[Ip-health] Wall Street Journal: Big Pharma Faces Grim Prognosis

[Thiru Balasubramaniam]

http://online.wsj.com/article_print/SB119689933952615133.html

Big Pharma Faces Grim Prognosis
Industry Fails to Find
New Drugs to Replace
Wonders Like Lipitor
By BARBARA MARTINEZ and JACOB GOLDSTEIN
December 6, 2007; Page A1

Over the next few years, the pharmaceutical business will hit a wall.

Some of the top-selling drugs in industry history will become history
as patent protections expire, allowing generics to rush in at much-
lower prices. Generic competition is expected to wipe $67 billion from
top companies' annual U.S. sales between 2007 and 2012 as more than
three dozen drugs lose patent protection. That is roughly half of the
companies' combined 2007 U.S. sales.

At the same time, the industry's science engine has stalled. The
century-old approach of finding chemicals to treat diseases is
producing fewer and fewer drugs. Especially lacking are new
blockbusters to replace old ones like Lipitor, Plavix and Zyprexa.

The coming sales decline may signal the end of a once-revered way of
doing business. "I think the industry is doomed if we don't change,"
says Sidney Taurel, chairman of Eli Lilly & Co. Just yesterday,
Bristol-Myers Squibb Co. announced plans to cut 10% of its work force,
or about 4,300 jobs, and close or sell about half of its 27
manufacturing plants by 2010. (Please see related article.)

Between 2011 and 2012, annual industry revenue will decline, estimates
Datamonitor, a research and consulting firm. That would be the first
decline in at least four decades.

Patent expirations are a big problem. Drugs are granted 20 years of
patent protection, although companies often fail to get a product to
market before half of that period has elapsed. Once it hits the
market, however, the patent-protected drug is highly profitable:
Typical gross margins are 90% to 95%. When patents expire, generic
makers offer the products at a price much closer to the cost of
production.

Pfizer Inc. will be particularly hard-hit when the patent expires as
early as 2010 on Lipitor, the cholesterol-lowering blockbuster that
ranks as the most successful drug ever. Pharmacists and managed-care
companies will aggressively fill prescriptions with generics, reducing
annual Lipitor sales to a fraction of last year's $13 billion.

By 2012, Merck & Co. will face generic competition to its three top-
selling drugs: the osteoporosis treatment Fosamax, Singulair for
asthma and the blood-pressure drug Cozaar. Those three represent 44%
of the company's current revenue. Following the loss last year of
patent protection for Merck's cholesterol-lowering Zocor, sales this
year are expected to fall 82% from $4.38 billion in 2005. A Merck
spokeswoman said the company has several products in the pipeline that
will offset its patent losses.

The rise of generics wouldn't matter so much if research labs were
creating a stream of new hits. But that isn't happening. During the
five years from 2002 through 2006, the industry brought to market 43%
fewer new chemical-based drugs than in the last five years of the
1990s, despite more than doubling research-and-development spending.

In October, Moody's Investors Service, which rates about $90 billion
in U.S. pharmaceutical-company debt, lowered its outlook for the U.S.
drug industry to negative from stable. The industry was long
considered among the most credit-worthy, but in recent years, Moody's
has downgraded giants Schering-Plough Corp., Merck, Bristol-Myers,
Pfizer and GlaxoSmithKline PLC. In explaining its diminished outlook,
Moody's said that drugs currently in development don't have as much
commercial potential as earlier pipelines.

Investors, once huge beneficiaries of drug-industry success, have
moved to the sidelines. As the Dow Jones World Index rose 75% in the
six years ended Nov. 29, the FTSE Global Pharmaceuticals Index fell
19.8%.

While many patients are benefiting from lower-cost generics, others
are waiting in vain for relief of their suffering. "In anxiety
disorder, the field has imploded in terms of drug development," said
P. Murali Doraiswamy, chief of biological psychiatry at Duke
University medical school. "Ten years ago, we had eight or nine
different" anxiety-disorder drugs under development, but that has now
"come to a halt."

At last month's big American Heart Association meeting in Orlando,
Fla., there were just two high-profile studies of experimental drugs
on the agenda. One, for Eli Lilly's anti-blood-clotting drug
prasugrel, posted results that left some doctors and analysts
questioning whether the drug would be a big seller. Lilly, however,
says it is "very pleased with the trial's outcome."

