The drugs industry used to be very simple. Companieswould invest money in research to develop the next blockbuster drug. Patent protection would mean that these new drugs would provide a steady flow of income to Big Pharma. Much of the increased profit would then be spent on more research. And so we had the virtuous circle of increasing profits and increasing share prices that sustained the industry for years.
Big Pharma mustbe more creative
But about a decade ago, people started to realise that most of the low-hanging fruit had already been picked. In the 1980s stomach acid treatment Zantac was the best selling drug in the world. Around 2000, Losec was an even biggerseller. But nothing is ever linear. The follow-up medicines to these winners could simply not match their sales.
After all, ifa doctoralready has a treatment thatcures the ailment without side effects, why should he or she spend more on a more recent drug thats little different? Thats particularly so when the doctoris already familiar with the current medicine and it will soon be off-patent.
This means that Big Pharma is having to be far more creative about how it will generate its profits in coming years.
Today, there are still blockbuster drugs, but theyre biological rather than chemical medicines, based on antibody technologies that are now at the cutting edge of medical science. These treatments are providing step change improvements in diseases such as cancer and arthritis, and theyre a particular strength of AstraZeneca (LSE: AZN).
Adapt and survive
But most firms are finding that they have ageing pharmaceutical portfolios and many of their medicines will be branded and over-the-counter. Here profits will be generated by the quantity sold, rather than by margins. This is an approach thatsuits companies such as GlaxoSmithKline (LSE: GSK), with its broad portfolio of treatments.
And then there are emerging markets. This is where much of the growth will be as the ever-increasingmiddle classes of China, India and other emerging marketsstart to spend much more of their wealth on healthcare. The growing population of this world, and its increasing wealth, means that there will always be a market for the products that AstraZeneca and GlaxoSmithKline make. But we will seea shift in the mix, from the premium end to mass-market and budget treatments.
So the future of pharma is more complex than you might think. Its no longer a linear game, butmore a battle on many fronts. Medicalresearch is advancing veryfast. The pharmaceutical industry needs to adapt to advancing science, and a new, rapidly growing market with different priorities and different needs.
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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca and GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
