Industry brief: Pharmaceuticals

25 May 2004Oligopoly Watch

The profitable and growing pharmaceutical industry has been rapidly consolidating over the past few years. The Pfizer-Pharmacia merger is the latest move in this trend, as what were several dozen large companies consolidate into ten or fewer major companies. You can see that trend even in the compound names of a company like GlaxoSmithKline, which represents the consolidation of half a dozen companies, which a little more than a decade ago were all, separate. You can also see it company names like Novartis and Aventis, which are just made-up futuristic names of older, familiar companies.

Pharmaceutical companies are involved more than ever in politics, from drug pricing limits to cloning and from antiterrorism to African AIDS relief. It stands to reason that larger companies can swing more political heft, and have an influence on government health policies. In addition, the massive sales, advertising, research, and testing costs require companies with deep pockets.

There are other pharmaceutical firms, but more and more these companies exist by forming alliances for distribution and marketing with the big companies. They are slowly becoming research satellites of the drug companies.

All but one of the top ten firms showed growth in 2002, almost all at double digits. But that means companies with a lot of money, looking for deals. Another phenomenon has happened as more diversified companies have concentrated more and more on pharmaceuticals, and some have sold off units that deal with chemicals and agricultural products, pet care and general health care.

So expect the number of drug companies to be reduced soon. The Pfizer move indicates that antitrust authorities will put up with far larger firms. With Bristol -Myers-Squibb being the only top ten company to lose money, it is likely to be the next candidate for absorption. Wyeth looks vulnerable as well.

Is this a good or a bad thing? At least one source argues that the hundreds of drug mergers over the last decade have led the drug companies to pile on massive debt, over $300 billion. In turn, the companies to recoup that money have raised prices (over 15% a year in the United States), raising in turn the costs for hospitals and insurance programs. The price hikes are not going into researching new drugs or improving old ones.