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Tool Vendors Unworried by Pharma Industry Woes; See Opportunities in Biotech Drugs

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
With a bevy of blockbuster drugs slated to lose patent protection over the next several years and a number of large pharmaceutical players cutting staff, life science instrument vendors could be facing a potential tightening of pharma spending budgets reminiscent of a couple of years ago.
The difficulties facing the pharmaceutical industry were laid bare last week in an article in The Wall Street Journal, which noted that generic drug competition could cut $67 billion in revenue from the top pharma firms between 2007 and 2012. The question facing life science tool vendors is whether this likely revenue decline will trickle down to them or whether an investment shift to more biotech-based drugs could spur sales of their instruments.
Officials from a couple of life science tool vendors, Waters and Agilent Technologies, are unfazed by the impending changes in the pharmaceutical industry. They pointed to a number of factors that could mitigate potential cuts in R&D spending by their customers and are likely to drive revenue growth instead.
“To look at it accurately, you have to look at it on a global basis, and you have to look at the total industry, which includes all of the big name pharmaceutical companies, as well as generic manufacturers, biotechnology companies, and CROs,” said Gene Cassis, vice president of investor relations for Waters.
“Superimposed upon this maybe sobering look at the industry we do see some bright spots … just based on this continued requirement to get more drugs in the pipeline and reliance on new technology to facilitate the development of these new drugs,” he told BioCommerce Week this week.
“Detailed analysis of restructuring announcements, expense-reduction plans, and in-depth discussions with our customers make us believe that investments are not reduced across the board,” Guenter Nill, general manager of pharma and biotech for Agilent, told BioCommerce Week via e-mail.
The day before the article in The Wall Street Journal, Bristol-Myers Squibb said that it would cut its workforce by roughly 4,300, or 10 percent of its global staff. The firm, whose blockbuster anticoagulant Plavix will lose patent protection in November 2011, also said that it would either shutter or sell about half of its 27 manufacturing plants over the next couple of years.
Bristol-Myers is just one of several large pharmaceutical firms that are in the process of cutting staff, with Pfizer, AstraZeneca, and Johnson & Johnson also laying off workers in anticipation of future revenue declines. Merck has been reducing its workforce since 2005, and said this week that it is nearing its goal of cutting 7,000 positions by the end of this year.
Pfizer is in the process of trimming 10,000 jobs as it expects to lose revenues from generic competition for its antidepressant Zoloft and blood pressure drug Norvasc.
A few years ago, when some of these pharmaceutical firms began their cutbacks, they also had tightened their R&D budgets, and the effect on the life science tools industry was noticeable among some of the major players.
But by the end of the third quarter of 2006, the consensus among tool vendors appeared to be that pharma spending had recovered somewhat during the year, but officials from several companies were cautiously optimistic and warned that pharma spending was not likely to return to the robust levels of a few years ago. That prediction remained throughout this year.
“I think it’s been a very gradual recovery so far,” said Thermo Fisher CEO Marijn Dekkers this past summer (see BioCommerce Week 8/1/2007). “Early on in 2005 it was a disaster. It started getting better in the second half of ’05, ’06 got better again, [and] ’07 is better again.
“But this, in my mind, is not an inflection point to the good old days,” he added. “That may come next year. I actually think, in listening to pharma companies, that they are confident that some of the issues will be behind them within the next 12 to 18 months, and that the companies will be operating more at a historical type of investment scheme.”
Pharma Spending Shift
Waters, in particular, struggled in 2005 and early 2006, but rebounded with a strong second half of 2006 and expects to report 14 percent revenue growth for 2007.
“I’m not sure to what extent the Waters business is a proxy for the analytical instrumentation space … [but] certainly we saw a major shift in the spending behavior of our pharmaceutical customers in 2005 and it caused us some consternation during that year,” said Cassis.
He said the firm’s rebound in 2006 coincided with a significant shift in its overall pharma business toward generics, contract research organizations, and smaller specialty pharmaceutical firms.

“Superimposed upon this maybe sobering look at the industry we do see some bright spots … just based on this continued requirement to get more drugs in the pipeline and reliance on new technology to facilitate the development of these new drugs.”

“Demand for more drugs associated with aging populations in the developed world and demand for better healthcare in the developing world is going to create a demand for more pharmaceuticals — and given the percentage of our business that is associated with production of pharmaceuticals, we think that that has healthy prospects going forward,” said Cassis. He said roughly half of Waters’ business in the pharmaceutical space is associated with the production process.
In addition, Cassis noted that all of the big pharmaceutical firms have been moving into biotechnology. Some are doing it through acquisition and others are doing it through licensing deals. Either way, the development of biologics opens up opportunities for vendors of analytical instrumentation because biotech drug synthesis is more complex, he said.
“We feel that in order to facilitate a world where biosimilars and biogenerics actually get commercialized, you are going to have to have technologies in place that characterize not only the active ingredient but the whole suite of potential impurities associated with the particular bioprocessing technique,” said Cassis.
Biologics discovery and production are expected to continue to grow as pharmaceutical firms move away from traditional chemical-based drugs, and comments from Bristol-Myers suggested the firm would actively pursue biotech drug development despite its cost-cutting measures.
“While we are reducing headcount in certain functions, we will continue to invest in R&D, biologics, and commercialization talent," Bristol-Myers CEO James Cornelius said in a statement last week.
“Industry is focusing their investments to accelerate discovery of new drugs and accelerate development of new drug candidates, to focus on developing biologics and structuring partnerships to fill their product pipelines quickly and efficiently,” said Agilent’s Nill.
He said pharma firms also were directing their investments to gain access to high-growth geographic markets and local talent by establishing subsidiaries or partnerships.
Agilent CEO Bill Sullivan said during a conference call last month that the firm saw “strong demand” from the pharmaceutical market in its fourth quarter ended Oct. 31 (see BioCommerce Week 11/21/2007). He said that although the firm doesn’t have an outlook specific to US pharma spending in 2008, “it is our expectation … that the investment around the world in pharma and biologics will continue.”
Nill added this week that Agilent’s “outlook into 2008 has not changed in light of the recent announcements, as some of the developments  — downsizing of organizations, restructuring, and off-shoring of activities — already started in 2006 and 2007 or, at least, were on the horizon this past year and were taken into account when formulating our 2008 plans.”
Like Waters’ Cassis, Nill noted that generic pharmaceutical companies have become an increasingly important customer base for Agilent, and in response the firm has strengthened its offerings in bioavailability testing and quality control/quality assurance.
In addition, he said, “Other segments will contribute to strengthening our business, for example, new research and development facilities established by big pharma in other geographies, [such as] Asia Pacific,” as well as CROs and contract manufacturing organizations.

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