Diversification will not lessen impact of patent protection loss, says Datamonitor
Although Big Pharma is implementing strategies to lessen the impact of the loss of patent protection by diversifying away from its core business of developing medicines, a new report from Datamonitor, Mapping the Healthcare Landscape: Bringing Pharmaceuticals into Focus, suggests that this is not the cure.
Although Big Pharma is implementing strategies to lessen the impact of the loss of patent protection by diversifying away from its core business of developing medicines, a new report from Datamonitor, Mapping the Healthcare Landscape: Bringing Pharmaceuticals into Focus, suggests that this is not the cure.
Between 2001 and 2008, sales of Big Pharma companies grew by 8.6% year-on-year according to Datamonitor's PharmaVitae Explorer. If this rate of growth were to be maintained, sales would reach US$628bn in 2014. However, the reality is that revenue growth for Big Pharma will flat-line at 0.2% between 2008 and 2014, with sales predicted to reach US$387bn in 2014.
This dramatic slow-down will be attributable almost entirely to the expiration of patents for key products and few Big Pharma companies will emerge unscathed.
The pharmaceutical business model is currently undergoing major change, driven both by the current economic climate and the much-anticipated "patent cliff", says Datamonitor pharmaceutical strategy analyst Dr Pam Narang.
"Although these changes might provide a cushion of sorts to the forecast decline in revenue growth for Big Pharma, a more aggressive response is required, and diversification away from pharmaceuticals is one avenue that a number of companies have pursued."
The different sectors into which Big Pharma has diversified include over-the-counter healthcare products, medical devices and diagnostics, animal health, retail pharmacy and health insurance. However, Datamonitor says companies for which pharmaceuticals accounted for more than 90% of 2008 revenues (AstraZeneca, Eli Lilly, Pfizer, and Merck & Co) had above average operating margins, while companies with a more intermediate pharma focus (GlaxoSmithKline, Roche, Wyeth, Sanofi-Aventis, Schering-Plough, and Bristol-Myers Squibb) and those that were diversified (Bayer, Johnson & Johnson, Abbott, and Novartis) had below average operating margins.
Although Big Pharma could potentially off-set sales growth decline by diversification, the resulting fall in operating margin would act to reduce operating profit and somewhat negate the benefits of diversification. Pharma-focused companies therefore have little to gain from diversifying away from branded pharmaceuticals, and should instead "ride out" the patent cliff by looking to increase operating margin. While cost-cutting and restructuring can go some way to achieving this goal, merging with and acquiring other pharma companies and biotechs to gain access to their drug development pipelines is a more powerful means of improving operating margin.
"In broad terms, Datamonitor's analysis indicates that moving towards and remaining in the branded pharmaceutical sector offers the greatest rewards," said Dr Narang.