Pharma Diagnosis for 2011: Increased Project Spending, Decreased Staff, a "Navigating the Currents of Change" Webcast on Industrialinfo.com

---

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Despite the swarm of litigation against last year's health care overhaul, the law is good news for the Pharmaceutical & Biotech Industry, Annette Kreuger, IIR's vice president of research for the Pharmaceutical & Biotech Industry, said in an exclusive "Navigating the Currents of Change" interview.

"The health care overhaul will create more than 30 million customers, and it averted potential price caps--both of those were huge wins for the industry," Kreuger said about last year's health care overhaul. More than two dozen attorneys general have filed suits to block implementation of the law, and federal judges in Virginia and Florida have found parts or all of the law to be unconstitutional. Judges have ruled as unconstitutional the law's requirement that each person purchase health insurance. All parties seem to be preparing to march to the U.S. Supreme Court to argue the law's constitutionality.

Despite legal uncertainties, Pharmaceutical & Biotechnology companies have pushed forward with aggressive project spending plans for 2011, Kreuger noted. "About $18 billion of capital and maintenance projects are scheduled to kick off this year," well above last year's project spend for the year, she said. "There is a high confidence factor around project spending for this industry: About 70-75% of the projects that the industry announces will eventually move forward. That's down a little bit from what it was a few years ago. But, in general, when the industry announces a project, they are highly likely to move forward with it."

From a regional standpoint, project spending this year is all over the place. New England is currently the clear leader, but there is activity throughout North America. This shows that incentives work. Companies will invest where they get the biggest bang for their buck.

One of the trends that Kreuger sees continuing is the industry's construction of new research and development facilities, or the significant expansion of existing ones:

• Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) (Cambridge, Massachusetts) is building an $800 million grassroot biotech research & development (R&D) center in Boston.
• Novartis AG (NYSE:NVS) (Basel, Switzerland) is expanding its vaccine R&D facility in Cambridge, Massachusetts, with a total investment value of $600 million.
• Gilead Sciences Incorporated (NASDAQ:GILD) (Foster City, California) is expanding its life sciences campus in Foster City, California, which is valued at $600 million.

For more information on North American project spending for the Pharmaceutical & Biotech Industry, see the February 10, 2011, article - Middle Age Crisis Over for the Life Science Sector?--$19 Billion Investment Reported for 2011 North American Construction Starts.

Kreuger acknowledged that all of this project spending might seem odd for an industry that has been slashing payrolls and closing facilities in the wake of a recent surge in mergers and acquisitions (M&A). In the past two years:

• Pfizer (NYSE:PFE) (New York, New York) acquired Wyeth
• Merck & Company (NYSE:MRK) (Whitehouse Station, New Jersey) merged with Schering-Plough
• Roche Holding AG (PINK:RHHBY) (Basel, Switzerland) acquired Genentech
• sanofi-aventis SA (NYSE:SNY) (Paris, France) acquired Genzyme

All of this M&A has contributed to a brutal downsizing in the industry. Drug companies reduced their staffs by 53,000 in 2010 and 61,000 in 2009, far more than most industries, according to Challenger, Gray & Christmas, an outplacement firm quoted in a recent New York Times article on the subject. For more information on the industry's recent staff reductions, see November 2, 2010, article - As Pharmaceutical Workforce Marches Out, Construction Marches On.

Consolidation of staff and facilities will continue throughout 2011 and may extend into 2012, Kreuger predicted: "This industry will be a lot skinnier than it used to be." But once that phase is complete, she continued, Pharmaceutical & Biotech companies will increase spending on capital and maintenance projects. "The industry can't build the way it used to until the companies decide where their R&D and manufacturing centers will be located. Once they reach those decisions, I expect project spending will pick up."

The reason: expiring patents. By the end of 2011, patents will expire on drugs that generated as much as $50 billion in sales per year, according to the Times article. Kreuger concurred, adding that the industry sees no blockbuster drugs in the near term to rival perennial cash machines like Lipitor, Viagara and Prozac.

"Companies in this industry used to depend on customer loyalty--they would seek brand-name drugs even when a cheaper generic was available," she said in the interview. "Now, insurance companies are putting a stop to that with their reimbursement practices."

For this reason, Pharmaceutical & Biotech companies are increasingly focusing on what the industry calls "biologicals," a new type of drug that is based on manipulation of a live cell. "Biologicals will allow doctors and drug companies to tailor drugs to each person's individual, specific needs, ultimately their unique genetic makeup. Biologicals are the future of medicine."

In the not-too-distant future, Kreuger said the industry's revenue stream will look like a barbell: a lot of revenue coming from low-priced generics on one end, and high-priced biologicals on the other. "The middle has pretty much been taken away. The most expensive drug on the market costs about $450,000 per year. You only need a few customers on that drug for it to become a really valuable drug."

Kreuger will attend the upcoming InterPhex convention in New York, March 29-31. IIR will be exhibiting at Booth 1766. "This is an important convention for the industry. Please come by and let us help you navigate this market--it's really challenging to break into. But we have tools that can help suppliers of equipment and services better identify potential business opportunities."

"There really is no such thing as a bad time for this industry," Krueger concluded: "Even when things are bad, they're good. After all, who doesn't want to keep living?"

Click here to hear this and other "Navigating the Currents of Change" webcasts, covering important industrial topics and trends throughout the world.

View Plant Profile - 1079453 1058686 1061661
View Project Report - 35001022 35000899 6005593

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.