It's a 'Golden Age' for Pharmaceutical Makers: Drugs' New Era
Bloomberg News
July 20, 1998, 11:25 a.m. ET
It's a 'Golden Age' for Pharmaceutical Makers: Drugs' New Era
(The first of a series on the rapid pace of drug development
and its ramifications. Subsequent stories will cover new
treatments for cancer, heart disease, AIDS and ailments of the
aging.)
New York, July 20 (Bloomberg) -- These are heady times for
drug companies, their shareholders, and the people who use their
products. Treatments for everything from arthritis to AIDS to
breast cancer are coming to market in unprecedented numbers.
Almost every pharmaceutical company has a blockbuster drug.
Pfizer Inc.'s Viagra impotence pill, launched in April, is the
biggest-selling new drug ever, with more than $400 million in
sales so far. It broke a record set a year earlier when Warner-
Lambert introduced its Lipitor cholesterol pill.
Schering-Plough Corp. shares have doubled in the past year,
helped by a television advertising campaign that spurred sales of
its allergy pill Claritin. Even a laggard in the drug chase,
Pharmacia & Upjohn Inc., has risen 30 percent in the past 12
months.
''We're in a golden age of pharmaceuticals,'' said Martin
Bukoll, an analyst for Northern Trust Corp., which owns shares in
several drug companies. ''This is a great growth story as far as
the eye can see.''
With profits soaring, drugs stocks have made index funds
look like also-rans. Riding a roster of other popular drugs,
including treatments for heart disease, Pfizer shares have
returned 704 percent to investors through market appreciation and
dividends in the past five years -- almost four times what an
average stock returned in the period.
Seeking the size they hope will produce even more
breakthrough products, drug companies are merging in a new wave
of consolidation. Mergers by drug and other health-care companies
total $77 billion so far this year, virtually matching the $78
billion tally for all of 1997. Five years ago the total was $27
billion.
Eager Customers
More important for future profits is a steady supply of
eager customers, as an ever-aging populations clamors for more
and better care.
This euphoria is quite a contrast to the gloom hanging over
pharmaceutical stocks when Bill Clinton was elected U.S.
president in 1992, promising to stop big companies from ''price-
gouging'' on their prescription drugs.
Pharmaceuticals haven't become a risk-free business,
however. While the U.S. Food and Drug Administration is approving
drugs at a faster pace, many costly new products don't make it.
In June, the FDA denied approval to Pfizer's schizophrenia drug
Zeldox -- for reasons the FDA hasn't yet explained.
Many companies also are losing patent protection on
profitable medications. The world's best-selling drug, the
Prilosec ulcer treatment made by Sweden's Astra AB, for example,
goes off patent in 2001.
Other drugs are losing their effectiveness. Companies are
urgently developing new AIDS drugs, because HIV, the virus that
causes the disease, has developed resistance to many of the drugs
that once were effective against it.
And for all the compelling drugs coming out of research,
manufacturers still sell into a buyers' market. The leading
purchasers of drugs today are managed-care companies bent on
keeping the cost of medicine down.
Viagra
Pfizer's Viagra impotence pill is a case in point. The drug
had an unprecedented $411 million in sales during its first three
months on the market. But already some managed-care companies
have refused to pay for the pills -- because of possible side
effects and because they cost $10 apiece.
The drug industry has a powerful hedge against these risks,
however, with its huge array of new products on the market and in
development.
Merck & Co. and Monsanto Co. are developing painkillers that
will treat the swelling and burning caused by arthritis without
irritating the lining of the stomach. These drugs, called Cox-2
inhibitors, could be on the U.S. market as early as next year.
So-called super estrogens, such as Eli Lilly & Co.'s Evista,
now used to prevent the bone-thinning disease osteoporosis, and
Zeneca Group Plc's Tamoxifen, now used to treat breast cancer,
may also prevent breast cancer, recent studies show. Other
research indicates that Genentech Inc.'s drug Herceptin can stall
the progress of breast cancer and boost the effectiveness of
chemotherapy.
Cancer Drugs
Within 12 to 18 months, Bristol-Myers Squibb Co. and its
partner, EntreMed Inc., hope to begin testing a promising new
cancer drug on humans. It works by stemming the flow of blood to
cancerous tumors, in effect, starving them.
Using ever faster computers and more sophisticated software,
researchers have begun to unlock some of the secrets of the
genetic code. Their work is giving drugmakers a better
understanding of proteins -- the building blocks of the body. In
time, drugmakers expect this knowledge to pay off in new
medicine.
''What's really driving the industry is the state of the art
in technology,'' said Michael Berry, portfolio manager for the
Heartland Midcap Value Fund. ''Research creates its own demand.
There's an opportunity to make a lot of money and do some good.''
In addition to looking for new drugs, companies devote much
of their research budgets to testing for added benefits from
existing products.
Lilly is conducting a study of 10,000 women in 25 countries
to see if its Evista estrogen drug also can prevent heart disease
in older women. Merck and Bristol-Myers have done giant studies
to see if their cholesterol drugs can reduce risk of heart attack
in some patients.
