The business: things get worse and worse for the drugs companies. On top of growing resistance to their high prices come more doubts about their products' side effects
I interviewed a City fund manager the other day who is so bearish about the prospects for the world pharmaceutical industry that he won't give house room in his portfolio to a single drug company share.
The gloomy prognosis for the likes of GlaxoSmithKline and AstraZeneca has been well aired: increasing generic competition, horrendous litigation risk and the failure of drug company scientists to come up with as many blockbuster treatments as in the past.
My fund manager's view was soured still further because, he thinks, customers (governments on the whole) will soon no longer tolerate the premium prices charged by the companies. In the past, these have been justified as the price we all pay to bankroll the next generation of cures.
Research and development, however, accounts for a diminishing proportion of the pharmaceutical industry's costs. More money goes to paying the army of sales and marketing people who promote the products to medics. Some of this expenditure is unsavoury, as Margaret Cook recently described in these pages.
Another growing chunk of drug company money goes to a second army of lawyers, whose job is to protect and prolong patents and fend off class action lawsuits--some of them legitimate, some of them frivolous.
Once governments recognise that the unwritten pact has been broken--that the high cost of drugs isn't being ploughed back into R & D--they will be much less willing to pay high prices.
Meanwhile, in the past few days, a quite different problem has beset Big Pharma. A senior official at the Food and Drug Administration (FDA) in the US has blown the whistle on the regulator's practices. Dr David Graham, associate director of the Office of Drug Safety, has named five drugs that, although approved by the FDA and used daily by millions of patients, have question marks over them in his opinion.
The FDA is the most influential drugs regulator in the world and Graham is eminent in his own right. He led the recent study that resulted in the withdrawal of Vioxx, the arthritis treatment from Merck that increased the risk of heart attack. Within minutes of his remarks, more than [pounds sterling]3bn was wiped from the stock market value of AstraZeneca, which makes the cholesterol-busting drug Crestor, one of the five on Graham's hit list.
Crestor had been tipped to generate sales of $4bn ([pounds sterling]2.1bn) a year. Now concerns about its side effects are likely at the very least to dent sales, even though the FDA says it and the other four products are safe. The wider issue is Graham's concern that a serious conflict of interest is built into the system. The FDA's Office of New Drugs, which gives the green light to new treatments, also has authority over its Office of Drug Safety, which monitors drugs after they are approved. The concern is that the senior FDA arm, which inevitably works closely with drug company scjentists, is reluctant to have its wisdom questioned when unexpected side effects crop up years after the drug has been approved.
Graham's stand, whether or not it leads to changes at the FDA, will almost certainly foster greater political and consumer suspicion of the drug industry--giving yet another reason for my fund manager friend to shun it.
Oops. Another economist has failed to read from the script. Christopher Smallwood, chief economic adviser to Barclays Bank, predicts house prices will fall by 8 per cent next year and by 20 per cent over three years. That doesn't sound unreasonable. Buyers are sitting on their hands in most parts of Britain. Transactions have dried up. I've been trying to sell since the spring, and I'd say the 20 per cent slide has largely happened already--in Sussex, anyway. But Barclays, through its Woolwich offshoot, makes its living selling mortgages. The last thing it wants is to dent confidence further. It has distanced itself from Smallwood's remarks, insisting his is just one of several views at the bank.
This tiny vignette illustrates the awkward position of economists in the commercial world. They regard themselves as free thinkers who can look objectively at the world and say the unsayable. But their employers largely see them as adjuncts to the marketing department, hired to keep the bank name on TV screens and in the papers, to espouse the view that favours a particular trading position and to curry favour with (or at least not offend) important clients--be they governments or companies.
Next time you see an egregiously optimistic house price forecast from an estate agency or mortgage lender, have some sympathy. Behind the airy prediction, there may be an in-house economist squirming to square the forecast with the facts.