Where Next For The Drug Companies?

AstraZeneca (LSE: AZN) was the first of the big three to please with its first-quarter numbers. It reported an 18% jump in earnings to £1.3b on sales of £4.4b. GlaxoSmithKline (LSE: GSK) also pleased with its 14% hike in first-quarter earnings to £1.6b and 6% improvement in revenues to £5.1b. However the star of the show was the smallest of the three large cap medicine makers, Shire Pharmaceuticals (LSE: SHP). The company delighted with its 40% jump in earnings to £54m on sales of £169m. Down in the midcaps the full year results from former FTSE 100 company Celltech Group (LSE: CCH) were also well received. The UK's biggest biotechnology outfit reported an 84% improvement in earnings to £48m on sales that rose 28% to £303m. However investors should look beyond the results and take a peek into the somewhat uncertain future that faces all of these companies. They should at the same time try to determine how, if at all, these companies will position themselves given the uncertainty that awaits them. Despite their strong results there is still a big question mark that hangs over the pharmaceutical sector in terms of the product pipeline, patent expiry and pricing power for these companies. The 3 "P"s of the pharmaceutical industry needs to be addressed if these companies are to successfully negotiate the rapidly changing business environment. GlaxoSmithKline showed just how important the 3 "P"s are to drug companies on Friday. Its patent for the antibiotic Augmentin was found to be invalid in the US courts. This now opens the doors to generic version of the drug making its way into the market place. GSK put on a brave face but there is little doubt that the court's verdict harmed the company. Investors were also hurt when almost £9b or 8% was wiped off the value of the company on Friday. Thankfully for GlaxoSmithKline its product pipeline is solid with a host of new drugs in the late stages of development. But none of these drugs appear to be in therapeutic areas that would enjoy significant pricing power. GSK is particularly weak in oncology, an area that still retains strong pricing power by virtue of the small number of effective drugs that treat the disease. It is perhaps for this reason that the market is speculating that a merger with the troubled US drug developer Bristol Meyer Squibb (NYSE: BMY) could be on the horizon. Bristol Meyer Squibb is especially strong in cancer research and a merger would plug a glaring hole in GSK's drug pipeline. Investors should remember that the drug industry has been around for what appears to be aeons and many of the players also just seem to go from strength to strength. Of course some will fall by the wayside. The reason for the longevity of some players is in part due to their ability to adapt quickly to the changing business environment. Clearly the environment is more uncertain now than it has been in the past but a focus on the 3"P"s should help you to sort the wheat from the chaff. The writer has beneficial interests in GSK and Celltech. Check with The Fool for more financial information