Biotechnologyistechnology based onbiology,agriculture,food science, andmedicine. Modern use of the term usually refers togenetic engineeringas well ascell andtissue culturetechnologies. Biotechnology has applications in four major industrial areas, including health care (medical), crop production and agriculture, non food (industrial) uses of crops and other products (e.g.biodegradable plastics,vegetable oil,bio-fuels), and environmental uses. For this report, we have chosen to look at how the recession has affected the pharmaceutical industry.
The global pharmaceutical industry is a multibillion dollar industry that is a highly regulated, capital intensive, and which is driven by large research and development expenditures. The major firms in the industry are privately owned and the industry is highly dependent on technology. The worldwide pharmaceutical market is forecasted to grow to US$ 842 billion in 2010. The strong growth in the ten European markets that joined the European Union in 2004 will help to boost European sales over the next five years, as a result of deregulation of markets and a wider pool of potential customers. The competitiveness and intense rivalry within the industry is such that in 2005, there were sixteen blockbuster drugs generating combined revenues of US$ 18.1 billion.
Recession and the Pharmaceutical Industry
The world is going through a difficult time as we write. Recession has hit all sectors of the global economy and all industries along with it are affected by this. This has created high business, political and social uncertainty, and this uncertainty has become embedded in all business sectors. The unprecedented scale of such a financial crisis has not been experienced since 1930s. The year 2008 was scarred by volatility and uncertainty in the global financial environment. The consequences of the financial crisis have caused severe inflationary pressures on business activities all over the globe. Such an environment has generated deteriorating conditions even for the pharmaceutical industry.
Historically, the pharmaceutical industry has been relatively immune to the downswings of the global economic cycle, because basically illness, which provides the opportunities for these pharmaceutical companies to create and produce drugs, doesn't take a vacation. But, with the current recession, investment confidence has dropped and therefore financial support will decrease as investors are often reluctant to invest in biotechnology companies. This is as a result of more attractive industries like natural resources such as oil, gas and mining. Therefore, it is expected that the type of pharmaceutical companies that will be most affected by the reduced availability in financial investments will be the early stage pharmaceutical companies, who need funding for research and development or the building of facilities.
For this report, we have chosen to analyse the impact of the recession on the pharmaceutical industry, by analysing the effect the recession has had on two companies namely, Amgen Inc. which is a large company and Atherogenics Inc which is an early stage company. We hope that this will paint a picture of the impact on the industry as a whole.
Using PEST analysis, we will show how the global recession has impacted upon the macro environmental factors of the pharmaceutical industry, and in turn, how these factors have affected the firms and thus the industry as a whole.
- Political- The recession has led to ramped up Governments pressure on pharmaceutical companies to lower their prices. Leading drug makers have been pressured to, and have reduced prices of key products, such as medications to treat chest pain, anxiety, allergy and diabetes. These drugs have therefore become cheaper by between 2 percent and 39 percent. In the US, uncertainty has been created in the industry by the push of the government to reduce prices in Medicare's prescription drug program, this, will allow generic versions of expensive biotechnology drugs to be made available to uninsured Americans. This will cause the use of medications to grow, but the lower prices will mean that the companies are not making as much as they would like to.
- Economical- In the middle of 2007,as the world was realizing the strong likelihood of a global recession the US dollar was seen as a safety reserve for foreign currency investment. So this led to the dollar rising up in price to highs of 1.58 USD against the Euro from 1.33 USD in early 2007 as investors flocked to buy the dollar. This meant that practically overnight it became more expensive for European and Asian consumers of American pharmaceutical products, to buy these products as they just couldn't afford it.
- Social- The recession has led to historically high levels of unemployment, in the United States alone the unemployment rate is at a 26 year high of 9.7%. The increase in unemployment and the rise in savings, as consumers have less disposable income, have led to a fall in global consumer spending patterns on drugs amongst other products this has in turn led to a fall in revenues generated from drugs. Major firms such as Johnson and Johnson, GlaxoSmithKline and Amgen, have had to layoff thousands of staffs as a result of this. CEO of Johnson and Johnson said consumer demand won't pick up until unemployment eases and people become less cautious on spending. Consumers are more aware of the happenings in the pharmaceutical industry now more than ever, and in turn, some consumers have opted to go for cheaper more generic branded drugs.
