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Pharma and Biotech: Unstable Condition

Pharmaceutical and biotechnology firms in North America are restructuring to cut costs and diversify their marketshares - but profits are still high.

Mark Crawford (Apr/May 08)
Pharmaceuticals is a competitive, rough-and-tumble, high-stakes world. It takes about $800 million and 12 to 15 years to bring a new drug to market, according to the Pharmaceutical Research and Manufacturers of America. There are countless expensive dead ends: On average, for every 10,000 compounds investigated, only five advance to clinical trials, and only one of those five are approved for human use.

But it's still a profitable world. According to Mergent's November 2007 Pharmaceutical Report, North America racked up $290.1 billion worth of global pharmaceutical sales in 2006 - about 45 percent of the total global market. This is an increase of 8.3 percent over the previous year, driven by the medical needs of aging baby boomers, as well as the Medicare Part D benefit in the United States.

By all counts, 2007 was an uneven year for the pharmaceutical industry. Drawbacks included plant closings and the layoffs of thousands of workers as U.S. pharmaceutical companies scrambled to restructure and cut costs.

A prime concern is simply not having enough blockbuster drugs in the developmental pipeline. From 2002 to 2006, the industry commercialized 43 percent fewer new chemical-based drugs than it did in the previous five years, despite more than doubling its R&D spending. The FDA has also been slow in approving new drugs - a cautious reaction, no doubt, to Merck's recall of Vioxx in 2004. Drug companies face further pressure from large private insurers that want them to lower prices.

Another worry is the high number of recent or pending patent expirations, which will allow other companies to flood the market with less expensive generic drugs. Industry experts have estimated that generic competition will wipe out more than $60 billion from U.S. industry sales over the next five years, as more than three dozen drugs lose patent protection.

Mergers and Acquisitions
This economic unsteadiness has led "big pharma" to diversify their assets through mergers and acquisitions, which give them immediate positions in different segments of the healthcare market. For example, Amgen's $300 million acquisition of Massachusetts-based Alantos Pharmaceuticals gives Amgen strategic leverage in the diabetes, inflammatory diseases, and osteoarthritis markets. Other hot markets are stem-cell research, biosimilars, and biofuels.

Another trend over the last several years is the industry's shift away from "blockbuster" drugs (chemistry-based drugs for broad patient populations) to promising new "specialized" products that are geared toward specific disorders and are increasingly biotech in design - that is, biologically derived, rather than chemically produced. These specialized products contributed 87 percent of the market's total growth in 2006-2007.

And if you can't beat them, join them. Novartis and Pfizer have recently announced formation of in-house biotech units. After Pfizer's antidepressant Zoloft went off-patent in 2006, the company's own generics unit marketed a generic version. Other big pharma companies with their own generics units include Novartis and Johnson & Johnson.

Some of the majors also have plans to outsource at least some of their manufacturing, and possibly clinical trials. Bristol-Myers Squibb CEO James Cornelius recently told The Wall Street Journal, "There are lots of people in India, China, and Eastern Europe who can make products of the same quality as ours, but at significantly less cost. We don't do any basic research yet in the lower-cost countries, but over the next few years, to be successful, there'll be a constant emphasis on looking for that."

Most forecasters are cautiously optimistic about 2008. IMS Health, a market research firm that tracks pharmaceutical sales, projects worldwide drug sales in 2008 will grow 5 to 6 percent and that U.S. and top European markets will grow about 4 to 5 percent. High-demand products will be vaccines and specialty drugs, especially for cancer, diabetes, and autoimmune disorders. "Oncology is the fastest-growing sector in pharmaceuticals, driven by the enormous amount of innovation coming into the market and the enormous unmet need by patients," says Murray Aitken, senior vice president at IMS Health.

The United States Market
Data Monitor Market Research Profiles indicates the U.S. pharmaceuticals market totaled about $276 billion in 2007 - which reflects a compound annual growth rate of 6 percent for 2003-2007. Drug sales for nervous system and cardiovascular system disorders totaled about $120 billion, almost half the U.S. market's total value. In addition, Burrill & Company indicates that over $55 billion was reinvested into R&D by the U.S. pharmaceutical industry in 2006 -something investors like to see.

The Battelle/BIO study Growing the Nation's Biotech Sector reveals that the pharmaceutical/biotech industry employs more than 400,000 workers in the United States and accounts for about one-third of total bioscience employment. The top 10 states are New York, New Jersey, North Carolina, Pennsylvania, Illinois, Indiana, Florida, California, Massachusetts, and Missouri.

One of the country's leading pharma/biotech clusters is Research Triangle Park (RTP) in North Carolina. Founded in 1959, RTP has become an international model for highly effective research and development. RTP draws on the research strengths of North Carolina State University, University of North Carolina-Chapel Hill, and Wake Forest University. The North Carolina Biotechnology Center, a support organization, has invested nearly $200 million in developing the state's biotech industry. Leading life sciences employers at RTP are GlaxoSmithKline (6,400 employees), National Institute of Environmental Health Sciences (1,000 employees), and Biogen Idec (720 employees). The Biomanufacturing Training and Education Centerin Raleigh, North Carolina, uses commercial-scale equipment to provide hands-on technical training for biotechnology workers and students.

In Florida, Tampa is emerging as a pharmaceutical/biotech center. Merck has invested $95 million to build a new $150 million cancer research facility that will conduct joint research with the H. Lee Moffitt Cancer Center and Research Institute. At least six biotech companies are interested in coming to the area to participate in the research. Goodwin Biotechnology, a contract manufacturing firm that specializes biotherapeutics, is planning to double its research space to handle projects from global clients such as Minarini Group, Thallion Pharmaceuticals, and Memorial Sloan Kettering Cancer Center.

San Antonio, Texas, another biotech hotspot, is one of five cities being considered by for the 520,000-square-foot Department of Homeland Security's National Bio- and Agro-Defense Facility. The NBAF would be located in Texas Research Park, already home to the University of Texas Institute of Biotechnology and the South Texas Center for Biology in Medicine. DPT Laboratories in San Antonio, a biotech/pharma manufacturer, opened a new $24 million, 258,000-square-foot research, manufacturing, and distribution facility in late 2006.

The Canadian Market
Canada is home to nearly 500 biotech companies that generated more than CAN$25.2 billion in sales in 2006, a 7.6 percent increase over the previous year. Overall R&D expenditures by drug manufacturers in Canada totaled CAN$1.21 billion in 2006, about the same as 2005. The Canadian market is expected to grow in 2008 at about the same rate as the United States.

Ontario employs more than 9,000 pharma/biotech workers. Hundreds of companies are located in the Toronto area, the largest biotech cluster in Canada. Major players are AstraZeneca, GSK, and Bristol-Myers Squibb. Toronto recently opened the MaRS Discovery District, which is dedicated to the commercialization of new technologies.

Another biotech hotspot is the province of Québec, which claims to have the fourth-highest number of biotech companies of any province or state in North America. Nearly 30 percent of all Canadian biotech companies are located here, mostly in Montréal. McGill University's Genome Québec Innovation Center specializes in genotyping, DNA microchips, pharmacogenomics, and sequencing. The National Research Council's Biotechnology Research Institute, Canada's largest biotech R&D facility, is also located in Montréal. Other research centers are the University of Montréal's Robert-Cedergren Center (bioinformatics and genomics) and the Québec Proteomics Center.

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