The Fall of Big Pharma

4th July 2012

The drug giant is to plead guilty to promoting two drugs for unapproved uses and failing to report safety data about a diabetes drug to the Food and Drug Administration (FDA), reports the BBC.

While Glaxo's share price has been relatively unaffected by the news of the huge settlement, the scandal highlights the risk that unexpected events can hurt even the most ‘stable' companies.

So what has become of big blue chip Pharma stalwarts that have been renowned for forming a solid part of a balanced investment portfolio?

Even through the darkest days of our financial collapse and recession, the sector, dominated by the large multinational players, continued to deliver export growth and a glimmer of hope of economic recovery.

This was despite the potentially high-risk nature of a business heavily dependent on research and development of new products, and patent protection.

Vulnerable to competition – the ‘patent cliff'

However, many drugs in the market are losing patent protection in the coming years, so the need to develop new products while they still have the revenues is huge.

Drug makers lost patent protection last year on products valued at $34 billion in annual sales, an amount that will rise to $147 billion by 2015, according to data compiled by Bloomberg.

This is when high-selling multi-nationals are vulnerable to competition from cheaper rivals, with giant AstraZeneca one of the worst affected by what's known as the "patent cliff".

The rise in M&A

One strategy has been to shift M&A activity to a higher gear. The pharmaceutical industry has been buzzing with activity lately, with acquisitions and new drug developments that have been grabbing headlines.  

For example, there is Bristol-Myers Squibb's $5.3 billion deal to buy diabetes drugmaker Amylin Pharmaceuticals, giving Bristol immediate access to a market of growing medical need, while heralding a burgeoning hunger among pharmaceutical companies for acquisitions. The Bristol deal would be the fifth sealed in 2012 for more than $1 billion, and there are more on the cards.

However, pharmaceutical companies are in the grip of the bears. Since the start of the year they have experienced an average fall in share price of 11%, reported Investors Chronicle last month, and the share price charts for the giants in the sector aren't pretty.

"That's terrible for companies that should have benefited from turbulence in other parts of the market," the report adds.

In the wider sector, austerity measures have started to put pressure on medicines prices, alongside the problems in the eurozone and are affecting the outlook for companies with a big presence in major medical markets. Prices are declining.

What about the broader sector?

There is the broader sector for investors to consider. For example, there are companies aside from the giants such as medical device manufacturers and other specialists. In fact, some of the best-performing companies not typically traditional drugs companies, but a mixed bag of semen merchants Genus (GNS), snake-bite treatment salesmen BTG and obscure biotech firms Proximagen (PRX) that do not really share any particular operating characteristics.

Meanwhile, the likes of Abbott Laboratories (ABT) and Bayer (BAYN), whose share prices have both performed well, have pharmaceutical arms that form part of a diversified conglomerate that embraces medical technology.

The phrase "value trap" is increasingly used when talking about pharmaceutical shares, concludes the Investors Chronicle. Even so, the income on offer from the likes of AstraZeneca and GSK is hard to beat.  

Meanwhile, remember that recession has not entirely spared any segment or industry in the market, each and every industry has felt the impact of the economic slowdown to varying degrees. And investing in the pharmaceutical companies is still considered to be a safe option in comparison to some, such as the banking sector.

However, with recent news and falls in value, it will pay to be picky.


More on Mindful Money

What Big Finance can learn from Big Pharma

AstraZeneca and GlaxoSmithKline – What about the shareholders?

Diageo and GlaxoSmithKline: When debt is good for investors

Sign up to our daily newsletter and you could win an Amazon Kindle Touch

The Financialist

7 thoughts on “The Fall of Big Pharma”

  1. Drf says:

    Simon, normally I agree with your excellent posts here, but on this occasion with all due respect you seem to be suffering from a delusion!

    When Thatcher destroyed most of UK industry, she proudly proclaimed
    that that did not matter, since North Sea Oil and Gas were going to more
    than compensate for this loss of industry, and that all the dirty greasy
    jobs of industry were going to be replaced with nice clean jobs in
    leisure centres, shops and banks etc. That was then exactly what
    occurred. However, all the output from North Sea Oil and Gas was then
    included and has since been included every year in the computation of
    GDP to make it seem larger than it would have been if North Sea Oil and
    Gas had been stripped out then! So North Sea Oil and Gas was used to
    deceive people into believing that the economy was not so bad, except
    for the industrial jobs which had been lost, and the resultant
    unemployment caused by this.

    So, having used North Sea Oil and Gas to obscure the economic
    realities of industrial destruction in the 80s and for so many years
    since then, how can it now be an honest and valid position to adopt
    that, just because North Sea Oil and Gas is now in decline, it should be
    stripped out of the equation? Clearly this is delusional, dishonest
    and manipulation of the very worst kind.

  2. Noo 2 Economics says:

    Whilst I wouldn’t put it as violently as Drf s/he has a point. Oil and Gas extraction are a part of GDP, albeit a steadily diminishing one.

    I don’t accept that an extra bank holiday makes all the difference, nor that the Olympics had much impact at all, as there would have been plenty of tourists disinterested in the Olympics, postponing their trips to avoid the Olympics crowds, the “postponements” effectively cancelling out the “Olympics Tourists”. Indeed I think the only boost from the Olympics came long ago when the building contractors were constructing the stadia etc.

