When I first got into health care a little over a decade ago, the first lesson I learned about big drug companies was that they were very profitable. The second lesson was that a huge company might have only one or two profitable drugs. When I first looked at the Fortune 500 I found that Merck, then the big Kahuna of big pharma, had a market cap the same size as companies with ten times its sales, reflecting that profitability. Pfizer, which is now the big Kahuna, has a market cap of over $250 billion (here’s a list of the top pharmas) with net income of $9 billion on sales of $32 billion. For comparison GE has net income of $14 billion on revenues of $131 billion. (GE’s market cap is around $315 billion).
However, behind the numbers, the pharma industry, despite all its dalliances with PBMs, care management, and genomics, over the years still operated by simple rules. So what a big pharma company did was to somehow develop a profitable drug and market it to doctors (and more recently patients). But there wasn’t a concentration in the industry like there is in automobiles, or steel, because the products were company-specific and of course patent-protected.
So the rules of the game are, if you’re a pharma company and you can’t develop a profitable drug, then license one in. If you can’t license one in then buy the company that makes it — even if it’s a huge company. Pfizer’s purchase of Pharmacia was $60 billion spent largely to get hold of one drug — Celebrex. Since the early 1990’s Pfizer had successfully played a strategy of marketing drugs when others (especially Merck) were distracted by managed care, buying PBMs and generally cutting back on their sales forces. That gave Pfizer the marketing clout to license in other drugs, even from big companies. For instance, they were already co-marketing Celebrex before they bought Pharmacia. And eventually it gave them the scope to have a full portfolio of drugs by acquiring other companies. Other big pharmas, notably GlaxoSmithKline — the combination of Glaxo, Burroughs-Wellcome, Smithkline-Beckman, Beecham (and a few I’ve probably missed), which were all largely "one-drug" companies at the start of the 1990s — followed suit by getting bigger to get both marketing clout and more comprehensive portfolios.
The other side of this coin is what happens when you don’t have the first part of the equation; the blockbuster drug. Schering-Plough’s new CEO Fred Hassan (ex-Pharmacia by the way) gave a talk this morning about the problems of his company. Schering has been hit by the loss — more like the evaporation — of its main allergy products Claritin and Nasonex, as well as in the Hepatitis C market. Schering has been unable to replace these losses with new brands, and also has had manufacturing and regulatory problems. It has been therefore unable to jump from being a one (or two)-drug company to being a serious heavyweight. Astra-Zeneca, a mid-size player that became big on one drug, Prilosec, looks like it is making that jump with Crestor — its new statin.
Usually the companies in that situation sell out/merge with others around the same size, rationalize their sales forces, and wait for new blockbusters to emerge. However, its been more than a year since we saw the end of the last round of pharmaceutical mergers — last one was Pfizer-Pharmacia — and it may be that the really big guys don’t need the medium size guys any more. In that case we might see the slow withering of the medium-sized pharmas, especially those without strong pipelines. And as I mentioned in last week’s post about biotech, there’ll be more continued interest from the big guys in cutting deals with interesting small research companies to keep that pipeline stocked.