View from City Road: UK drugs industry is looking dopey

Has the drugs industry, one of the UK's few success stories, lost its Midas touch? Last year British companies failed to register a single new chemical entity - in other words they failed to come up with any innovative new drugs. Given that the profits of prescription drugs last only as long as their patent protection, that augurs ill for the earnings of the future.

It is possible this was a maverick year. Yet, other statistics tell a similar story. As recent figures from the market researchers IMS and the British Pharmaceutical Industry demonstrate, a failure to generate sufficient new patent-protected products means that the sales of UK companies are much more vulnerable to generic competition (and so much thinner profit margins) than US ones.

On average 29 per cent of the turnover of the big five US companies - Merck, Bristol Myers Squibb, Pfizer, Cyanamid and Lilly - is at risk from generic competition. That compares with 59 per cent for the UK leaders - Glaxo, SmithKline Beecham, Zeneca, Wellcome, Fisons, Boots and Reckitt & Colman. For some companies - Boots and Fisons for instance - the exposure is more than 90 per cent. Even for Zeneca, which merrily trumpeted the success of its new products yesterday, the figure is around two- thirds.

The reasons may be many and various. Certainly the relentless attack on university funding, with casual discretionary funds being replaced by targeted finance, has almost certainly led to a deterioration in the type of innovative research that was the seed bed for the UK drugs industry. And of course luck plays a part in any scientific discovery.

It is nevertheless hard to avoid the conclusion that the industry itself has become fat and lazy through too many years of easy money. There has as yet been no significant attempt to restructure the cost base of the UK drugs business, even though it is widely acknowledged that the writing is on the wall.

In the old days production and marketing costs - as well as the sacred cow of research and development - were insignificant compared with the profits generated. Not any more.

Nor, with the exception of the Anglo-American SmithKline Beecham, have any of the big drug UK companies developed a coherent strategic response to the changed healthcare environment of the 1990s.

While the decisions of Merck and SmithKline Beecham to become broad-based healthcare providers may indeed prove expensive mistakes, until the British companies offer an alternative strategy, they will be at risk of being upstaged by their US counterparts. As the American Home Products hostile bid for Cyanamid demonstrates, this is a fast-moving arena and time is running out.