{"id":116,"date":"2003-06-01T11:00:00","date_gmt":"2003-06-01T11:00:00","guid":{"rendered":"https:\/\/earlywithdrawal.net\/wizardsofmoney\/?p=116"},"modified":"2021-12-08T14:05:13","modified_gmt":"2021-12-08T14:05:13","slug":"part-16-theres-a-generic-in-my-shark-fin-soup","status":"publish","type":"post","link":"https:\/\/earlywithdrawal.net\/wizardsofmoney\/index.php\/2003\/06\/01\/part-16-theres-a-generic-in-my-shark-fin-soup\/","title":{"rendered":"Part 16: There’s a Generic in my Shark Fin Soup!"},"content":{"rendered":"\n
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\"podcast<\/a>
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This is the Wizards of Money, your money and financial management series, \nbut with a twist. My name is Smithy and I’m a wizard watcher in the Land \nof Oz. This is part 16 of the Wizards of Money series and it is entitled \n“There’s a Generic in my Shark Fin Soup!”\n<\/p>\n\n\n\n

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<\/a>Introduction<\/b> <\/h3>\n\n\n\n

In this, the sixteenth episode of the Wizards of Money, we’re going \nto take a look at the world of drugs – the legal ones, that is. The star \nof this episode is the only industry more profitable than the commercial \nbanking sector throughout the 1990s – and that’s the pharmaceutical industry, \nof course.\n<\/p>\n\n\n\n

We’ll start with a look at the recent wave of pharmaceutical mega-mergers \nand what’s driving them \u2026 from the ominous “Shark Fin Curve”, to the search \nfor the elusive “Blockbuster Drug”, to the need for ever more shelf space. \nThen we’ll look at the battles between the brand name drug companies and \nthe generic companies, governments, and the other big giants of healthcare \n– the managed-care companies.\n<\/p>\n\n\n\n

This journey through the shark-infested world of “legal drugs” will \ngive us a good look at the bizarre human behavior that results from allowing \nthe capital markets and the patented medicine model to dominate decision-making \nin one of the oldest of human pursuits\u2026finding remedies for human illness. \nAllowing this behavior to continue unfettered may very well end in the \ncapital markets giving themselves an incurable disease. For, while the \ncapital that flows into drug research and development is obsessed with \na couple of shark fins on the horizon, it is failing to notice the tidal \nwave swelling just over the horizon. This tidal wave is the global HIV\/AIDS \ncrisis, already striking at the very thing the capital markets need to \nsurvive.\n<\/p>\n\n\n\n

Far away, in the land where Shark-Fin soup is a high-priced legacy of \nImperial times, HIV\/AIDS is rearing its ugly head. As the epidemic rips \nin to China, will the US be able to continue its token level support for \nthis crisis of the developing world? Or will this threat to the labor force \nof a major trading partner provide the shock necessary to remind us that \nillness prevention and cure is, after all, a social service that does not \nfit well into the confines of 20-year patent monopolies. And will the exponential \ngrowth of HIV\/AIDS in Eastern Europe and the former Soviet states, right \non the doorstep of the European Union, wake up the rest of the West to \nthe need to either act now, or risk losing their global marketplace?\n<\/p>\n\n\n\n

Let’s get started with a discussion of what’s been going on in the world \nof patented drug monopolies.\n<\/p>\n\n\n\n

Predator-Prey Dynamics in the Drug Sea<\/b> <\/h3>\n\n\n\n

A July 16, 2002 article in “The Economist” announced the union of the \ntwo drug giants Pfizer and Pharmacia by opening “Depressed, bald-headed \nmen with erectile dysfunction should be especially pleased.” The companies \nthat make the world’s leading treatments for baldness, depression and Mothers \nNature’s way of telling gentlemen their reproductive years are over, have \ncombined to become the world’s biggest legal drug giant. The Pfizer-Pharmacia \ncombo boasts over $50 billion in annual drug sales and spends about $7 \nbillion a year on Drug R&D (Research and Development), plus another \n$3 – 4 billion on drug advertising.\n<\/p>\n\n\n\n

