StreetTalk: Trends to Watch in 2005

I just hate predicting the future. To paraphrase Woody Allen on death, there's just no future in it. Those who try to gaze into their crystal balls and tell us what they see are just kidding themselves. As Peter Drucker once said, "We know only two things about the future: It cannot be known, and it will be different from what exists now and from what we now expect." Translated: Predicting the future is for suckers.

Brian O’Connell

But even Drucker admits a forward-looking vision — studying the themes that will frame an industry going forward — makes good business sense. "It is futile to guess what products the future will want. But it is possible to make up one's mind what idea one wants to make a reality in the future and to build a different business on such an idea."

Make your own reality in the future . . . now there's an idea I can get behind. For the biopharm sector, making your own reality should be a top priority. But first, you have to know what trends are likely to gain strength as the new year progresses.

Here's my stab at what will really matter in 2005. Not predictions, per se, but themes and issues that should rise to the top of the industry this year.

Combination drugs. Some industry observers liken combo drugs to Reese's Peanut Butter Cups. The idea behind combo drugs is that two drugs work better than one. If Pfizer combines torcetrapib and Lipitor, the chances of that product doing a better job of boosting good HDL cholesterol and reducing bad LDL cholesterol could be exponentially higher. Pfizer sure thinks so. It's spending $800 million on the new combo drug. According to the industry research firm Greystone Associates, combination drug delivery products are growing at an annual rate of 14% and will total $38 billion in 2008. The company reports that growth will be led by inhalation devices, including intranasal and pulmonary systemic therapeutics. Transdermal delivery — in particular drug patches capable of delivering two or more drugs and patches based on microneedle technology — will also contribute significantly.

Pharma stock no longer a safe haven. When foul weather hits Wall Street, investors tend to go where it's dry. For years, the pharmaceutical sector has provided a safe haven for investors beaten about by brutal conditions in other sectors. I'm not so sure that will be the case in 2005. FDA's demand for stronger "Black Box" labeling on certain drugs, especially antidepressants, sends a sour message to investors who treat government interference like Shaquille O'Neal treats point guards driving to the hoop. The flu-vaccine "vacuum" crisis won't sit too well with investors, either. Too many vaccine developers have disappeared from the marketplace, driven out by low profit margins and, yes, more government interference. Then there is the Vioxx mess. The removal of Merck's COX-2 inhibitor due to an alleged link between the drug and cardiovascular disease drew high-profile media attention that neither Merck nor the drug industry wanted or needed. That leads to volatility and the stock market hates volatility.

Bye-bye blockbusters? Will the Vioxx debacle help drive companies away from producing blockbuster drugs? Probably not. After all, 67 drugs sold more than $1 billion worth of product in 2003. Experts say that the number of similar monster drugs will rise to over 100 by 2007. But a growing number of biopharm firms are thinking small, and a slew of manufacturers are redirecting resources to vertical niche markets. For example, the outlook for cancer therapies Gleevec (imatinib) and Avastin (bevacizumab) is great — don't think investors and industry marketers won't notice.

Fast boat to China. Okay, we've all heard how the formidable Chinese economy is going to put the US to shame within 20 years. Given the US's technological headstart, along with its deep pockets and knowledgeable workforce, fat chance. But what China does offer the biopharm sector in abundance is opportunity. Right now, China only comprises a little over 1% of the global pharmaceutical market, but with hundreds of millions of potential customers, China will be an attractive venue for biopharm companies in 2005. However, one sticking point is China's reluctance to play along with Western copyright protection rules (it recently ruled against protection for Pfizer's Viagra). This might give companies pause — but not much. India, with it's more flexible copyright protection policy, could also take center stage in 2005.

"Vanilla" drugs. Last year I devoted a column to the issue of generic drugs. It's an issue that's only going to grow more heated in 2005. Health plan bureaucrats are already ordering more and more patients to use generic drugs before they try pricier brand-name prescription drugs. Studies show that generics account for almost one-third of the global drug market. And, in 2003, the growth of generic drug sales outpaced brand-name drugs by 24% compared to 8%. As more brand-name drugs go off patent in 2005, look for generics to generate an even deeper impact on the market this year.

Heftier health insurance payments. Older Americans may remember the salad days of American healthcare when insurance paid for just about everything and there were no deductibles, coinsurance, or copayments. Now, those days are only lingering memories. Americans are doling out $1.4 trillion dollars each year for healthcare — 14% of our current GDP. By 2010, that figure could rise to $3 trillion dollars, or 17% of our total national output. These days, the healthcare industry has shifted to a cost-sharing payment platform where consumers pay a portion of the costs, either in the form of coinsurance or copayments. Advocates say that cost sharing is a big factor in managing healthcare costs. As issues like generic drugs and flexible spending accounts for healthcare rise to the top, expect consumers to look for more ways to keep a lid on their healthcare costs.

Rise of nutraceuticals. According to Stephen L. DeFelice, M.D., who coined the term nutraceutical in the mid-1990s, the nutraceutical revolution is leading us into a new era of medicine and health. He defines a nutraceutical as "any substance that is a food or part of a food and provides medical or health benefits, including the prevention and treatment of disease." Many scientists aren't so sure about the health benefits of nutraceuticals, but what cannot be denied is the surprising growth of the industry. The US nutraceutical market grew from $19.9 billion in 1998 to about $27.5 billion by the end of 2003, according to the business consulting group Datamonitor America. In an increasingly "do-it-yourself" culture, Americans are warming to the idea of treating their health maladies on their own, just as they would rent their own hotel room on Priceline.com. The biopharm industry could lose market share to the nutraceutical industry.

The importance of marketing ROI. A key in 2005 — okay, in any year — is for biopharm companies to find ways to do more with less. Count on corporate bean-counters to hog-collar their marketing directors and ask them to create campaigns that are highly targeted and more customer-centric but also more effective and cost efficient. Call it "marketing ROI," a way for firms to cut costs in an industry grappling with the effects of looming patent expirations, weakening product pipelines, increasing generic competition, and tightening regulations.

As noted above, these aren't predictions — only educated guesses at what issues will rise to the top in 2005. I'll leave the predictions to the crystal ball crowd.

Brian O'Connell is the celebrity author and business/finance commentator for CNN and Fox News, has written for The Wall Street Journal and Newsweek, 79 Radcliffe Drive, Doylestown, PA 18901, 267.880.3144, fax 267.880.1939,brian.oco@verizon.net