    All economic activity that comprises the GDP should be included every quarter, not excluded because it doesn’t fit your theory.

    You are better than this, I like your, usually, analytical succinct style, keeping emotion out of it. This post seems to have let emotionally held beliefs into it. When emotion arrives, reason and logic depart. Please maintain your previous style and keep up the excellent work.

  3. David Lilley says:

    Drf and Noo.

    Please read Simon’s blog again. He is only stating that “if” we strip out the North Sea the onshore GDP was quite good at 0.6%. He is not making a case for removing the N. Sea from GDP.

    One of the biggest fields in the N Sea was shut down for maintenance in the fourth quarter. A massive one off event wrt GDP. Things do look a lot better than the naysayer’s prognosis which is Simon’s point.

    If I may make a few other points:

    Maggie came to power in 1979 following an IMF bailout and the loss of our AAA. Did she wreck manufacturing and the economy? Far from it. The facts are that the manufacturing decline was heavier under Labour. Her mantra, in a nutshell, was that government should stick to its core business of governing and not be an amature at collecting bus tickets and mining coal. The manufacturing decline was simply collateral in her refusal to wreck successful businesses by supporting lame ducks with taxpayer’s money.

    The N Sea may be in decline but every new field development in the N Sea has been a marginal field development in its day. Remarkably so many were discovered in 1974 but only became economically viable due to new technology and the rising price of oil. Today our offshore investment is at a thirty year high and incudes a wider area than the N Sea. Good news again and shale gas to come.

    The UK is still the fifth biggest manufcturer in the world.

    1. Noo 2 Economics says:

      Sorry David, I have re read Simon’s post 5 times now and still cannot get your interpretation. Sticking to your point of North Sea oil he clearly thinks it should be excluded from the numbers for the last 4 quarters which will then “prove” his money supply theory. So North Sea fields were shut down in the fourth quarter- does this mean that if a number of car assembly plants are shut down for maintenance in the first quarter of this year that we should exclude them from the figures too, or “qualify” the figures by stating if they hadn’t been closed down then we would have seen growth? The fact is the N Sea fields were closed down and account has to be taken of that along with all other economic activity.

      Taking this a step further, if I wanted to “prove” the economy was shrinking I could start ignoring any growth sectors as they don’t fit my theory. Indeed, I could even argue that 4th quarter stats should be ignored as they reflect a “one off Christmas effect” the point is it’s all part of the economic cycle and needs to be included with no arguments that certain items could be excluded as they are “unrepresentative” the fact is anything “unrepresentative” will be diluted within a years figures. If it’s still strong enough to affect the total year’s figures then it’s a representative feature.

      I was around (as in an adult) in 1979, Maggie wanted to close coal mines as they were “uneconomical” to operate and imported coal was cheaper. This was because the (mainly German coal) that was imported had even bigger subsidies applied to it by the German Government than that of the British which, funnily enough, seemed to disappear once the British mining industry had been decimated and we started paying through the nose for our imported coal, funny how that happened! As to British manufacturing, lets face it, Britain never was very good at “making things.” I remember most appliances/cars/motorbikes made in Britain in the 70’s being unreliable.

      1. David Lilley says:

        Noo 2 economics

        I am honoured by your excellent but mistaken reply.

        Simon points out that GDP was up 0.3% in the period, ie. that there was no double dip. He adds that the onshore economy grew by 0.6% in the period. Which is an important observation but no more than an observation and not a cry for rebasing GDP.

        Simon’s observation was useful to me. I was of the view that a decade of leverage would be met by a decade of deleverage. The former considerbly enhancing GDP and the latter reducing GDP. That we are in growth, with or without the gift of offshore oil and gas, was wonderful news for me. But bad news for the likes of Stephanie Flanders and Megan (the guest economist on Jeff Randall Live tonight) both of whom continue to throw round the term triple dip when we haven’t had a double dip.

        On coal and Maggie.

        If Germany, Poland and Spain wished to subsidise our electricity prices with coal subsidies we should say thanks suckers. We certainly will not regret the loss of the NUM (“I want my members to have a Jaguar outside their home and a Mini for the wife”, a clean record of always getting what they wanted or the lights would go out).

        On British made tat.

        I agree with you here. Until the 60’s, if it was made in Britain it was quality, but not there-after. Japaness and German car manufacturers would exploit this by concentrating their ads on the number of inspectors they employed. Another leading bad-guy was the dandy Sir Michael Edwards, chairman of BL, who took us for £800m in bailout money on the promise that we would get the supermini. The supermini turned out to be the Metro.

  4. bernard says:

    Simon, you need to read more of Shaun’s blogs. These kind of extenuating circumstances (bank holidays, the wrong kind of snow) are exactly the kind of excuses for stagflation that he draws attention to.

  5. HarryA says:


    How can you justify the contractions in Q2 and Q4 as extraordinary due to the extra bank holiday and Olympics unwind respectively, without acknowledging Q3 as a positive blip due to the Olympics itself?

    Forget talk of double and triple dips. This is one big dip until we reach the peak levels again.

Leave a Reply

Your email address will not be published. Required fields are marked *