There are many reasons one can cite to predict big trouble for the drug companies in the next decade and beyond. The most significant is cost control and the expectation that government and private payers will squeeze drug company margins through price controls and less patent protection. Second is the trend towards regulatory conservatism requiring more clinical substantiation before getting approval. Third is the difficulty in creating new blockbusters while so many big profitable drugs going off patent leaving holes in pipelines.
Genomics has proven to be a slower path to wonder drugs than originally hoped. The drug industry is searching for those new breakthroughs for major diseases but to date we have not found many. Fourth, the recession has caused drug companies to downsize, causing loss of many experienced R&D personnel and a general belt tightening that may make future drug discovery more difficult.
The low P/E ratios of drug company stocks show Wall Street is not expecting high growth rates. In fact, most drug stocks have dropped much further than the S&P averages in the last decade.
On the flip side there are numerous forces that bode well for the health and growth of drug companies.
First, we are getting older and fatter, and that applies to most of the developed and developing world.
Rates of diabetes are exploding in India and China. Our western diet is very popular and that diet rich in
cheap carbs has been shown to make people fatter and more diabetes and heart disease prone.
Second, the rest of the world is getting more affluent and branded drugs can become affordable for the
new emerging middle class. Wealthier people will spend more on health and big drug companies can
expect many new customers. We can expect over a billion people to reach the middle class in the next
10 years as most Asian and some Latin American economies boom. By 2030 an OECD report predicts a 3
billion person increase in the size of the middle class. That is a lot of potential customers.
Third, our health care systems around the world will not be able to handle the explosion in disease and
chronic conditions. As diabetes rates explode, and they will, treatment will be difficult because we have
a severe shortage of medical personnel. Therefore, in order to prevent complications, drug treatment
will be used more aggressively and earlier. We just do not have the resources to carefully examine and
follow up with intensive monitoring and treatment.
Fourth, people are living longer in most developed countries and that few extra years of life means more
drugs needed to keep us healthy in those extended years. On average life expectancies are predicted
to rise, depending on the source, between 4-6 years in the developed world from now to 2040 from 81
to about 85-87. That does not necessarily mean healthy extra years. We may learn to delay death but
we can expect many of us to need more drug care to extend life. Dementia, heart disease, diabetes,
arthritis, and cancer will get more of us the longer we live.
Finally, drug companies will evolve to be more efficient. Organizations learn and adapt. Big pharma may
become medium pharma, and more nimble, faster and more specialized companies may emerge. The
idea that a big drug company has to participate in all major categories may be a thing of the past. To be
successful, we may see a shift towards focus on a few disease categories.
I would not bet against the drug industry. While we have had a lean decade in producing new blockbuster categories, I expect by 2020-25 a thriving industry. Of course it may no longer be based in the United States and Europe if those governments are anti-business and do not welcome innovation. Tax rates, patent life, regulatory conditions, an educated technical work force and public attitudes matter. Whether the pharmaceutical renaissance is based in China, India, Brazil, Europe, or the U.S is to be determined, but it will certainly happen because we have no choice but to have a thriving drug industry.
Bob Ehrlich, Chairman
DTC Perspectives, Inc.