Investment in big pharmaceutical companies used to be as dependable as aspirin. Now the industry faces great challenges and its business model - inventing and selling "blockbuster" drugs - is under pressure.
GlaxoSmithKline, the world's second-largest pharmaceutical company in terms of market share with 7% and a market capitalisation of £106bn, is still learning lessons from a changing marketplace.
The new giant is the result of a megamerger last year between Glaxo Wellcome and SmithKline Beecham.
The merged company makes and sells pharmaceuticals (mainly prescription drugs and vaccines) and consumer health care (over-the-counter medicines, oral care and nutritional products).
The research development capability of the merged giant is now one of the industry's most powerful and it has one of the largest sales and marketing operations .
It needs that power. "It costs about US800m to get a new chemical entity into the market," says SA GlaxoSmithKline's medical director, Peter Moore. "Only one in every 10 000 gets that far."
Drug makers' spending on research is up almost 60% since 1996 to $26,5bn this year.
But they can't afford inventor's block. "We have to continuously come up with new drugs to ensure a steady revenue stream as patents expire," says Moore. "And we don't want me-too' drugs or copies."
Improving technology and knowledge in the area of genetics will boost R&D capabilities. Glaxo Wellcome and SmithKline Beecham bring different strengths to this area. " The science will tell us how to use existing drugs better," says Moore.
The company has 25 new drugs and 17 vaccines in clinical development, half of which are in late-stage development.
Its portfolio is built on six core products, with more than $1bn in global sales: Aropax for depression; Augmentin, an antibiotic; Flixotide/Flovent for asthma; Seretide/Advair for asthma; Imigran/Imitrex for migraine; and Avandia for diabetes.
New products represent 22% of total pharmaceutical sales and grew at 48% at constant exchange rates to more than £3,7bn in 2001. GlaxoSmithKline is the world leader in three key therapy areas: anti-infectives, and respiratory and central nervous system products.
Last year, the company posted profit before tax of £4,5bn, down from £6bn in 2000, including the costs of the merger. But measured on business performance and excluding nonrecurring costs, Glaxo showed a 13% increase in sales and boosted pre-tax profits by 16% to £6,2bn.
The company has a current R&D budget of more than £2,4bn (4bn) , but the depreciation in the rand has affected SA business. "All drugs manufactured here have raw active ingredients which are imported," says Moore. "But our earnings are rand-based."
The sorry state of medical aid schemes in SA (see pg 283 ) is another problem for pharmaceuticals here. Schemes are encouraging the use of generic brands instead of more expensive patented ones. "We need to collaborate with medical schemes to provide effective and affordable treatments," says Moore.
The uncertainty around intellectual property rights is also a nagging threat for Glaxo. This is its lifeblood. Most patents expire after a number of years and other manufacturers are free to produce generics. Revenue streams could dry up overnight, so the business model is based on milking as much profit from a drug as possible while it can.
Take Aids, for example. Glaxo has a 40% share of the global market of HIV/Aids medication. Trizivar, a new triple combination drug, has been the main driver of growth in this market. Combivir is still a cornerstone in the treatment of Aids, and last year growth in sales was 5%.
But after public pressure began to mount on pharmaceuticals to provide cheaper treatments to developing nations, Glaxo began talks with the SA government in 1997 . Last year, the company offered all antiretrovirals to nongovernmental organisations, government departments and large employer groups at cost price.
The company is in the final stages of talks with the mining sector and NGOs, but government is still undecided about how to deal with the Aids crisis.
What Glaxo doesn't want is uncontrolled distribution of cost-price antiretrovirals. The company has already granted a voluntary licence on AZT and Combivir to local pharmaceutical manufacturer Aspen Pharmacare. "We recognise we have a responsibility and a commitment to the developing world," says Moore.
SA also provides a unique patient population to run pilot studies of antiretrovirals. These patients are referred to as "naive", not because they are unaware of what drugs they are taking, but because they have never been exposed to other therapies.
Testing tuberculosis and malaria drugs is also important to the SA subsidiary. The company runs a R300m research programme for TB.
But while big pharmaceutical companies such as Pfizer, Bristol-Myers Squibb and American Home Products have sold off lower-margin businesses such as personal hygiene products to focus on developing profitable drugs, Glaxo still has a large health-care consumer division. This makes many international and SA brands, such as Eno, Aquafresh, Lucozade and Horlicks. The financial director of the consumer health-care division, Kevin Hayes, says the division did well last year despite increased pressure on consumer spending.
"We're focusing on line extensions of the products we already have," says Hayes.
Because the consumer products are so diverse, ranging from beverages to toothpaste, Glaxo outsources the more specialised manufacturing processes.
"We import many components for our big brands, though, and the exchange rate has hit us hard," says Hayes.
Competition from sports energy drinks such as Energade, produced by Cadbury Schweppes, has put pressure on Glaxo's Lucozade health drink.
"Instead of price, we prefer to focus on innovation, packaging and quality to grow our market share, especially in products where we already have a large proportion of the market," says Hayes.
The division's importance will grow, as it allows Glaxo to seize "switch opportunities" for pharmaceutical products at the end of their patents. "When prescription drugs switch to over-the-counter medicines, the resources and marketing expertise of the consumer health-care division are used," says Hayes. "This allows us to compete on brand power against generics."
The merger should bring the company cost savings of about £250m, to be reinvested in R&D.
Nobody can be sure which pharmaceutical company will hit the next jackpot, but investors are still backing GlaxoSmithKline.