There are certainly good reasons to be cautious about the sector’s prospects. These include: the strong competition from generic producers against the large established firms, the difficulties involved in launching new products and the political drive to reduce the cost of drugs. But it would be a mistake to forget the positive factors that affect the sector in both the short term and the long term.
According to some analysts the industry’s earnings over the most recent quarter were the worst it has experienced over the past decade. A good example is Merck which has recently indicated that its second quarter profits declined by almost 4% because of competition from generic products.
Another problem is launching new products in the market. So far this year the Food and Drug Administration in America has only approved the launch of seven new drugs. Such a low level of innovation is likely to make it difficult for firms to sustain strong profits in the future.
Another pressing concern for healthcare companies is the political battle in America to reduce the cost of drugs. Some American states are trying to control the cost of Medicaid programmes (for the poor) by forcing the companies to reduce the cost of their products if they want them to be included in the state-approved preferred list. If these actions succeed they will put a lot of pressure on the companies’ profit margins. There is also the risk that the authorities will approve the import of cheaper drugs from abroad.
Positive factors
But it would be a mistake to overlook the factors that could benefit the pharmaceutical sector. In the long term, demography, particularly the ageing population, is certainly the most important. In the short term, it should not be forgotten that the healthcare sector, more than other, is in a strong position to take advantage of a weak dollar as a 30-40% of the revenues of the big pharmaceutical companies come from outside America.
Another positive factor is all the merger speculation that has arisen since Pfizer’ s acquisition of Pharmacia a few weeks ago. For example, Novartis has denied recent rumours that it is to merge with Roche. But whatever the truth of this particular rumour the fact is that companies will have to react to compete against the new enlarged Pfizer.
In relation to biotechnology, firms such as Amgen and Gilead have enjoyed positive clinical and regulatory news. But AstraZenaca’s drug for treating cancer has suffered from negative coverage.
