Recently, EvaluatePharma published its “World Preview 2018” which analyzes the pharmaceutical market and makes a variety of projections for the status of the industry in 2018.  While a lot can happen over the next six years that can alter such a forecast, I always find it fascinating to read predictions about an industry that has been in constant flux – some may say turmoil – for over a decade.  For one thing, EvaluatePharma predicts the top-selling drug in the world in 2018 will be Merck’s Januvia (for diabetes) with sales of $9.7 billion.  Few would have predicted this six years ago.  But the quality of this drug, coupled with the ever-increasing incidence of obesity/type 2 diabetes, will result in many Januvia prescriptions being filled.

Another surprise is in the list of the predicted top 20 companies.  EvaluatePharma projects that by 2018, Novartis with worldwide prescription drug sales of $51.3 billion, will overtake Pfizer for the top spot in the industry.  In fact, Pfizer’s sales for 2018 are projected to be $48.2 billion–significantly less than its 2011 sales of $53.5 billion and identical to the predicted sales for Sanofi.  Thus, Pfizer’s recent dominance as the world’s top pharmaceutical company will be coming to an end.

In the 1980s, Merck led the field.  It built a great product line from the combination of in-house R&D (Mevacor, Zocor, Vasotec) with astute licensing deals (Fosamax, Pepcid, Cozaar) and rode these and other compounds to become the world’s most admired company.  The next big mover was Pfizer.  With compounds that were referred to internally as the “Big 5” (Zoloft, Zithromax, Norvasc, Cardura and Dilflucan), it dramatically climbed the leaderboard.  Pfizer quickly followed up on these discoveries with Viagra, then did great co-promotional deals for Lipitor and later Celebrex.  To ensure its leadership, Pfizer grabbed all of Lipitor first with its hostile take-over of Warner-Lambert, followed by the purchase of Pharmacia.  Pfizer’s total revenues went from $4.8 billion in 1988 to $52.5 billion in 2004.  Things will clearly be different for the company in the next few years.

Both Merck and Pfizer’s meteoric successes were followed by a dry spell, which are not unique to industry leaders.  AstraZeneca had $32.4 billion in sales in 2011, but EvaluatePharma projects their sales to drop to $21.9 billion in 2018.  Eli Lilly is experiencing the same pains, going from $20.4 billion to $13.7 billion.  Even Amgen (AMGN), for many years the poster child for success in the biotech arena, will drop from $15.3 billion in 2011 to $14.5 billion in 2018. In fact, one may argue that the industry pattern for decades has been a cycle of booms and busts.

There are multiple reasons for this pattern.  One that has received much attention has been the dependence on large blockbusters.  When a company like Pfizer has $12.9 billion in revenues coming from Lipitor alone, a tremendous hole occurs when the patent for that medicine expires, as Pfizer has recently experienced.  In looking at EvaluatePharma’s projections, Merck might be in the same boat by 2018 as Januvia sales will be almost 25% of Merck’s total revenues.

However, there is a more subtle contributor to this trend, namely in-house R&D investment.  Make no mistake – all of the major pharmaceutical companies invest anywhere from 12 – 16% of total revenues into R&D.  This percentage is more than any other industry sector.  However, an R&D investment doesn’t pay off for at least 15 years, which is the time it takes to start a new discovery program and then get a drug candidate through the development process to FDA approval.  To put this into perspective, when Pfizer had $52.5 billion in overall sales in 2004, it invested $7.7 billion in R&D, an impressive amount.  However, 10 years earlier, Pfizer’s R&D investment was $961 MILLION.  This R&D investment wasn’t trivial for Pfizer in 1994; in fact, it was 13% of revenues.  But it was never envisioned to be the R&D foundation to support a company with sales of $54.5 billion.  Ironically, when a company is very successful and sales increase dramatically, the chances of it having a pipeline to support sustained growth are pretty poor.

So, can one make any predictions for Novartis, the new king?  The EvaluatePharma data provides some interesting insight on this.  For one thing, it is predicted that Novartis’ $51.3 billion in sales will not be overly dependent on any one compound.  In fact, it has no compound projected to be in the top ten in 2018.  Thus, as it will inevitably lose patent coverage for its drugs, none will be crippling to their overall sales.  In addition, Novartis has been heavily investing in R&D for a number of years with an $8.0 billion investment in 2010, $9.0 billion in 2011, and $10.1 billion projected in 2018.  Clearly, simply investing money doesn’t guarantee success, but Novartis’ bold spending heightens its odds.  Novartis appears to be purposefully growing R&D to support themselves beyond 2018.  It will be interesting see if they succeed.