Another Golden Year In Prospect

At the same time, there is increasing excitement about a new wave of innovative drugs in the research pipeline as scientists apply new genetic and chemical techniques to pharmaceutical discovery and development.

There may be some setbacks as governments in Europe and Asia attempt to strengthen drug price control mechanisms but on the whole, as Richard Markham, American chief executive of Germanys Hoechst Marion Roussel (HMR), puts it: Its going to be a fantastic year for the industry.

Analysts expect the global market to keep growing at about its current rate of 7 per cent during 1998.

As Markham notes, it is just five years since one respected team of investment analysts put out a fat report entitled The Pharmaceutical Industry of the Future - A Black Hole.

In the early nineties, many people forecast that a combination of healthcare reform programmes and ferocious price competition between similar drugs would drive down profits throughout the industry, to a point at which many companies would be forced to make big cuts in research and development the lifeblood of their future. In response to such fears, shares in pharmaceutical companies were then trading at a price/earnings discount to the market.

As it turned out, the Clinton administration and Democrats in Congress failed to impose a damaging reform programme in the US, European governments took a more relaxed attitude to pharmaceutical pricing than the pessimists had expected, and several companies managed to cut costs substantially through mergers and acquisitions.

The outcome has been a sequence of four consecutive years in which the pharmaceutical sector has outperformed the market. It is now back to its traditional P/E premium.

As a sector, the pharma industry has delivered in spades, says Mark Becker, London-based pharmaceutical analyst for J P Morgan Securities. On average, companies have shown earnings growth of 13 per cent over the past five years and are forecasting a growth of 13 per cent over the next five.

One reason for the improved outlook, Markham says, is that companies are winning the battle to convince governments that drugs, far from being a drain on healthcare resources, help to save money. The industrys growing band of pharmaco-economists is producing increasingly sophisticated analyses to show that innovative drugs lead to savings far greater than their own costs, for example by reducing substantially the time that patients need to spend in hospital.

It is becoming increasingly clear that the pharmaceutical industry will be the saviour in the fight to cut healthcare costs, Markham says.

The other reason for optimism is the way companies are increasing the productivity of their R&D operations (which typically consume about 15 per cent of total expenditure) by improved management and new technology. Large companies such as HMR, which have managed to launch drugs at an average rate of about one a year, are now promising two or three important new products a year. Glaxo Wellcome put 18 new chemical entities into the first exploratory stage of development in 1997, says James Niedel, R&D director, compared with just six by Glaxo and Wellcome before their merger in 1994.

Im very excited about the R&D revolution, says Kevin Wilson, European pharmaceutical analyst at Salomon Smith Barney. I think it will be very bullish for some parts of the industry.

One buzzword in the industry, which Wilson predicts will become increasingly familiar to investors during 1998, is bioinformatics: the use of information technology to make sense of the vast volumes of genetic and biological data pouring out of research laboratories. Companies vary greatly in the extent to which they have invested in bioinformatics: SmithKline Beecham has perhaps the highest profile in this field.

Another likely buzzword for the future is pharmacogenomics: Using genetic analysis of patients to prescribe the drugs most beneficial for their diseases.

Although the pressure on pharmaceutical companies to merge has relaxed as their financial outlook has grown brighter, the industry is expecting further activity in mergers and acquisitions over the next two or three years. Consolidation may no longer be a matter of life or death, but companies are still attracted by the large cost savings available from a well managed merger.

Some names feature in takeover speculation more frequently than others. Global companies that are in the second tier by size, such as the UKs Zeneca, are often seen as targets. Any of the giants seeking to increase market share is a potential predator, though Switzerlands Roche may be particularly hungry now that Ciba and Sandoz have combined into Novartis.

Predicting takeovers is as much a matter of guesses and rumours in the pharmaceutical industry as in any other. But, with the largest companies holding less than a 6 per cent market share, the biggest surprise would be if there was no corporate consolidation this year.

Focus on care, not just on costs

For our industry, 1988 is likely to see a continuation of two co-existing themes: the discovery and development of important medicines, alongside the challenges of financing societys demands for improved healthcare.

In Europe, the important dialogue sponsored by Martin Bangemann (the European Union industry commissioner) has made progress which can be built upon in 1998. This contrasts with Japan, where negative policy responses towards pharmaceuticals are in prospect.

It is in the US where issues of key importance to the ultimate consumer of healthcare, the patient, are being addressed, through improved information provided directly to patients and focus on the quality of care and not just its costs. I look forward to a greater role for patients on the agenda in other areas of the world in 1998.