- Technological- The recession led to a credit crunch, which means that major financial lenders where not willing to lend companies money as they too, needed the funds to secure their business survival and also, the uncertainty as to whether they where going to get their money back or not. For a pharmaceutical company, whose life blood is dependent on very expensive research and development, this brings about a serious problem. The lack of credit in the market means that companies do not have the extra cash they need to carry out research on possible new drugs. These drugs may be urgently needed in the society as a result of epidemics such as swine flu etc, and a delay in research because of lack of funding can prove to be dangerous for a firm, not only in terms of profits, but also in terms the cost to human lives.
Amgen is an international biotechnology company, headquartered in Thousand Oaks, California. Originally founded in 1980 as Amgen (Applied Molecular Genetics), Amgen pioneered the development of novel and innovative products based on advances in recombinant DNA and molecular biology. Today, Amgen is a Fortune 500 company whose business has expanded to serve patients around the world and was once ranked the 4th on the S&P 500 by Business week, saying to be the most ''future-oriented'' firm. Amgencontinues to sustain a culture rooted in biotechnology entrepreneurialism and innovation. As a science-based company and patient-focused organization,they aim to follow science wherever it may lead, to best treat serious illness.
The recession led Amgen in august 2007 cut staff by 12- 14 per cent as a result of to lower revenues from its anti-anemia drugs. It also decided to reduce its expenditures by $1.9bn in 2008. This resulted in reduced research and development expenditure, and the closure of major drug manufacturing plants in the United States. Amgen stock was one of the best performers in 2008 on the S&P500, rising 24 percent as the S&P500 fell 38% in the midst of the worst financial crisis.
In 2009, Amgen Inc share prices fell by 2.7%, because the revenues from almost all of its key drugs fell short of Wall Street estimates. The company lowered its 2009 revenue forecast, becoming the latest big drug maker to blame the recession for disappointing earnings. The company decided to go towards further layoffs during July 2009. The layoffs meant that an organization with 17000 employees left 101 employees jobless.
Strengths and Opportunities- Amgen has spent decades building up its business into one of the most successful pharmaceutical companies in the world and therefore has a reputable brand name. A brand name that says quality and it can use this as weapon when sourcing for finance in this tough economic climate. Although credit is hard to find, it doesn't mean that there isn't any credit left in the market, and therefore the little that is available, Amgen is in a stronger position, because of its brand name, to get it. Secondly, because of its strong cash flow position, the company can take advantage of weaker early stage pharmaceutical companies, who are struggling to stay afloat and need a financial life line. Amgen can either buy these companies out right, and take advantage of their niche products, or collaborate with them and in turn share the benefits they have to offer. This may be in terms of new drug development or research and development knowledge.
Weaknesses and Threats- Amgen and other US based pharmaceutical companies are facing increasing manufacturing costs, as opposed to their counterparts in Asia and South America. As these costs are getting higher, the patent protection laws are getting shorter, which means that when firms like Amgen spend lots of money to create drugs, the benefits of their patents run out in just a couple of years, as opposed to previous years. The threat from emerging economies mean that generic drug manufacturers, especially those in emerging economies are taking advantage of this and producing drugs in mass quantities as soon as the patent expires, in order to serve their ever consuming population. The scale of this in recent years is greater than previous years, as a result of increased deregulation of global markets.
An American research oriented pharmaceutical company, based in Alpharetta, Georgia, U.S.A., founded by Russell Medford, R. Wayne Alexander, and Michael A. Hones, in 1993., focused on 'discovery, development and commercialization of pharmaceutical products for treatment of chronic inflammatory diseases'. The company had no present product in the market but had been developing a key drug - AGI-1067, claimed to reduce results of heart attacks and strokes during clinical trials and a very possible cause for the downfall and bankruptcy of AtheroGenics Inc.
AtheroGenics Inc. and AstraZeneca Pharmaceuticals entered a worldwide collaboration in December 2005, aiming to cover expertise in R&D resources and commercialization of AGI-1067
In March 2007, AtheroGenics reported that the Phase-3 trial of AGI-1067 in which more than 6100 patients were involved did not show any positive results. Following the news, the company stock plummeted about 61% to $3.09 a share. The failing of the drug and the lack of investment funds in the market, which the firm needed to continue further research into AGI-1067 and other drugs led to AstraZeneca, ended its collaboration with AtheroGenics, in April 2007.
In May 2007, AtheroGenics had to cut down its workforce by half to 67 employees as part of its new strategy of streamlining its operations to carry out research for its drug AGI-1067, causing share price to fell almost 95%. The mounting pressure from the market led to the Chief Medical Officer Rob Scott resigning in 2007.
