As patents run out, drug firms need to find a new Viagra

"The real goal is to grow revenues. We are open to opportunities and constantly looking at those which are big, small and in -between," said Pfizer chief executive Jeff Kindler.

The Viagra-producing drug company may need to go shopping. With the patent on its £8 billion-a-year cholesterol drug Lipitor due to run out in 2011, Pfizer has a serious headache that none of its huge back catalogue of pills looks set to solve.

The problem is not exclusive to the American pharma giant. Many of its competitors, including the UK's two biggest drug companies, AstraZeneca and GlaxoSmithKline, are facing falling future sales.

The industry — worth £7 billion to the UK economy and employing 70,000 people — has a stream of blockbuster drugs coming out of patent, and generic drug developers are gearing up to move into the market.

The Association of the British Pharmaceutical Industry estimates that it takes £500 million of investment to launch a new branded medicine. When patents expire, usually after 20 years, a generic version can be developed for less than £100,000, and sold for a much lower price.

With 40% of AstraZeneca's sales coming out of patent by 2012, and a quarter of GSK's sales in the same predicament, the next few years could see a dramatic reshaping of the pharma industry.

The sector — considered a safe haven in a recession — was one of 2008's few positive success stories. While the FTSE 100 index crashed 31%, its worst performance since its inception in 1984, pharmaceutical shares ended the year up 7%.

AstraZeneca was a particularly bright star, rising 29.7% by the close of the stock market in 2008, benefiting from strong sales in emerging markets — and serious cost-cutting.

The market has warmed to drug stocks in part because of so-called efficiency plans that are shifting the industry eastward.

For UK workers, the restructuring has been a bitter pill to swallow. British drug giants have made large-scale redundancy plans for thousands of staff as they shift investment to China and India. GSK is closing two UK factories with 600 redundancies in Dartford, Kent, and 200 in Barnard Castle, Durham, plus 350 jobs in research and development, including some at its site in Harlow, Essex, as part of 2000 worldwide job losses. AstraZeneca has shed the first of 250 UK-based manufacturing jobs as part of its own massive restructuring plans.

Announcing plans to cull 11% of its 66,000-strong global workforce, AstraZeneca revealed the extent that the Western side of the drug industry is changing. "Manufacturing for AstraZeneca is not a core activity," explained David Smith, AstraZeneca's head of operations. "There are lots of people and organisations that can manufacture better than we can. We are looking to access China and India in a much more meaningful way."

Indeed, China's pharma industry is worth £70 billion and rising. By 2012, India's drug business is expected to reach £12 billion.

Further job cuts within the UK are certain. Jonathan Jackson, head of equities at stockbroking advisory firm Killik in Mayfair, says: "The themes we've seen over the last few years — IT outsourcing to India and manufacturing to the Far East — look likely to continue, although the decline in sterling makes the UK more desirable for firms and may slow the process for a while."

Old discussions about a GSK-AstraZeneca merger could surface again if Pfizer were to change the shape of the industry by pursuing a megadeal. As Jackson points out: "It would change the shape of the industry, and the British giants would need to react, potentially by uniting."

Despite many of the pharma sector's largest firms having unusually cash-rich balance sheets, another megadeal — like that which created GSK in 2001 — seems unlikely. "There are too many barriers to M&A activity at the moment. The difficulty raising finance has obviously hit pharma too," says Jackson. "Lower risk, smaller acquisitions, with the big companies buying single-product pharma firms, have been going on for a while, and these will carry on. But a huge merger is unlikely."

But rumours of change abound. GSK's new chief executive Andrew Witty has said he is keen to capitalise on the downturn to buy assets. Kindler's announcement led to speculation Pfizer is planning a £15-a-share offer for UK drugs group Shire, pushing up its shares by 3% this week.

Today it was revealed that US giant Wyeth is in talks to buy Dutch vaccine company Crucell NV for over £900 million in an attempt to capitalise on one of the pharma industry's fastest-growing divisions.

As pharma bosses look to unlock value, analysts say that demergers — rather than takeovers — could even be on the horizon. Capital markets undervalue "tail" products — which are at a late stage in their life cycle. So selling them off can prove lucrative.

"It's likely that Pfizer will spin off some products," says Panmure Gordon's pharma analyst Savvas Neophytou. "Their strength is sales. So we might see them selling off its R&D division entirely.

"The old way of thinking was that a bigger chemical library would make researchers more likely to stumble across a blockbuster. But that didn't prove correct. Cost-cutting is a much more likely trend."

The only acquisition Neophytou regards as a real possibility is a buyout of Amgen, a big US biotechnology firm. Biological drugs, produced by living cells, are harder to copy, so as yet there is no process of getting generics onto the market: "Amgen could make a good target, it's fairly low valued and would add to Pfizer's portfolio. But it could just be chit-chat. The industry is in an interesting place."