As in most industries, the capital markets drive the classic predator-prey \ndynamics of the pharmaceutical sector. You either eat\u2026Or you get eaten!\n<\/p>\n\n\n\n

The Pfizer digestion of the smaller Pharmacia, announced in July 2002, \nwas just the latest episode in the struggle to the top of the food chain. \nLet’s go back to 1995 when much of the mega-merger madness was just heating \nup. In that year, Glaxo Holdings gobbled up Wellcome Plc to form Glaxo-Wellcome. \nThe following year the Swiss drug giant Novartis was formed out of the \nmerger of Ciba-Geigy and Sandoz. 1998 saw the creation of Aventis out of \nthe fusion of smaller drug companies and AstraZeneca from Astra and Zenenca. \nAbout a year later Pharmacia & Upjohn thought Monsanto looked pretty \ntasty, so they swallowed them whole, only to spit out the controversial \nagribusiness piece in August of this year. Also in 1999 we saw Pfizer swallow \nWarner-Lambert. Glaxo-Wellcome and Smith-Kline-Beecham were fused together \nto form GlaxoSmithKline in 2000. And just when we thought the mergers couldn’t \nget any bigger – Pfizer and Pharmacia announced their merger, pending regulatory \napproval, in July 2002 to outsize GlaxoSmithKline, and become the biggest \nfish in the drug sea.\n<\/p>\n\n\n\n

And there are rumors of yet more drug mergers on the horizon!\n<\/p>\n\n\n\n

The modern pharmaceutical industry has its origins in the late 1800s \nwhen it became possible to mass-produce compounds such as morphine and \ncocaine. By the early twentieth century drugs and compounds were patented \nby various companies to protect their discoveries. A patent on a branded \ndrug or chemical gives the company a monopoly on sales of that chemical \nfor a specified period, enabling them to set high prices in the absence \nof competition. The argument for patent protection is that it enables the \ndeveloper to recover their investment in R&D plus a profit, hence providing \nincentive to private industry to find new cures. However, in order for \nthe company to lure customers into buying such a high priced product they \nalso need to spend a lot of money on advertising and marketing to convince \npeople that it\u2019s a very special product. There are many arguments both \nfor and against the patent model for pharmaceutical development and we \nshall revisit these later.\n<\/p>\n\n\n\n

Today, the brand name drug companies look nothing like their chemical \ncommodity predecessors of the 1800s. New products require large investments \nin R&D and take a long time to bring to market. The drug giants are \ndependent on patents, marketing and branding to make a profit. Consequently, \nthe pharmaceutical sector has more in common with the Hollywood movie industry \nthan with any public service provider – A new drug must become a profitable \n“Blockbuster”, or it’s not worth the effort to develop it.\n<\/p>\n\n\n\n

In contrast, generic drug companies spend comparatively little on R&D \nand advertising, existing primarily to compete for market share based on \nprice once a patent on a brand name drug has expired. Once such a patent \nexpires, generic companies can copy the drug and can afford to sell it \nat a lower price (as low as a quarter of the branded drug price) since \nthey don’t have as much R&D and advertising costs to recoup.\n<\/p>\n\n\n\n

After roaring successes and record high profit levels throughout the \n1990s, today we find that all is not well in the world of blockbuster remedies. \nAilments in the branded pharmaceutical sector include looming patent expiries \nand the resulting competition from generic companies, a drug R&D pipeline \nthat is drying up, and angry governments, corporations, consumers and managed-care \ncompanies tired of high drug prices.\n<\/p>\n\n\n\n