The other study was a postmortem on Pfizer's torcetrapib, already
known as one of the industry's most costly failures, with $800 million
in budgeted research costs.

"There haven't been any new therapies that are proven to reduce death
and disability for atherosclerosis since the introduction of the
[cholesterol-lowering] statins" in the late 1980s, said Richard C.
Pasternak, vice president of Cardiovascular Clinical Research at
Merck. Atherosclerosis, a buildup of arterial plaque, is a major cause
of heart disease.

As patent expirations loom, pharmaceutical companies are reorganizing.
In five years, many may look very different. They will be in new
businesses. Their cost structures may be slimmer and more flexible.
Some familiar names may disappear in mergers. Companies are installing
new leaders, including outsiders like Pfizer Chairman and CEO Jeffrey
Kindler, who in 2002 joined the company as general counsel from
McDonald's Corp.

"The era that created the modern pharmaceutical industry is in fact
over," said Richard Evans, a former Wall Street analyst and now a
pharmaceutical consultant.

To be sure, the pharmaceutical industry is still highly profitable.
Sales will continue to benefit from the Medicare drug benefit for the
elderly and from growth in overseas markets. The industry will
continue to produce new drugs, though at too slow a rate to sustain
its size and cost structure, analysts assess. Some players, such as
Merck, may fare better because of a more productive R&D operation,
according to Sanford C. Bernstein & Co. research analyst Timothy
Anderson.

It has never been easy to take a drug from the lab, through animal
testing and into human trials. The industry estimates only one out of
every 5,000 to 10,000 candidates makes it to human trials. And many
drugs that work beautifully in animals fail miserably in people.

But those odds seem to have worsened in recent years, prompting debate
about whether the cause is government regulation, corporate structure
or an excessive scientific reliance on chemicals rather than biology.

Many drug-company executives blame the FDA for pulling back on
approvals. "Very few products are being approved today," said Bernard
Poussot, incoming chief executive of Wyeth. The heightened scrutiny
contributed to delays of two Wyeth products this past summer, the
company has said.

Would-be blockbusters such as Novartis AG's diabetes drug Galvus and
Sanofi-Aventis's weight-loss drug rimonabant have recently been
delayed by the FDA over safety concerns.

Safety concerns have also prompted the agency to require larger
studies of new drugs. Novartis CEO Daniel Vasella says this trend has
done more than any other to drive up the industry's R&D costs. He
cites Novartis's blood-pressure drug Tekturna, approved earlier this
year, which had more than 6,000 patients in its late-stage trial. A
decade ago, a similar study might have had fewer than 1,000 patients,
according to Dr. Vasella.

Christopher DiFrancesco, a spokesman for the FDA, said, "The number of
approvals have declined because companies are submitting fewer drugs
to the FDA for approval. The threshold for what we consider to be a
safe, effective drug hasn't changed."

Some say the industry's ballooning research budgets may be working
against productivity. Most companies use a centralized system to
allocate research money, and the growing budgets have left the
decision making to too few people who are too far removed from the
research, suggests Mr. Evans, who worked at Roche's U.S. subsidiary
until 1998, spent several years as a Wall Street analyst and is now a
consultant at a health-care-consulting firm. He calls the system "a
nightmare of complexity."

As evidence of this problem, some in the industry point to Pfizer,
with an annual research budget that has grown to $7 billion, highest
in the industry. Yet only a handful of drugs discovered in its
internal research labs have come to market in the past decade. And
late last year, the company lost its most promising hope when the
cholesterol drug torcetrapib failed in late-stage trials.

In a statement, Pfizer said it has the largest pipeline of midstage
drugs in company history and plans to triple the number of late-stage
drugs in its portfolio by 2009.

A few companies, notably GlaxoSmithKline, have begun breaking R&D into
smaller groups, though it is too early to gauge results.

Some believe the industry, which grew out of the European chemical
business of the late 1800s, has remained too reliant on that
foundation. "For all our amazing advances in the last 50 years, we are
still working with the tools of the first pharmaceutical
revolution...using advanced chemistry to treat disease symptoms," Mr.
Taurel of Lilly said in a 2003 speech.

The future, many believe, lies in biotechnology. Unlike traditional,
chemistry-based drug development, biotechnology uses biological tools
to create entire proteins, often similar to those that occur in the
human body. This approach has yielded successful drugs to treat
diseases such as anemia, cancer and rheumatoid arthritis.

