Drug returns set to plummet

INVESTORS IN pharmaceuticals companies will see their returns plummet to "dire" levels over the next seven years unless the top drug groups slash the costs of developing their products, according to a report published yesterday.

Companies which fail to raise productivity and cut soaring research and development budgets will be taken over by leaner, fitter rivals in the years ahead, the Pricewaterhouse-Coopers (PWC) study concludes.

The accounting firm predicts that the number of top pharmaceutical groups will shrink from 20 to 13 by 2005 as financial pressures take their toll.

In a stark warning to the global drugs sector PWC, which runs a management consultancy for drugs groups, says structural changes will force companies to "make some difficult choices" if they are to survive and maintain the "stellar" shareholder returns of the past five years. On average, leading drugs groups have delivered total returns - capital growth plus dividends - of more than 20 per cent a year. Pfizer, makers of Viagra, has returned more than 40 per cent.

However, the report warns that "soaring R&D costs, shortening product lifecycles and sluggish sales growth have combined to produce a climate more hostile than anything [the industry] has previously encountered."

If companies do not adapt, total shareholder returns could halve, assuming that R&D costs remain at around $350m (pounds 210m) per drug. But if this cost rises to $500m per product, in line with recent forecasts, returns will plunge further "to a level that would be dire for shareholders and management alike," says PWC.

To survive, drug groups will have to rein back R&D costs by outsourcing more research to smaller companies and teaming up with rivals at early stages of clinical trials, and will have to be more ruthless in axing compounds early if they have little chance of success.

"What seems clear is that some companies are heading for a crash unless they rethink their approach so completely that R&D costs and lead times plummet," PWC concludes.