Merck has 24; Abbot Labs, 17; AstraZeneca, 19. Many of them have approved drugs that were developed in collaboration with each other or other third party pharma companies. But the weakness lies in the fact that phase 3 clinical trials have much fewer drugs than before, as far as big pharma is concerned. Here is where another opportunity will present itself down the road - acquisition of smaller companies such as Spectrum Pharmaceuticals (NASDAQ:SPPI), which has two successful cancer drugs on the market (Zevalin and Fusilev) and 10 in the pipeline. The poor performance of drugs in phases 2 and 3 have also contributed to considerable losses: Briston Myers-Squibb reported a pretax impairment charge of $1.8 billion on BMS-986094, a Hepatitis C drug; Eli Lilly announced the halt of phase 3 trials for mGlu2/3, a schizophrenia drug, and solanezumab for Alzheimer's. Such losses weigh heavily on their bottom line, leading to a reticence on the part of big pharma to undertake R&D on innovative drugs.

    Niche or Diverse? The third weakness stems from too much diversity. Big pharma's firepower (as defined by Ernst & Young in its recent report) has been used to diversify extensively in previous years, and big pharma is now in a state of dilution that is affecting its core operations. Luckily, most of them have realized this and have started divesting their interests in these other entities - not only to create cash but to make sure that their focus goes back to their R&D capabilities. Pfizer has already made two major divestitures, and is considering two more - infant nutrition and animal health. However, this is still a weak point with many companies who, like Pfizer, are now looking for buyers for various non-core units.

    Ratings by Companies that didn't have a clue about the great financial crisis -The fourth weak point is the threat from ratings companies like Moody. AstraZeneca and other European pharma companies are already facing possible credit downgrades for their massive share buyback exercises, and Moody pegged the repurchase-over-cash-flow excess for the Anglo-Swedish company at $2 billion for 2012. A credit rating downgrade would impact their 'cost of capital', making it harder for them to boost investor confidence despite promises of future profits.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: Healthcare
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  • shudeepc
    , contributor
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    Great article, Shankar - very insightful, and certainly a good read for an investor with any kind of big pharma portfolio to their name. Where can I find part II? Could you share the link, please?
    28 Jan 2013, 09:09 AM Reply Like
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