Biotech drugs are especially appealing because they face no
competition from generics: No regulatory pathway yet exists in the
U.S. for bringing to market generic biotech drugs. So until Congress
creates such a pathway, no generic threat will exist to the $4,400 a
month that Genentech Inc. charges for its cancer drug Avastin, or the
$200,000 a year that Genzyme Corp. gets for Cerezyme to treat Gaucher
disease. And biotechnology products tend to target specialized areas
of medicine that don't require mass advertising or armies of
salespeople.

So big pharmaceutical companies have spent nearly $76 billion since
2005 to buy biotech companies, according to Health Care M&A
Information Service, a unit of Irving Levin Associates Inc., a
Norwalk, Conn., research company. While in 2005 there were 33 deals
amounting to $16.5 billion, in the first nine months of this year
there were 49 deals totaling $28.7 billion, including AstraZeneca
PLC's $15.6 billion acquisition of MedImmune, which followed a bidding
war against Eli Lilly, among others.

Meanwhile, Novartis and Pfizer recently announced the formation of in-
house biotech units.

The dearth of new products has led the industry to invest heavily in
marketing and legal tactics that squeeze as much revenue as possible
out of existing products. Companies have raised prices; the average
price per pill has risen 63% since 2002, according to Michael
Krensavage, Raymond James analyst. Companies raised advertising
spending to $5.3 billion in 2006 from $2.5 billion in 2001 and since
1995 have nearly tripled the number of industry sales representatives
to 100,000.

The industry spent $155 million on lobbying from January 2005 to June
2006, according to the Center for Public Integrity, on "a variety of
issues ranging from protecting lucrative drug patents to keeping lower-
priced Canadian drugs from being imported." The industry also
successfully lobbied against allowing the federal government to
negotiate Medicare drug prices, the center said. The lobbying has
drawn fire from politicians, doctors and payers, and damaged the
industry's public image.

Aware that seven of the top 10 drug launches of 2006 were generics,
pharmaceutical giants are pushing more deeply into that business. In
first nine months of this year, Novartis's generics unit, Sandoz, grew
roughly three times as fast as its branded-drugs business and
accounted for nearly 20% of overall revenue. "The balance is
changing," says Novartis CEO Dr. Vasella. In the coming quarters, "we
will continue to see a faster growth opportunity" in generics.

After Pfizer's antidepressant Zoloft went off-patent last year, the
company's own generics unit, Greenstone, launched a generic version of
the drug.

Johnson & Johnson has its own generics unit. Other companies cut deals
with generics manufacturers, licensing them the right to sell
"authorized generics" that are identical to a branded drug that has
gone off-patent.

Diversification is another hope. Roche Holding AG is pursuing a $3
billion hostile takeover of Ventana Medical Systems Inc., a
diagnostics company that makes the test used to determine whether
women with breast cancer should receive Herceptin, a targeted
biotechnology drug that Roche sells in some markets.

The bid is part of a broad push further into diagnostics by the
company, which said in July that Severin Schwan, who runs the
company's diagnostics unit, will take over next year as CEO.

Yet none of these moves are forestalling cost slashing. Pfizer is
cutting 20% of its sales force, AstraZeneca is cutting 10% of its
employees and Johnson & Johnson is shrinking its staff by 4%,
according to Bernstein Research. As many as 50,000 industry positions
will be displaced over the next 10 years, according to wealth-
management company RegentAtlantic Capital, Chatham, N.J.

AstraZeneca, GlaxoSmithKline and Bristol-Myers Squibb have also
recently suggested they will outsource at least some of their
manufacturing. "There are lots of people in India, China and Eastern
Europe who can make products of the same quality as ours but at
significantly less cost," says Bristol-Myers Squibb CEO James Cornelius.

The outsourcing is expected to extend to research. "We don't do any
basic research yet in the lower-cost countries, but over the next few
years, to be successful you'll have a constant emphasis on looking for
that," Mr. Cornelius says.

The coming difficulty is threatening every industry tradition. "I'm
talking to you from the 44th floor of an office on Park Avenue," Mr.
Cornelius says. "A year from now, I won't be talking to you from the
44th floor because we're going to move downstairs out of these very
expensive offices."

--Sarah Rubenstein and Ron Winslow contributed to this article.

Write to Barbara Martinez at Barbara.Martinez@wsj.com and Jacob
Goldstein at healthblog@wsj.com

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Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)
thiru@keionline.org


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