Ernst & Young experts say the acquisitions by biotechnology companies are signs of the pressures of success. These challenges of success will drive even more deal activity in the years ahead. Of the biotechnology CEOs surveyed by Ernst & Young, 99% of Americas CEOs and 87% of European CEOs plan to enter deals in the next two years, with sales and marketing assistance being the most-popular reason for entering alliances. More than half, or 52%, of CEOs plan to partner to bring new products to market, up from 29% of products that are marketed with the help of partners.

"Maturation brings greater responsibilities, including greater regulatory challenges and heightened investor scrutiny," Mr. Giovannetti says. "Despite these challenges, the biotechnology sector still holds great promise for innovative companies and is comfortably on track to become a $100 billion revenue industry before the end of the decade."

"Both Nycomed and Altana Pharma are successful and growing companies with highly complementary businesses," says Dr. Hakan Bjorklund, CEO of Nycomed (nycomed.com). "Merging the two companies will provide a leadership position in our European home markets and a strong platform in some of the world’s fastest-growing pharmaceutical markets, including Russia-CIS and South America."

In May 2007, Mylan announced the signing of a definitive agreement under which the company will acquire Merck KGaA’s generics business, Merck Generics, for $6.7 billion in an all-cash transaction. According to Mylan executives, the combination of Mylan and Merck Generics will create a vertically and horizontally integrated generics and specialty pharmaceuticals leader with a diversified revenue base and a global footprint. (For more information about the generics companies, please turn to page 88.)

The generics industry is benefiting not only from patent expirations, but greater use of generics in Medicare Part D. According to IMS Health Inc., previously uninsured seniors are saving 60% on medicines through Part D plans on average, and the use of generic medications is higher in Medicare Part D than in the rest of the marketplace. According to IMS, generic drugs comprise 58% of prescriptions in Part D, compared with 57% of all retail prescriptions. Previously uninsured seniors in Part D increased their use of all medications, including generics and brands, by 26% and their out-of-pocket costs per prescription decreased 60%.

"PBMs have played a key role in increasing generic utilization in Part D," says Mark Merritt, president, Pharmaceutical Care Management Association (pcmanet.org). "This new report is further evidence that Part D plans and the PBMs who administer them are reducing costs and increasing access for America’s seniors and the disabled."

Bayer announced the company would cut 6,100 jobs worldwide after the acquisition of Schering. The cuts comprise 3,150 jobs in Europe, 1,000 jobs in the United States, 750 jobs in Asia, and 1,200 jobs in Latin America and Canada. The positions to be cut are 1,400 in global R&D, 1,850 in production, and 2,850 positions from central administration.

The Japanese pharmaceutical industry continues to struggle. Out of the 10 Japanese pharmaceutical companies among the top 50, the majority posted sales increases only in the low single digits and declining net income. Continuing government efforts to cut drug costs continue to have a negative effect on Japanese drug makers. In April 2006, the Japanese government carried out a special drug-price reduction and revision of price calculation for branded drugs for which substitute generic drugs were available, in addition to the ordinary reduction of National Health Insurance drug prices. Specific measures to encourage the use of generic drugs were also put into place. As a result, the domestic market in fiscal 2006 posted negative growth for the first time in six years.

The Japanese government is expected to promote various measures to cut pharmaceutical costs, including annual National Health Insurance drug-price revision, price reductions that are not based on market prices, and the planned adoption of a scheme for comprehensive medical fees for elderly outpatients. Therefore, analysts forecast the Japanese market to grow at about 1% to 2%, in the year ahead. For more information about the Japanese pharmaceutical companies, please turn to page 106.

Looking away from Japan, experts at PricewaterhouseCoopers say the Asia-Pacific region will replace the United States and Europe as the pharmaceutical industry powerhouse, fueled by government incentives. In addition to becoming the largest market in the world for drugs, led by growth in China, India, and Singapore, Asia Pacific is seeing an influx of multinational companies, and its own pharmaceutical companies are bulking up by acquiring international market share.

According to PricewaterhouseCoopers analysts, competition for international pharmaceutical players is intensifying as Asian entities offer grants, incentives, and infrastructure support. Operational risks continue to be a concern despite progress in strengthening regulatory standards and intellectual-property protections across Asia, and growth in the region may be tempered by continuing industry concerns about intellectual-property rights, corruption, and pricing.

"The pendulum for the pharmaceutical industry is shifting from the West to the East," says Dan Bartholomew, senior managing director, pharmaceutical and life sciences practice, PricewaterhouseCoopers (pwc.com). "This means that if U.S.-based companies want to have part of that market, they are going to need to be present in the region and learn to navigate the risks. It’s not that U.S.-based pharmaceutical companies will leave the States altogether, but they will restructure just as the textile, electronics, and automobile industries have done."

