Problems Faced by Big Pharma and Their Solutions
Since 2000 the Stock market valuation of the ‘Big Pharma’ companies has dropped sharply. Discuss the causes of the pharmaceutical industry’s current problems and steps that companies are taking to tackle them.
By Ali Asgar Kagzi
In 1990s, pharmaceutical companies were one of the leading shareholder value creators at the stock market. By 1998 the P/E ratio of the Big Pharma companies was twice that of the global stock market and there was a sudden rush among the investors to have a share of the Pharma pie. But according to the Harvard Business Review, May 2008, from December 2000 to February 2008 the top 15 companies lost approximately $850 billion in shareholder value and the price of their shares fell from 32 times earnings, on average, to 13. This suggests that something went gravely wrong. The following sections would highlight the reasons responsible for the industry’s tumble on the stock market and the steps the pharma companies have been taking to gain back their profitability and reputation.
Though the use of drugs dates back to the 9th century, the pharmaceutical industry came into existence only during the later 19th century. Minimal research was conducted using primitive methods and little development occurred till the mid 20th century. The discovery of Penicillin by Alexander Fleming in 1928 was a major breakthrough. But it was not produced commercially and was used mainly for the purpose of carrying out laboratory experiments. The widespread use and development of Penicillin during the World War II opened new avenues for the pharmaceutical industry. The conditions after the World War II further facilitated the industry’s development. The war exposed many diseases for which no drug existed, thereby providing ample opportunities for research and development. Additionally, public awareness and support for health related research boomed and public funding increased dramatically. The period from 1950 – 1990 can be termed as a golden period for the
By Ali Asgar Kagzi
In 1990s, pharmaceutical companies were one of the leading shareholder value creators at the stock market. By 1998 the P/E ratio of the Big Pharma companies was twice that of the global stock market and there was a sudden rush among the investors to have a share of the Pharma pie. But according to the Harvard Business Review, May 2008, from December 2000 to February 2008 the top 15 companies lost approximately $850 billion in shareholder value and the price of their shares fell from 32 times earnings, on average, to 13. This suggests that something went gravely wrong. The following sections would highlight the reasons responsible for the industry’s tumble on the stock market and the steps the pharma companies have been taking to gain back their profitability and reputation.
Though the use of drugs dates back to the 9th century, the pharmaceutical industry came into existence only during the later 19th century. Minimal research was conducted using primitive methods and little development occurred till the mid 20th century. The discovery of Penicillin by Alexander Fleming in 1928 was a major breakthrough. But it was not produced commercially and was used mainly for the purpose of carrying out laboratory experiments. The widespread use and development of Penicillin during the World War II opened new avenues for the pharmaceutical industry. The conditions after the World War II further facilitated the industry’s development. The war exposed many diseases for which no drug existed, thereby providing ample opportunities for research and development. Additionally, public awareness and support for health related research boomed and public funding increased dramatically. The period from 1950 – 1990 can be termed as a golden period for the
References: 1. Business Standard, Tatas’ Advinus to break even this year, October 2, 2008, http://www.business-standard.com/india/storypage.php?autono=336130 2 15. The Guardian, Drug Companies: Big Pharma besieged from all sides, August 30, 2008 http://www.guardian.co.uk/business/2008/aug/30/pharmaceuticals.medicalresearch