R&D
The cost of all this is huge. U.S. drugmakers alone plan to
spend $21.1 billion in 1998 on research and development, compared
with $18.6 billion last year, according to the Pharmaceutical
Research and Manufacturers of America, an industry group. Pfizer
and Merck have each targeted about $2 billion for R&D this year.
It's easy to see why the companies spend so much. Analysts
were speculating five years ago that Warner-Lambert would sell
off its lackluster drug operations to focus on consumer products
such as Dentyne gum and Schick razors. But last year it
introduced Lipitor, a cholesterol-reducing pill, vaulting it to
the front ranks of drugmakers.
In their quest to develop market-leading drugs, companies
have decided that size matters. They're merging to cut costs, to
offer managed-care customers a broader range of products, and to
throw more money at research.
''The large companies are simply more likely to find
blockbuster drugs, which makes it difficult for the companies
that don't have scale to prosper,'' said Clinton Gartin, the head
of the health-care group at Morgan Stanley, Dean Witter & Co.,
which has had a hand in several of this year's drug takeovers.
In June, Astra said it would pay Merck at least $4.4 billion
to buy out their joint venture. That move could pave the way for
the Swedish drugmaker to seek a full-fledged merger with another
company. In June, American Home Products Corp., the world's
largest maker of estrogen-replacement drugs for women, said it
would link with Monsanto Co., which is racing with Merck to
develop a Cox-2 inhibitor, in a $38 billion merger.
Earlier drug industry combinations produced Pharmacia &
Upjohn, a merger of Swedish and U.S. companies, and Glaxo
Wellcome Plc, bringing together two U.K. drugmakers, in 1995. The
creation of Novartis AG in 1996 united two Swiss companies,
Sandoz AG and Ciba-Geigy AG.
Patents Expired
Mergers carry their own risks. After patents expired on
several of Pharmacia & Upjohn's leading drugs, the company's
sales fell 6 percent in 1997 to $6.35 billion, and it hired a new
chief executive.
Merged or not, drug companies bet that profit from new
products will overshadow any problems. Part of their push stems
from the need to replace big sellers that are going off patent.
Lilly, for instance, needs new sales from Evista, a drug
that can prevent aging women from getting brittle bones, and
Zyprexa, a big-selling anti-psychotic, to offset the loss of
patent protection for Prozac, the world's best-selling
antidepressant, early in the next decade. Merck, facing the loss
of patents on drugs with more than $5 billion in annual sales,
has introduced five new products in the past year.
Drug manufacturers are also investing in revolutionary
technologies. One is genomics, or the study of the complete set
of human genes. Genomics provides drugmakers with a better
understanding of which proteins play a role in disease and
health. By interfering with these proteins, the manufacturers
intend to develop new drugs
The big drug companies have signed agreements worth as much
as $3.3 billion with smaller biotechnology companies specializing
in genetic research, said Matthew Murray, an analyst with Lehman
Brothers.
AIDS Drugs
The new approach of discovering treatments by targeting
proteins has already paid off for Merck and one of its rivals,
Agouron Pharmaceuticals Inc. They've each developed new drugs to
fight the virus that causes AIDS by targeting one of its
proteins. Merck's Crixivan and Agouron's Viracept both work by
disabling protease, an enzyme HIV needs for successful
replication.
''You use chemical engineering to design a molecule that
binds to and blocks this protein,'' Murray said.
The AIDS drug market could grow to $5.5 billion in 2000 from
almost $4 billion in 1998, according to Mehta Partners,
securities analysts who follow the drug industry.
As the pace of innovation in the industry has increased, the
FDA has shortened the time it takes to review new drugs. The
agency said it approved 39 drugs in 1997 and 53 in 1996, up from
about 28 in 1995.
This may be too fast. Among the drugs approved in 1997 were
Roche Holding AG's high blood pressure drug Posicor and American
Home's painkiller Duract. The companies pulled both drugs off the
market in June because of side effects. Researchers discovered
that Posicor had adverse interactions with some other drugs, and
American Home withdrew Duract on reports of four deaths and eight
liver transplants among users of the drug.
''I think we're going to see a lot more of this,'' said
Raymond Woosley, chairman of Georgetown University's pharmacology
department. ''We don't have the infrastructure to handle'' 90 new
drug approvals applications each year, the current level, he
said.
Murray Lumpkin, deputy director of the FDA's center for drug
evaluation and research, defends the process, which approves
drugs, then continues to monitor them. ''The rarity of this
liver toxicity (with Duract) never would have been picked up in
clinical trials,'' he said.
Lumpkin says the FDA's ''primary core mission'' is to get
drugs out on the market.
The FDA certainly has been fulfilling that mission. The drug
business prospers as never before, benefiting millions of
patients, employees -- and investors.
--Kerry Dooley in the Princeton newsroom (609) 279-4016, with
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