[Pharm-policy] Wall Street Journal: Drug Firms, Stymied in the Lab, Become Marketing Machines

[Thiru Balasubramaniam]

THE WALL STREET JOURNAL  

Drug Firms, Stymied in the Lab, Become Marketing Machines
By GARDINER HARRIS 
Staff Reporter of THE WALL STREET JOURNAL

July 6, 2000 



Copied for Fair-Use



Pharmaceutical researchers have never had it so good. Their labs are
stuffed with high-tech equipment. A golden age of biology has brought an
avalanche of discoveries. And fat profits have bankrolled large staffs
and high salaries.

The hard truth, however, is that the pharmaceutical industry's
researchers are not delivering on all this promise. Their production of
breakthrough medicines, the products vital to propelling revenues and
profits over the next decade, has actually declined since 1996. As a
result, the industry is sliding toward a crisis in which business
necessities and political realities collide.

"We don't have enough in our collective pipelines," says Jean-Pierre
Garnier, who will be chief executive of the combined Glaxo Wellcome PLC
and SmithKline Beecham PLC.

Simply accepting lower profits isn't an option for pharmaceutical
executives, since doing so could bomb their share prices and make them
vulnerable to takeover. So executives, in some cases dissatisfied with
the output of their own labs, are farming out much of their research to
biotech companies. And they are  investing more and more in marketing to
boost the sales of the drugs they do manage to create. If the difficulty
in producing enough new products continues -- and signs are it will --
the industry will become increasingly reliant on costly marketing
schemes, and relatively less on its research operations.

Story Line

In fact, the pharmaceutical industry is gradually shifting the core of
its business away from the unpredictable and increasingly expensive task
of creating drugs and toward the steadier business of marketing them.

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The more marketing succeeds in convincing consumers they need a
company's drugs, the less the consumers -- unhappy with how much drug
makers charge -- want to see the drug makers spending their money on
advertising. So drug makers' solutions to their lab woes -- raising
prices and aggressively marketing -- may make good business sense for
individual companies, but they are politically perilous for the industry
as a whole.

Backlash

The industry's political fortunes decline steadily as it squanders some
of the good will it has generated curing ills. Price controls, an idea
once dismissed out of hand, are getting increasing political attention.
So are proposals to allow drug re-importation from Canada and elsewhere
where prices of American-made drugs are often half those in the U.S.

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Marketing Costs


The industry's response to rising complaints over prices is to repeat an
argument it has used for years: Drugs are priced to support expensive
and risky research.  Indeed, the pharmaceutical industry's spending on
research and development has tripled since 1990 to $26.4 billion. As a
percentage of sales, it spends more on research than almost any other
industry.
                         
But the drug industry still spends far more on salesmen than it does on
scientists.  Its army of nearly 70,000 U.S. salespeople costs roughly $7
billion a year. And although they often deliver information doctors
need, they do so at a high cost: The average sales call lasts seven
minutes but costs companies $100 to $300 each to make. Overall, the
industry's marketing and administration expenses are            
generally more than twice those of research and development. At Pfizer,
for instance, marketing and administration make up 39% of expenses,
compared with 17% for R&D.

One of the fastest-growing costs at pharmaceutical companies is consumer
ads.  In 1998, according to the research firm Competitive Media,
Schering-Plough Corp. spent $136 million advertising just one medicine,
its allergy drug Claritin.  That's more than Coca-Cola Co. spent
advertising Coke, or Anheuser-Busch      Cos. spent advertising
Budweiser. Schering-Plough spent an additional $53 million that year on
salesmen who visited doctors in person to pitch the drug, according to
the research firm IMS Health.

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The number of novel drugs approved by the U.S. Food and Drug
Administration peaked in 1996 at 53. There were just 35 in 1999, and 16
through the first half of this year. While those numbers remain higher
than the average of 22 drugs launched annually in the 1980s, the
industry is now much bigger, so it takes  more new drugs to keep up the
same percentage growth.

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The research shortfall means that the cost of producing each new drug
continues to rise. The industry now estimates that each approved drug
must return between $300 million and $600 million, to cover the research
expense of the many that don't pan out. Meanwhile, contract research
organizations, companies that perform human testing for pharmaceutical
companies, have been in a funk for about a year because of the low
number of new drugs coming out of industry labs.

In this situation, the industry is pinning its growth hopes less on new
products and more on persuading people, including healthy ones, to buy
the pills already being sold.

Consider Viagra. Though its sales rose above $1 billion last year, they
were well below some projections. Now Pfizer Inc., which initially
insisted Viagra was only for "erectile dysfunction" and not for healthy
men looking for a good time, is running ads featuring smiling young
couples. One ad in February called Viagra "an official sponsor of
Valentine's Day.'' 