In December 2007, AtheroGenics received delisting notice from NASDAQ as share price reached as low as 39 cents and failed to comply with the minimum bid price requirement for continued listing.
In September 2008, shareholders filed petition putting AtheroGenics into Chapter 7 bankruptcy liquidation as investors lost confidence in company as it was incurring losses one after the another. AtheroGenics posted a $49.5 million loss in 2007; similarly in 2nd quarter of 2008, a $14 million loss. In March 2009, AtheroGenics entered into an agreement to sell its assets to Crabtree Acquisition Co., a former board member/investor, for $2 million.
SWOT analysis for Atherogenics
Strengths and Opportunities- Atherogenics had a strong research and development team, and a committed management team, who believed in their new product and was able to sell the idea to a very large pharmaceutical company, namely AstraZeneca. The collaboration allowed it access to funding from this large firm, in order to produce its core and only drug. If it succeeded, it would have also had access to the distribution channels of AstraZenca, therefore being able to get its drugs to the market faster and more efficiently than it would have done, on its own.
Weaknesses and Threats- One of the main weaknesses Atherogenics had, was its inability to research on the economic environment, before it started its clinical trials. If a drug fails in clinical trials, that is likely the end of that drug, but not necessarily the end of the company as whole, even though that was their only drug. The life line of pharmaceutical companies such as Atherogenics is cash flow, in order to carry on researching on further drugs. As an early stage company, Atherogenics could have secured better longer term finances in case its drugs didn't pass clinical trials, so that it can have a lifeline for further research into that drug, or possibly other drugs.
Conclusion and Recommendation
It is not that pharmaceutical industry has escaped the recession; there is certainly a decrease in growth but not ruthless decline. The sector is not as severely hit as the banking and financial sector or the automotive sector.
The companies that are surviving the recession should take advantage of the fact that Global healthcare spending is definitely going to expand as the life expectancy has grown. Long lived consumers will increase the demand for pharmaceutical drugs. The growing population of the world, combined with chronic diseases will ensure continued growth of the pharmaceutical industry.
Pharmaceutical companies are also focusing on merger activities with biotechnology firms. Present economic downturn has given an opportunity or big pharmaceutical companies; to focus on smaller, more niche companies, in order to boost their research and development talent pool.
During the economic downturn pharmaceutical companies are also facing challenges from generic drugs, expiry of patent of some of their blockbuster drugs.
It seems that this tough time is here to stay for all the industries including pharmaceuticalsector, but the silver lining is that healthcare spending is going to increase. This will help pharmaceutical companies in growing and.
- AstraZeneca ends partnership with AtheroGenics (2007, Apr 23). Atlanta Business Chronicle at http://atlanta.bizjournals.com/atlanta/stories/2007/04/23/daily1.html
- AtheroGenics: Drug trial fails to meet end point (2007, Mar 19). Atlanta Business Chronicle at http://atlanta.bizjournals.com/atlanta/stories/2007/03/19/daily2.html
- AtheroGenics eliminates 50% of jobs (2007, May 25). Atlanta Business Chronicle at http://atlanta.bizjournals.com/atlanta/stories/2007/05/21/daily35.html
- AtheroGenics reports ARISE Trial results for AGI-1067 (2007, Mar 19). Bio-Medicine at http://www.bio-medicine.org/medicine-technology/AtheroGenics-Reports-ARISE-Trial-Results-for-AGI-1067-1241-3/
- AtheroGenics seeks Chapter 11 (2008, Oct 7). Atlanta Business Chronicle at http://atlanta.bizjournals.com/atlanta/stories/2008/09/22/story13.html
- Moraity, E. (2005, Dec 22). Licensing deal could bring AtheroGenics $1 billion. Atlanta Business Chronicle at http://atlanta.bizjournals.com/atlanta/stories/2005/12/19/daily20.html
- Urvaksh, K. (2008, Apr 25). AtheroGenics captains boosted as ship rocks. Atlanta Business Chronicle at http://atlanta.bizjournals.com/atlanta/stories/2008/04/28/newscolumn4.html
- Urvaksh, K. (2009, Mar 27). AtheroGenics to sell assets to investor for $2M. Atlanta Business Chronicle at http://atlanta.bizjournals.com/atlanta/stories/2009/03/30/newscolumn5.html