Analysis: Is Pharma's big brand era over?

NEW YORK Thu May 12, 2011 3:00pm EDT

A pharmacy employee looks for medication as she works to fill a prescription while working at a pharmacy in New York December 23, 2009. REUTERS/Lucas Jackson

A pharmacy employee looks for medication as she works to fill a prescription while working at a pharmacy in New York December 23, 2009.

Credit: Reuters/Lucas Jackson

NEW YORK (Reuters) - When drug sales reps come knocking in the future, they are increasingly likely to lavish their attentions on neurologists or cancer specialists than that old standby -- the local family doctor.

Pharmaceutical companies have long spent millions of dollars pitching pills to U.S. primary care doctors, the main prescribers of the world's most lucrative medicines.

These physicians were the gateway to selling everything from cholesterol-lowering drugs to antidepressants, blood pressure medicines, allergy pills and stomach ulcer treatments.

But with patents on many of the world's best-selling drugs expiring, the industry is seeing less value in its traditional strongholds. Now it is the specialist physician who is more likely to hear from the sales force.

"The mass market is really starting to disappear," Sanofi (SASY.PA) Chief Executive Officer Chris Viehbacher told the Reuters Health Summit this week, where healthcare executives discussed the industry's changing focus.

Viehbacher himself took a big step away from the mass market with Sanofi's $20 billion purchase of biotechnology company Genzyme, which specializes in treatments for rare genetic diseases.

Oncology, multiple sclerosis and hepatitis C are some of the therapeutic areas where the industry is focusing its commercial efforts to fight stagnating sales.

The narrower categories have meant less competition for a given drug. Companies are also often able to charge higher prices for more tailored treatments that are less vulnerable to pressure from governments and health insurers.

Primary care doctors will still prescribe the industry's inventions. But with the drugs' patents gone, the prescriptions will be almost exclusively for low-cost generic versions, which are virtually worthless to big brand-name drugmakers.

At least 90 percent of prescription pills and capsules will be generics within 10 years, according to David Snow, CEO of Medco Health Solutions Inc MHS.N, which manages drug plan benefits.

In years past, drug innovation meant that brand name products were less vulnerable to generic rivals. By the time they had lost patent protection, manufacturers had come up with a new and better class of medicine to treat the same problem.

That has changed with the latest crop of blockbusters, like Pfizer Inc's (PFE.N) Lipitor cholesterol drug and Novartis' (NOVN.VX) blood-pressure drug Diovan, which face generic competition by next year. They have proven so successful for addressing areas like heart disease that drugmakers have found it difficult to improve on them.

"There are some mass markets that are so well-served now it is hard to be better," Biogen Idec Inc (BIIB.O) CEO George Scangos said. "If you look at what the statins did for lipid (levels), it is hard to do much better ... And so it's harder to develop those drugs."

Or as Bain & Co healthcare expert Tim van Biesen puts it: "The generic drug cabinet, so to speak, works."

SPECIALISTS SIT PRETTY

Instead, companies like Allergan Inc (AGN.N), which focus on more niche areas, now sit in the sweet spot. Allergan, which has a stock valuation of 22 times earnings estimates -- more than double many larger pharmaceutical companies -- has prospered selling the anti-wrinkle drug Botox and other cosmetic products as well as therapies for the eye.

Allergan CEO David Pyott noted that most of the company's markets are growing at double-digit percentage rates. He even downplayed the importance of emerging markets, viewed as a critical new growth vehicle for major drugmakers, as a "wonderful little kind of booster engine" for Allergan.

Shire Plc (SHP.L) has a major business in rare disease treatments and also boasts a valuation well above large drugmakers. It has developed a more "holistic" approach to reflect its specialty, focusing on patients and healthcare payors rather than just doctors, CEO Angus Russell said.

The large drugmakers that want to succeed in specialty areas may require a major cultural shift, Russell said. That could prove difficult if specialty is only a relatively small part of their expansive operations.

"The mass marketing model was designed around certain principles which worked really well for probably 30 years and they're not working so well today," Russell said.

A move to specialty could help drugmakers cut marketing costs at a time the industry is eager to slash expenses.

"It's much easier to get to 6,000 oncologists in the United States, which is roughly what you have to cover, than it is to get to 250,000 primary care physicians," said van Biesen, head of Bain's North American healthcare practice.

At the same time, some brand drugs continue to address medical needs of a wide population of patients, including treatments for diabetes and pain, where experimental medicines are in development.

Several major drugmakers are trying to strike gold by developing treatments for Alzheimer's disease, a research field marked by failure. Any effective therapy would no doubt be widely prescribed to an ever-growing patient population.

And as drugmakers crowd into specialized areas, the newer markets may start to lose some of their appeal.

"If everybody gets into specialty care it will become like primary care, which is to say very high competitive intensity," van Biesen said. "From an industry standpoint that's a long-term challenge; from a consumer and patient standpoint, not a bad thing."

(Reporting by Lewis Krauskopf; Editing by Michele Gershberg and Matthew Lewis)