Drug wars go global

In the modern world, countries must make their crust where they can. Historians will doubtless read much into the fact that Britain's most successful export in the past 20 years has been a drug for treating ulcers. That drug is called Zantac and it has propelled its manufacturer, Glaxo, in little more than 20 years, from nowhere to number one in the world's pharmaceutical industry, with sales of £5.6bn worldwide. In Britain's post-war corporate history, there has been nothing to match this phenomenal record of growth. Glaxo is now the most valuable company on the London stock exchange. For 20 years it has consistently been two to three times as profitable as the average British company.

Yet now this phenomenal engine of profitability is in danger of running out of steam, the victim of a worldwide set of changes which are transforming the market for drugs and healthcare. That is the simplest and most compelling explanation for the £8.9bnbid that Glaxo is making for its fellow drug company, Wellcome.

News of yesterday's multi-billion pound deal is just the latest in a series of big transactions which is leading to unprecedented degrees of concentration among the world's leading drug companies. After years of producer domination, the driving force forchange is the growing power of the drug consumer.

There has never been any love lost between the pharmaceutical industry and its customers. With state-of-the-art medicines expensive to research and produce, and heavily protected by patents, it has proved impossible for drugs companies to shake off suspicions of profiteering.

But for much of the past decade, the drugs companies have been in the ascendant in this struggle between supplier and consumer. A flood of innovations discovered in the 1960s and 1970s came to the market in the 1980s. They made enormous fortunes for the shareholders of the companies with the most successful products.

They seemed at times to be able to charge what they liked, especially with high-profile treatments for the diseases that preoccupy the rich West, such as Aids, heart problems and ulcers. World-beating drugs such as Zantac, the anti-ulcer drug which made Glaxo's fortune, were products that customers felt they had to buy, whatever the price.

But in the past couple of years, the market for drugs has begun to change, and there are disturbing signs for the multinational giants that customers are at last gaining the upper hand. Faced with rising costs and growing consumer power, the drug companies are being forced to find new ways of sustaining their profits and investment capability.

Several negative trends have come together. The growth in worldwide drug sales has slowed. Patents on several of the most profitable best-selling drugs, including Zantac, are about to expire. Once a patent expires, prices and profits tumble as the marketis flooded with copies.

But more important, customers and politicians alike are finding new ways and means to gang up on the producers. The biggest battleground is the US, where the Clinton health-care reforms have focused minds on the soaring costs of medical care, and in particular on drug prices and prescription habits. This has boosted the growth of a new breed of middlemen, called pharmaceutical benefit management companies, whose objective is to control drug spending by negotiating discounts and restricting the range of medicines doctors can prescribe. So powerful have these intermediaries become that the biggest drugs companies decided that if they could not beat them, they would have to join them instead.

Yesterday's move by Glaxo is its response to these global pressures for industry consolidation. With 43 per cent of its sales in the US, the company was faced with a simple choice: finding its own partner among the smaller fry benefit management companies, or searching instead for a different way out of the coming squeeze.

Like many of its rivals, it looked at the possibility of diversifying into cheap generic drugs (those without patent protection) and into over-the-counter medicines (those bought without prescription). The debate engendered fierce arguments amongst the senior executives at Glaxo. One former chief executive, Ernest Mario, fell out with his mentor, Sir Paul Girolami, over how best to react.

His replacement, Sir Richard Sykes, came up through the company's R&D laboratories. No surprise therefore that he should opt to keep Glaxo as a research-based company that will stand or fall by its ability to invent new drugs and then push them through Glaxo's legendarily aggressive marketing network.

If the bid for Wellcome is successful, it will add a whole battery of new drugs to Glaxo's armoury, reducing the risk that profits will slump as ageing drugs expire. Glaxo also sees great scope for cost cutting by closing research centres around the world and rationalising sales and marketing. Thousands of jobs will go. The cost cutting logic is brutal but unassailable. It is the price that Britain's most successful industry must pay if it is to keep its place among the world's best.