These common enemies are forcing all these unions amongst the drug giants \nwho hope that consolidation will allow them to do more of their two favorite \nthings at lower cost. These two things are (1) Advertise and (2) Produce \nBlockbusters. The future dangers to the general public of all this industry \nconsolidation, in terms of even higher drug prices and, more seriously, \nthe lowered ability of the pharmaceutical sector to respond to real illness, \nare not getting much attention. The latter is reflected not only in the \nuntreated epidemics haunting the developing world, but even here in the \nUS, with increasing reports of shortages of basic medicines and vaccines \nat many hospitals.\n<\/p>\n\n\n\n

These problems are all compounded by the fact that drug companies are \nfighting dirtier and dirtier to counter the ‘Attack of the Generics’.\n<\/p>\n\n\n\n

Attack of the Generics! Meet the Shark Fin Curve.<\/b> <\/h3>\n\n\n\n

A story in the Wall Street Journal in June of this year about the birth \nof the much touted heartburn drug Nexium gave many people their first good \nlook at the importance of the “Shark Fin Curve” haunting the pharmaceutical \nindustry. You must know the Nexium ads, with a bunch of middle aged folks \nstanding around in some canyons that presumably represent an eroded esophagus, \nall mumbling “I didn’t know, I didn’t know, I didn’t know”.\n<\/p>\n\n\n\n

Insert: Nexium Ad<\/i>\n<\/p>\n\n\n\n

Well, I bet they didn’t know this\u2026The only reason Nexium exists is that \nits predecessor, Prilosec, which is almost exactly the same – is coming \noff patent. It’s sliding right down the other side of the Shark Fin Curve. \nThis eroded esophagus business is all about making the new patented drug \nNexium seem different to the one that will now be copied by the generics.\n<\/p>\n\n\n\n

The Wall Street Journal article describes the Shark Fin Curve as the \nSales versus Time graph of a patented drug. It looks like an upside-down \n“V”. As soon as a patented drug is launched, revenues generated by it shoot \nup over time like the rising edge of a shark fin. But the minute it comes \noff patent they plunge just as quickly as they rose, as the generic companies \ncome in, copy the drug, steel market share and force prices to drop. We’ll \ntalk more about Shark Fins and eroded esophagi later when we look at some \ncase studies of how the big drug companies fight back against generic competition.\n<\/p>\n\n\n\n

During the roaring 90s the pharmaceutical industry always seemed to \nbe topping the charts as the most profitable. We are all familiar with \nthe Blockbuster Drugs who made this dream a reality and have become celebrities \nin their own right – there’s Viagra, Vioxx, Celebrex, Claritin, Nexium, \nPrilosec, Lipitor, Rogaine, Zocor, Zoloft, Prozac, Paxil and Lamisil – \nto name but a few. Some will be on patent for many more years but others \nare soon scheduled to come off patent. Many patented drugs are simply ‘me-too’ \ndrugs, designed to achieve the same effect as other patented drugs, but \nreally add little value to society as a whole. To overcome lost revenues \nfrom patent expiries and the me-too drugs, each drug giant needs a certain \nnumber of new blockbuster drugs emerging from the R&D pipeline every \nyear. Massive advertising campaigns are then designed to sell enough of \nthe drug at a high enough price to recoup the R&D and advertising costs \nplus a target profit level.\n<\/p>\n\n\n\n

But the big pharmaceuticals, much to their dismay, are finding that \nthe blockbuster drug cabinet is bare, even after throwing piles of dough \ninto the R&D bucket. Despite the extensive range of the silliness of \nthe illnesses for which blockbusters can be made to remedy, such as toenail \nfungus and hair shortfalls, big pharma is still finding that it can’t find \nenough new drugs to bring to market. This makes them more desperate to \nmaintain high revenues on existing patented products, so they pour more \nand more funds into advertising and into fighting the generic companies \nin court.\n<\/p>\n\n\n\n

End Result: Profits are down in the pharmaceutical industry and the \nnear future looks glum. And we get to see even more drug ads!\n<\/p>\n\n\n\n

Add to all this the following pressures on the drug giants:\n<\/p>\n\n\n\n