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Wednesday, April 23, 2014

Big Pharma Deals Could Reshape Drug Industry

Swiss drug maker Novartis is buying British company GlaxoSmithKline’s cancer drug business for up to $16 billion.

Novartis is also selling its vaccine business to GlaxoSmithKline for around $7 billion. And the two pharmaceutical giants are forming a joint venture consumer drug business.

These moves, along with some other recent deals in the pharmaceutical business, could reshape the entire drug industry, according to analysts.

Oliver Staley of Bloomberg News joins Here & Now’s Jeremy Hobson with details.

Guest

Transcript

JEREMY HOBSON, HOST:

This is HERE AND NOW.

And now to some big news in drug industry. The Swiss drugmaker Novartis is buying the British company GlaxoSmithKline's cancer drug business for as much as $16 billion. Novartis is also selling its vaccine business to Glaxo for around $7 billion. And the two companies are forming a joint venture consumer drug business. The news came yesterday, and analysts are saying it's part of a larger shakeup that is reshaping the entire industry and could have big implications for consumers.

Oliver Staley is a reporter for Bloomberg News. He's with us from the Bloomberg newsroom in London. And, Oliver, why are these changes happening now?

OLIVER STALEY: Well, there's a couple of reasons. The first, and probably the largest, is a lot of these companies are facing the expiration of drugs that have been protected by patents. These patents are expiring, and so they're facing the loss of revenues, so they're searching for new profits. The other reason is they're facing increased pressure on prices. Insurance companies and governments who are the largest buyers of drugs are unwilling to keep on accepting price increases. So as the companies are getting squeezed, they're trying to find more efficient ways of making money.

HOBSON: And we should say, when you say that they're facing the expiration of these patents, what that means is that generics can come in and compete with essentially the same drugs.

STALEY: Exactly. And so, for some companies, you see a pretty dramatic drop off in the profitability of those drugs. When they had the control of the patent, they could sell a drug, you know, for example, Lipitor, which was Pfizer's big seller. It can sell for $11 billion a year, and then it falls dramatically down to something like 2 billion a year.

HOBSON: So why does it help a company that is facing that kind of loss in profit to go and get together with another company's cancer drug business, for example?

STALEY: Well, so what they're doing is finding what they're good at and getting rid of the things they're not good at. That means they are more efficient, and they get rid of, sort of, lower-performing units. It also means that you can't be all things to all customers anymore. It used to be you could have the third, fourth or fifth-best drug in any category and still count on insurers and governments buying it. You can't get away with that anymore.

HOBSON: So you're saying that a company like Novartis may just be the cancer drug company?

STALEY: Well, there'll be a couple of things, but they won't be - they'll have three or four specialties instead of nine or 10 specialties. And I think that's what you're seeing across the board.

HOBSON: Tell us about this joint venture consumer drug business with Glaxo and Novartis. What's the idea there?

STALEY: Those are consumer products like toothpaste, eye drops, Excedrin headache pills. And those are kind of low-margin, high-volume businesses. So the idea is to get as big as possible. And by combining, they'll be the second-largest consumer products health care group after Johnson and Johnson, and they'll be the largest seller of over-the-counter drugs. And so the idea is that they're combining their strengths. Both of them believe they have strong brands, and so they're holding onto them by creating a new company to profit from them.

HOBSON: Now, if an average American consumer is listening to this and wondering, what does this mean for me? I think the consolidation, for example, in the airline industry. When airlines get together, prices go up. That's just what has happened over the last several years. Is that what's going to happen now with drugs?

STALEY: Yeah. Well - I mean, first of all, from the baseline, drug prices rarely go down. So I think we can assume that the drugs will continue to get more expensive. But, you know, I think you're right. I mean, one of the concerns I've heard expressed about this deal is that, as companies shed units that are less profitable, they won't be competing them anymore. And less competition, as you say, usually results in higher prices. It also may mean less innovation, and the drugs are basically an innovation business. And if you have less scientists working on cancer drugs or other important diseases, then you may - we may have fewer options for solving these diseases in the future.

HOBSON: You're saying, even if a company like Novartis buys up the cancer drug business for GlaxoSmithKline and spends billions of dollars on it, that there are indeed - their innovation could go down?

STALEY: Glaxo's may. Now, Glaxo says they're going to continue. They have a team, and a successful team that has developed the oncology drugs that Novartis is buying. And so they say they will continue to develop those cancer drugs. But in others, there may be cases where the company simply shed those divisions, seeing them - if they're not going to be able to market them, they may not want to be developing them.

HOBSON: Are you expecting more big deals like this in the industry, going forward?

STALEY: Yeah. I think the trend certainly looks like we're going to see other companies shedding the units that aren't core of their earnings. Merck, for example, also has a consumer products division that they're trying to sell. And we've heard of - there are some rumors of some fairly big merger and acquisitions out there, and we've reported that Pfizer talked to AstraZeneca about buying the company - all of the company, which would be huge, a potentially 100 million - 100 billion, excuse me, deal.

So remains to be seen if it's going to happen, but there's a lot of talk out there. And yesterday certainly was as an exciting day in the business world.

HOBSON: Oliver Staley, reporter with Bloomberg News in London talking with us about some big deals in the pharmaceutical industry. Oliver, thanks.

STALEY: Thank you. Transcript provided by NPR, Copyright NPR.


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