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The Anatomy of an Industry
"The stakes for the pharmaceutical companies are enormous,"
says Bartfai. "Twenty-six billion dollars was spent on developing
drugs last year, and nine new chemical entity (NCE) drugs
were approved." (The FDA defines an NCE as a drug with no
previously approved active chemical moiety).
This stakes are reflected in the typical price-to-earnings
(P/E) ratios for companies involved in drug design.
The P/E is the ratio of the market value of a single share
of stock divided by the total earnings for that share. So
a P/E of 10 means that every $10 of stock returns a dollar
of profit. According to Charles Schwab Company, the historic
average P/E ratio for all the fortune 500 companies is around
16 and, of course, varies with the economy.
Blue chips stocks, the shares of those industries like car
manufacturers or utilities companies tend to have smaller
P/E ratiosunder 10. The low number reflects the fact
that these industries are time-tested and established as long-term,
The P/E of growth industries, like those in the health sector,
tend to be larger. The market average for major pharmaceutical
companies is around 20. Biotech companies tend to be even
higher. The 2001 P/E average for the largest biotechnology
companies listed on the New York Stock exchange was nearly
40, according to Forbes magazine. Small publicly traded biotech
companies can be higher still.
The high P/E ratio of pharmaceutical companies and biotechs
means that the earnings per share is low with respect to the
cost of the stock, but, more importantly, that investors have
high expectations for the companies to show significant growth
and yield large profits in the future.
Another characteristic of the pharmaceutical industry is
a lack of customer brand loyalty. There are no "Upjohn people"
or "Roche people" the way there are "Pepsi" or "Coke people."
Unlike other industries, where products may be selected on
the basis of manufacturer, pharmaceutical companies rely wholly
on the effects of the drugs they produce and market.
"If you succeed, nobody asks [whether you] you have made
this kind of drug before," says Bartfai. "If you make a truly
original drug that has a health benefit, people will eventually
The drug doesn't even have to be the first one on the market
to fight a particular indication. The thing that counts is
that it is significantly better than any other drug out there.
As an example, Bartfai points to Astra, which entered the
billion-dollar-a-year heartburn market with the drug Losec
(also called prilosec), which blocks a proton ATPase responsible
for pumping acid into the stomach. Astra was at the time a
tiny company entering a huge pond. But Losec was more effective
than its competitors, Zantac and Tagamet, both well known
labels, and is one of the reasons why Astra (now merged to
form AstraZeneca) has emerged as the largest pharmaceutical
company in the world.
"Nobody even knew how to spell [Astra]," says Bartfai, who
was a consultant for the company at the time "But we made
a significantly better drug, [which] so far has had $36 billion
The health benefit doesn't even have to be as tangible as
reducing acid reflux and stopping somebody's heart burn.
"You can sell something which does not cure a disease if
you have a good enough argument that it can prevent a disease,"
says Bartfai. "High cholesterol is not a disease, but six
billion dollars is spent each year on cholesterol-lowering
NEXT WEEK: Part 2Drug Development is the Single Most
Regulated Human Activity
DEVELOPMENT OF DRUG DISCOVERY PARADIGMS IN BIG PHARMA OVER
THE LAST 100 YEARS, on Thursday, April 25. This overview will
cover drug discovery paradigms, physiology-based drug development,
18801980; high-throughput screening-based drug development,
molecular/cellular drug discovery, 19802000; and "reverse
pharmacology," based on genomics and proteomics, 1999present.
TARGET-BASED DRUG DISCOVERY, on Thursday, May 2. Topics
to be discussed include validated drug targets: what they
are and for whom, a determination of their value, and comparison
of targets for the same clinical indication.
SELECTION OF CLINICAL CANDIDATES: MULTIPLE PRESSURES, on
Thursday, May 9. The presentation will focus on the key milestones
of preclinical drug developmenttiming, expenditures,
backup strategies, outside validations, and orphan drugsas
these factors play out in big Pharma decision making.
All lectures will be held from 5 to 6:30 PM in the Valerie
Timken Amphitheater of Green Hospital.
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