[Ip-health] The Economist: Merck’s woes illuminate the shifts taking place in the drugs indu stry

[Sarah Rimmington]

http://www.economist.com/business/displaystory.cfm?story_id=12780875

Pharmaceuticals
Winds of change
Dec 11th 2008 | WHITEHOUSE STATION, NEW JERSEY
>From The Economist print edition

Merck’s woes illuminate the shifts taking place in the drugs industry

DICK CLARK is no stranger to hard times. The chairman of Merck, a giant
American drugs firm, got the top job after a safety scandal caused
Vioxx, the firm’s blockbuster painkiller, to be pulled from the market
in 2004. The soft-spoken Mr Clark has won praise for his handling of
that crisis and for being quicker than his rivals to start restructuring
his firm in preparation for leaner years. He was also appointed head of
Pharmaceutical Research and Manufacturers of America (PhRMA), the
industry’s lobbying arm.

But Mr Clark is not celebrating. Merck’s shares have underperformed
those of its rivals this year (see chart). Investors have worried that
its efforts to find new sources of growth were not as vigorous as those
of its peers, which have been buying biotech firms and generics-makers,
replenishing their product pipelines and moving into new markets. On
December 9th, at the annual business review conducted at the firm’s
headquarters in central New Jersey, Mr Clark announced yet another new
strategy, involving low-cost biological drugs. He also spelt out PhRMA’s
softening stance toward health-care reforms that the group has hitherto
opposed.

A revealing moment at the meeting came when one analyst mistakenly
stated that Mr Clark no longer ran PhRMA. “Thank you for the offer,” he
joked, explaining that he holds the post until April—but it was clear
that his words were only half in jest. Being the standard-bearer for the
drugs industry has never been easy, but the job will get even harder. Mr
Clark thinks 2009 will be “a year of transformation” both for the
industry and for Merck.

One reason is the recession in America. Big drugs firms, including
Merck, report that growth is slowing in that all-important market. Drugs
were supposed to be recession-proof, but it seems that financially
squeezed patients without insurance, or with big co-payments, are
cutting back even on their medicines. Many drugs firms have responded by
reducing spending on sales and marketing by 10-20%; this week Merck said
it had made deep cuts in these areas without hurting sales. The firm has
also made a big push into emerging markets. It thinks its revenues there
may exceed its target of $2 billion in 2010.
Click here to find out more!

But Mr Clark’s main announcement was a bold $1.5 billion plan to enter
the nascent market for “biosimilars”, which are the biotech equivalents
of generics. This will put Merck in direct competition both with
generics firms, such as Teva of Israel, and with biotech giants, such as
Amgen, which make the expensive products that biosimilars hope to
replace. The reason to think Merck may succeed, argues Tim Anderson of
Sanford Bernstein, a research firm, is that it has found a way to make
biosimilars by culturing them inside yeast cells. This could be much
cheaper and more reliable than the usual method, using mammalian cells.

The second transformative force is the pending reform of America’s
health-care industry. When Hillary Clinton tried to push through a plan
for government-run health care in the 1990s, the drugs industry spent
huge sums to help kill the initiative. This time, says Mr Clark, his
industry wants comprehensive reform and even has “a seat at the table.”
Perhaps surprisingly, PhRMA now supports most aspects of health-care
reform being mooted, from universal coverage to restructuring the
insurance market.

However, this acceptance of change goes only so far. Push Merck
officials on the prospects for drug-price controls, and their
unflinching answer is that they are “completely opposed” to such
European-style “rationing” of care. The industry makes much of its
profit in the unfettered American market, and price controls threaten
that flow of cash. It argues that if limits are imposed on drug prices
in America, there will be less to invest in innovation and everyone will
suffer, since the rest of the world free-rides on American spending.

That argument is correct, in that businesses need the prospect of profit
in order to invest. In practice, though, America is unlikely to impose
draconian price controls. The more likely outcome is that government
health schemes will start demanding discounts from drugs firms, and will
buy more generics. Dr Anderson has crunched the numbers, and he reckons
this need not lead to disaster. He reckons that a 20% cut in drugs
prices paid by Medicare, America’s health-care system for the old and
disabled, will shave profits at the biggest drugs firms by a mere 5%.

So even if President Obama swings his budget axe forcefully, there will
be plenty of money left for the pharmaceutical industry—provided, of
course, that the companies keep coming up with genuinely new drugs.
However, as Mr Clark has discovered, that is no easy task.




--
Sarah Rimmington
Attorney
Essential Action, Access to Medicines Project
Washington, DC
Tel: (202) 387-8030
Cell: (202) 422-2687
www.essentialaction.org/access/