Among the executives surveyed from multinational pharmaceutical companies by PricewaterhouseCoopers, almost six in 10, or 58%, say they agreed that the center of gravity for the global pharmaceutical market is shifting to Asia Pacific. Among Asia’s domestic company executives, 62% agreed with this supposition. Three-quarters of executives from multinational companies surveyed say they are worried about intellectual-property rights and legal risks, and concern about intellectual-property protections is cited by them as the biggest reason to consider leaving Asia Pacific. Almost three-quarters, or 74%, of multinational companies and almost eight in 10, or 79%, of Asia’s domestic companies saw an improvement in intellectual-property right protections during the past five years, primarily as a result of the introduction of new IP laws, underpinned by a stronger government emphasis on IP protection and more rigorous application of existing laws.

"It is difficult to comprehend how an industry that has saved so many lives should be held in such low public esteem," says Peter Claude, a partner in PricewaterhouseCoopers Pharmaceutical and Life Sciences Advisory Services Group. "Yet in the current climate of distrust, the public is questioning the industry’s motives and practices from sales and marketing to pricing to drug development. Pharmaceutical companies need to demonstrate a better balance of their primary health-care mission with their fiduciary obligation to shareholders through patient-focused behavior. Research has shown that a 5% positive change in corporate reputation translates into a 3% to 5% positive change in market capitalization."

PricewaterhouseCoopers found that 74% of consumers underestimate the average financial investment required to research and develop a new drug by more than 50%. Just 55% of consumers believe that pharmaceutical companies consider important unmet medical needs when deciding to develop a new drug, compared with 45% believing that the industry prefers to develop "me-too" and "lifestyle" drugs with the greatest sales potential. Meanwhile, 91% of pharmaceutical executives say health needs are a top priority for pharmaceutical companies. When it comes to promotion, 94% of consumers and 81% of industry stakeholders say drug companies are too aggressive in promoting unapproved uses of their products, yet only 47% of pharmaceutical company executives agreed.

In assessing clinical-trial information, 62% of stakeholders agreed that drug companies often manipulate or suppress negative clinical-trial results to maximize sales. Four out of five pharmaceutical executives disagreed. 73% of stakeholders agreed that drug companies spend too much money and effort attempting to prevent generic drugs from competing with their branded products. Consumers strongly agreed that drug companies should be working with generic drug manufacturers to make generics available upon expiration of their branded drug’s patent.

PricewaterhouseCoopers found that consumers place more value on a pharmaceutical company’s reputation when deciding whether to use a given pharmaceutical product than pharmaceutical executives believed. Seventy-eight percent of consumers stated that when given a choice, they will consider a drug company’s reputation when choosing which product to take. Only one out of three pharmaceutical executives thought reputation was a factor. Because one of the chief ways patients become familiar with a company is through DTC advertising, this poses a double-edged sword for the industry. Although DTC advertising can provide valuable information to a large audience of consumers, only 10% of stakeholders and consumers think that direct-to-consumer advertising provides complete and useful information, compared with 40% of industry executives.

Additionally, almost 94% of stakeholders agreed that drug companies spend too much money on drug promotion overall, including DTC advertising as well as physician education and overall sales-force initiatives. Surprisingly, nearly three-quarters of industry executives agreed.

One way pharmaceutical companies can fight back against their negative image and take on generics is to show the effectiveness of their medicines. But a July study that looked at how closely information submitted to formulary committees at managed health-care systems and pharmacy benefit management companies complies with national guidelines from the Academy of Managed Care Pharmacy showed that this program has promise but is still far from successful.

The Center for the Evaluation of Value and Risk in Health at Tufts-New England Medical Center reviewed the quality of economic analysis in dossiers submitted to Premera Blue Cross between 2002 and 2005. The center also examined the clinical studies included in the submissions made to Premera in 2003. The center found the quality of information that drug companies submitted was of relatively poor quality, including sub-standard economic analyses.

Although FDA does not consider cost-effectiveness a condition of approval, health insurers and pharmacy benefit managers can ask for such information. Premera routinely requests the information to design benefits that reward consumers for purchasing the most cost-effective and high-quality drugs.

The study of 115 submissions by drug makers found that drug companies voluntarily provided economic or cost-effectiveness analyses about 46% of the time. When economic analyses were submitted, they had relatively low levels of compliance with industry standards. In analyzing cost-effectiveness, only 17% of the 115 submissions by drug makers compared their new drugs to the most relevant or cost-effective treatment alternatives. The researchers did find that economic analyses of high-value or innovative products had higher compliance with recommended practices.

"If pharmaceutical manufacturers know that the market will be asking them to show why a new and more expensive drug should be used, that could have a significant impact on long-term affordability of health care," says Gubby Barlow, CEO, Premera Blue Cross (premera.com).