PharmExec Blog

New Decade, New Agenda for Pharma

A new track for nonprofits, product diversification and the rise of the emerging markets —  Audrey S. Erbes reports on some of the takeaways from this week’s JP Morgan Healthcare Conference.

There were some surprising changes in the format of the 29th Annual JP Morgan Healthcare Conference, the world’s premier health care industry investment meeting which took place Monday through Thursday this week in San Francisco. There were increases in number of presenting companies and attendance versus last year, but curious was the first-time addition of a seventh “track” of presenting companies. The new “channel” included not-for-profit organizations for first two days and Chinese companies on Wednesday — a sign of the dynamic changes afoot.

In conversations with investors and JP Morgan staff, I learned that the nonprofits were pitching purchases of “debt.” While public companies use their presentations to promote stock purchases, the nonprofits tout their outstanding management to encourage bond purchases. Based on the sessions I attended, they sure looked like better investments than most municipal bonds. These sessions were well attended and judged a big success.

In the opening remarks on Monday, Doug Bronstein, CFO, JP Morgan Chase, covered positive economic trends across our business upon which Jamie Dimon, CEO of JP Morgan Chase, expanded at the Tuesday luncheon. Bronstein was upbeat about the conference and mentioned that there were 22 nonprofits presenting for the first time. He advised that interest in the 14 company Chinese track resulted from 40 Chinese U.S. IPOs in 2010.

It was just a couple of years ago that companies were looking to “repurposed” drugs, combinations of individual blockbusters, in-licensing of new entities and diversification to include more biologics alongside small molecule drugs to replace revenues to be lost to blockbuster patent expirations. All that has changed in the face of increasing challenges to the healthy growth of the industry from continually rising product development costs without increases in number of approved drugs; increased failure rate of Phase III drugs; rapidly rising share of health care costs as portion of GDP; the heightened “bar” for FDA approvals; and rise of reimbursement to primary consideration for investment decisions. Big Pharma which so depended on the primary care blockbuster drug business model has had a crash course in finding and substituting new revenues to replace those lost to generics and the failure of anticipated new drugs to replace those revenues to be approved.

At the 2010 JP Morgan meeting, companies started to discuss opportunities in emerging markets as an additional revenue stream to help overcome lost revenues in the big seven markets. Now with almost a “herd mentality,” almost every company is after a portion of the much higher growth in emerging markets versus the traditional markets. The majors are making large investments to develop viable pharmaceutical sales and distribution operations to market their branded generic products which they believe will be better received by middle-class patients there than much cheaper domestic drugs.

The high cost of drug development in the US  and EU has led many companies to pursue much lower labor costs in China and India through outsourcing, setting up company research labs there or acquiring existing companies. Their cutbacks in headcount and closing of facilities in the Western countries are helping fund hiring of staff and facilities in these newer markets. Those familiar with costs in China and India advise that management costs are approximately or will soon be the same as in the States but savings are from manufacturing and bench scientist staff which are approximately one 12th and one 7th the cost of a U.S. worker, respectively.

So here are the prominent “themes” this year emphasized in presentations Monday and Tuesday by many Big Pharma companies, which one assumes they think match desired success parameters from the investor’s perspective. They include:
•    20-25 percent of sales will come from emerging markets by middle of decade
•    Diversification into animal health, OTC products, vaccines, diagnostics, as well as branded generics (for some this is the reverse of divestments made in earlier decades)
•    Headcount cuts in US and European staffing
•    Hiring in emerging markets
•    Going after leading company ranking in emerging markets
•    Quality of research and development, and, finally,
•    Continued interest in innovation! (At least that wasn’t forgotten.)

Abbott’s presenter Thomas Freyman, EVP, Finance and CFO, emphasized Abbott had 50% of business outside the U.S. with 20% in emerging markets; had branded generics business outside the U.S bolstered by acquisition of Solvay and was diversified with drug, medical device, diagnostic and nutritional businesses.

Merck’s new CEO, Ken Frazier had slightly different focus but all the familiar “sound bites” — “uniquely positioned to outperform broader health care market with broad portfolio from Merck and Schering Plough merger, broader footprint in key markets and strong financials, and ability to meet needs in Emerging Markets. He mentioned their strengthened efforts and partnerships in emerging markets and diversification through drugs and vaccines. Their headcount cuts included 12% reduction in their sales force; 33% in U.S. pharmaceuticals but expansion of staff in China and Russia with expectations of 25% of business coming from these new markets by 2013. But note he didn’t fail to mention “Innovation is even more important.” Merck is still a science-based company.

Roche’s Erich Hunzik, CFO, emphasized that Roche wasn’t interested in generic or biosimilar business but rather was focused on maintaining a leading late-stage pipeline and progressing personalized medicine — they were in the “best position to push this (personalized medicine) ahead.” He reminded audience that Roche Diagnostics was the largest diagnostic company and reassured the listeners that “innovation remains key” for Roche. He wanted to be clear that their cost cutting via staff reductions planned at 4,800 by the end of 2012 was not at expense of long-term future.

Finally, Bristol Myers Squibb’s Elliott Segal, Executive VP, CSO and President, R&D countered with a very different vision — he proudly emphasized focus was on biopharma with divestment of non-pharmaceutical businesses, perspective as mid-sized company and reduction of geographic footprint.  He attributed this approach taken since 2002 as resulting in 11 new products in 8 years with the potential for four new products approved in 2011.

Audrey S. Erbes is Principal of Erbes & Associates.

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