Rising healthcare expenditures have become a major concern to European governments. While price regulations and generic manufacturers are doing a great job in reducing costs for governments, the companies developing drugs have not helped themselves.
"One accusation directed towards these companies is that they have been focusing on developing drugs for the so called 'costly' diseases, which have a very low patient population to cater to," says Frost & Sullivan (healthcare.frost.com) Research Analyst John Paul. "While acquiring an orphan drug status has its own advantages, the cost of developing and marketing such a drug outweighs the revenue it would generate."
In addition, the drug approval process for 'small molecule' drugs is not getting any better, the cost has increased and the possibility of lawsuits and withdrawal is much higher. Together with the impending patent expiries of several top drugs, pharmaceutical companies are being forced to look for efficiency in operation.
Pharmaceutical companies have realised that their strength lies in the later stages of product development and are cutting their costs by outsourcing both their manufacturing and R&D activities, particularly to Asia. Frost & Sullivan estimates that the cost of employing an experienced R&D person in China or India is 10 times cheaper than in the Europe or the US.
"For instance, AstraZeneca has turned to China and announced investments of $100 million in R&D," says Paul. "GSK is building a fully integrated, end-to-end R&D center in China that will employ more than 1,000 staff by 2010."
Layoffs in pharmaceutical companies are performed with the intention of redirecting the costs into R&D. However, the management of drug development and other late-stage processes in several therapeutic areas is not an attractive option. Considering that European governments are giving significant support to biotech start-ups, pharma giants are seeing the acquisition of these companies as a better proposition than developing their own pipelines.
"Pharma giants, in an effort to acquire the most promising drugs in the market, are paying over and above the value of these companies," says Paul. "Merck's acquisition of Sirna Therapeutics for $1 billion is just one example."
Many promising biotech start-ups are also doing their best to attract big pharma companies to acquire their technology, pipeline or the company itself, thereby sidestepping the costs of marketing. Biotech IPOs are not attracting much attention and they are under constant pressure to find a return on investment for their stakeholders.
"Be it layoffs or outsourcing, the pharmaceutical industry is geared up to fight the decline," says Paul. "Governments should however step up efforts and encourage companies, by means other than just tax incentives, to produce quality R&D. For the moment, the pharmaceutical industry has to be in fighting trim until the investments in R&D start producing results."
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