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To no one's surprise, marketing works -- sometimes better than science.
There is no evidence, for instance, that Claritin functions better than
competing nonsedating antihistamines like Allegra. But its ads have made
it the dominant allergy drug, with $1.7 billion in U.S. sales, more than
triple Allegra's. Claritin's success has been a revelation to industry
executives: Buy ads, watch sales soar.

<SNIP>

The industry is launching an increasing number of "lifestyle" drugs --
such as Merck's baldness remedy and Bristol-Myers's drug to eliminate
women's facial hair -- whose sales largely depend on inducing consumers
to ask doctors for them. The best way to do that: consumer ads.

<SNIP>

Joining Forces

Marketing isn't the industry's only answer to its research woes. Another
is mergers. 

<SNIP>

Filling the product pipeline was a key reason behind the soon-to-close
melding of Glaxo with SmithKline, Dr. Garnier says. And while Pfizer
says it launched its hostile takeover of Warner-Lambert out of
"strength," analysts figure Pfizer was pushed to make the play by the
limited number of major new products in its pipeline.

But like the move toward marketing, mergers have shortcomings. They help
profits for a few years as redundant support operations are cut, but
they do nothing for research productivity, say academics and consultants
to the industry. In fact, many believe mergers are distracting and
hinder researchers'        creativity. The need for double-digit growth
continues, but now on a bigger sales and earnings base.

"There are all sorts of formulas out there saying that these firms will
need to put out at least three or four new chemical entities per year
[to sustain growth rates] and there's no firm right now doing anything
more than one per year," says Kenneth Kaitin, director of the Tufts
Center for the Study of Drug Development.  "It's a very tenuous time for
the pharmaceutical industry.


Pressure for More

Take Pfizer. After absorbing Warner-Lambert, Pfizer will have revenue
this year of roughly $31 billion and a research budget of about $4.7
billion. Hollowing out Warner-Lambert's executive ranks and paring other
costs may maintain profit growth for a couple of years, but eventually,
sales growth will have to carry the load. To continue growing at
double-digit levels, the company by 2003 will need to be launching at
least three or four drugs a year that can do $1 billion in annual sales.
By 2007, when some of Pfizer's key patents expire, the company will need
to launch five or six huge-selling new drugs each year.

Pfizer's own labs have come up with just seven drugs in the past 10
years, and licensed four.   Warner-Lambert's labs came up with six drugs
in that time and licensed a seventh -- one of which was withdrawn and
three of which have low sales. Together, the two companies' labs
produced fewer than two new drugs a year, not nearly enough for future
growth. To create a 10% compounded annual return on its $4.7 billion
research and development investment, Pfizer researchers will have to
come up with products in 10 years that create $12 billion in new revenue
that tenth year.

<SNIP>

High Hopes

Many drug executives thought productivity would be climbing by now
because of investments made five years ago in robotic drug-screening
equipment. The robots speed 20-fold the process of coming up with a
compound that performs a needed biological activity. "We can screen our
entire chemical-compound          library against a target in two to
three weeks," says Edward Scolnick, president of Merck Research
Laboratories. "That would have taken us years before."  

What hasn't improved much is the time needed to formulate compounds into
drugs the body will be able to absorb and use and that aren't toxic. Far
from becoming more efficient, this process is only getting harder. Part
of the reason is that as the number of marketed drugs rises, coming up
with drugs that don't
interact with those medicines patients are already taking is an
increasingly difficult chore. More and more promising compounds are
failing in the lab because of such drug-to-drug interactions.

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Prodded Into Alliances


The increasing inefficiency of research has led drug executives, just
like movie executives before them, to pour money into buying and teaming
up with independent production companies. Among the big biotechs that
have been purchased in whole or in part: Genentech Inc., Agouron
Pharmaceuticals, Immunex Corp. and Chiron Corp. Commitments to research
alliances hit $5.3 billion in 1999, triple the 1994 level, according to
Recombinant Capital, a biotech analysis firm.

The proportion of Bristol-Myers's research budget that is spent on
research alliances with biotechs is up to almost 30%, and "I see that
eventually going to maybe 50%," says Peter Ringrose, research chief. At
Warner-Lambert, money spent on alliance research rose from nothing five
years ago to 25% of the budget last year.

The subtext for these deals: Concern that small biotechs' labs may be
better at discovering drugs than the giants'. While little data support
this notion so far, a Tufts University study found that the number of
drugs approved by the FDA that were discovered by the firm asking for
the approval fell to 61% in the mid-1990s from 72% in the mid-1960s. The
growing biotech alliances suggest that the number is even lower now.


<SNIP>

But as more pharmaceutical giants look to the biotechs for innovative
compounds, their prices rise. "I used to go to biotech companies all the
time, and we were the only ones," says Dr. Garnier. "Lately, everybody
is looking at the same assets."

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