Drug firms seek new model as blockbusters wilt

LONDON (Reuters) - The drugs are not working. Unprecedented generic competition, growing price pressure, a looming 2010-12 patent cliff and stagnant research productivity spells hard times for the $700 billion-a-year drugs industry.

That's forcing companies to review the way they do business -- and the arrival of a younger generation of chief executives in many boardrooms is set to spur the strategic overhaul.

"I'd be very surprised if they don't take the opportunity to make some radical changes because everybody recognizes that the old model is not sustainable," said Simon Friend, global pharmaceutical leader at PricewaterhouseCoopers.

The heads of more than 15 healthcare firms -- from pharma giants like GlaxoSmithKline (GSK.L), Roche (ROG.VX) and Schering-Plough SGP.N to niche biotechs and hospital chains -- will discuss strategy at the Reuters Health Summit in New York from November 12 to 15.

Medical device firms Baxter (BAX.N) and Hospira (HSP.N), and other players in the prescription drug chain -- Medco (MHS.N) and CVS Caremark (CVS.N) -- will also share their growth plans.

Reform of the U.S. Medicare system at the start of 2006 may have provided a temporary respite by boosting volumes, but the sector's traditional growth engines are now starting to sputter.

The problem is highlighted by the world's two biggest drugs, Pfizer Inc's (PFE.N) anti-cholesterol pill Lipitor and AstraZeneca Plc's (AZN.L) acid reflux treatment Nexium.

Both are losing sales years before their patents expire -- casualties not of direct competition but rivalry from cheap copies of older drugs within the same therapeutic class.

In a buyer's market, such factors are weighing heavily on sales of drugs prescribed by general practitioners, historically the central plank of revenues. According to IMS Health, sales into primary care will decline for the first time ever in 2008.

Overall, the healthcare information company expects global drugs sales growth to be an anemic 5 to 6 percent next year, down from 6 to 7 percent in 2007 and compared to double-digit rates in the 1990s.

U.S. growth in 2008 is anticipated to be just 4 to 5 percent, an all-time low.

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Recent safety scares and increased regulatory caution -- an attitude of "risk aversion" rather than "risk management", according to PwC's Friend -- has aggravated the situation by making it harder to get new blockbusters to market.

The result is a squeeze on margins that has triggered draconian cost cutting and the loss of thousands of jobs.

Perhaps more significantly, there is a radical questioning of the industry's conventional vertically integrated business model, with some companies outsourcing manufacturing or rethinking the way they way they sell drugs.

So far, none have ditched research and development despite dismal returns, which has seen R&D spending increase by an average of 7 percent a year in the last decade while new product output has fallen 3 percent a year, according to Merrill Lynch.

All large drugmakers, however, are embracing licensing of external products and the scramble for promising compounds has sent the cost of late-stage biotech drugs through the roof.

The symbiosis of big pharma and not-so-little biotechnology is becoming ever tighter, especially with biotech firms holding the keys to specialist medicine, where growth remains robust.

IMS expects up to 29 new medicines to be launched in 2008, of which 80 percent will be prescribed primarily by specialists.

No surprise, then, that biotech acquisition talk is hot. After AstraZeneca splashed out $15.6 billion on MedImmune earlier this year, Biogen Idec Inc (BIIB.O) is next on the block, with a possible price tag of $25 billion or more.

Sanford Bernstein analyst Tim Anderson says the pace of biotech acquisitions is likely to continue to rise, along with the size of the targets and the prices paid. The aim is to fill the new-product voids looming due to the coming flood of patent expirations.

Drugs with annual sales of some $20 billion face patent expiration in 2008 and within the next seven years most of the high-margin drugs developed in the 1980s and 1990s will lose protection.

(Editing by Phil Berlowitz)