Business

Published: 16 Apr 2009 17:36:14 PST

NEW YORK/LONDON, April 16 – The pharmaceutical
industry is going back to the lab for its business models as it
faces historic challenges.

Large drugmakers are experimenting with various
collaborations as their major products face revenue declines,
research productivity stalls, and governments and health
insurers crack down on drug prices and healthcare costs.

The new ventures — from deals on products to mega mergers
– seek to meet these challenges by cutting costs and
mitigating the risks of research into new treatments.

Look no further than Thursday’s deal between
GlaxoSmithKline Plc and Pfizer Inc. The world’s two biggest
drug companies announced plans to merge their HIV operations
into a new company.

“Pharma is feeling its way,” said Erik Gordon, a professor
at the Ross School of Business at the University of Michigan.
“They know that the present business model isn’t going to work
in the future … What they’re not sure of is what will work.”

Glaxo and Pfizer said the new HIV business would be more
sustainable and broader in scope than either individually, with
the potential for cost savings by melding the commercial
operations.

“What you are seeing is an industry facing the realities of
the challenges that exist and also, to some degree, a new
generation of management being prepared to come forward with
different solutions,” Glaxo Chief Executive Andrew Witty told
reporters.

Indeed, in the past, such collaborations would be unlikely
because rivals would be reluctant to share information about
product development or sales strategies, said Morningstar
analyst Damien Conover.

“You’re almost giving away some of the secret sauce to a
major competitor,” Conover said.

“In the new environment where cost controls are so
important, we’re going to start to see maybe some more shifts
like this where that old way of doing things by yourself may
not make as much sense.”

Virtually all large drugmakers are seeing patents lapse on
big-selling drugs, with a lack of blockbusters to fill the
gaps, driving the need to cut costs to shore up profits.

“They have to have a more efficient cost structure,” Gordon
said. “They are not going to get the kinds of margins they used
to get.”

At the same time, the desire to stem healthcare costs means
governments and other healthcare payors are reluctant to
reimburse for new therapies unless they represent a significant
medical advance, forcing drug companies to take more research
risks.

“They’re working against a higher risk, so one response is
combine some pipelines,” Gordon said.

The HIV tie-up follows risk-sharing deals forged by
drugmakers, such as Bristol-Myers Squibb Co’s licensing of two
experimental diabetes treatments to AstraZeneca Plc.

The formation of an entirely new company struck experts as
an unusual move for the drug industry.

“It is a sign of the times,” said Navid Malik, analyst at
Matrix Corporate Capital in London. “Everyone is looking at
their portfolios — exiting some areas, entering some and
refocusing in others.”

With Glaxo owning 85 percent of the HIV company, Sanford
Bernstein analyst Tim Anderson questioned whether Pfizer would
shift resources from HIV to other areas. The new company will
have 11 marketed products which generated sales of $2.4 billion
last year, plus a pipeline of six experimental medicines.

“The deal essentially looks like GSK is buying access to
Pfizer’s HIV/AIDS medicines,” Anderson said in a research
note.

While the structure of the GSK-Pfizer deal is unusual, its
financial impact is a drop in the bucket compared with enormous
acquisitions sealed recently to address the industry’s
challenges.

In the United States, Pfizer is buying Wyeth for $68
billion, while Merck is gobbling up Schering-Plough Corp for
$41 billion. Swiss drugmaker Roche Holding AG shelled out $46.8
billion to acquire the part of its U.S. biotech partner
Genentech that it didn’t own.

Rather than large-scale consolidation, others, like
London-based Glaxo, are emphasizing smaller deals and
diversification into areas such as emerging markets and
consumer health.

“We’re prepared to try different models and this is an
example of things we want to do,” Witty said of the HIV deal.
“It isn’t necessarily the template of the things we want to
do.”