E-drug: Blockbuster drugs
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[Food for thought. Distributed as fair use. HH]
Blockbuster drugs: Take the hype in small doses
Sharon Reier
International Herald Tribune March 03, 2003
Sheltered from the ravages of the dot-com bust, the U.S. glut in power
generation and the wave of accounting scandals, pharmaceuticals
would seem to merit their traditional reputation as a defensive
investment. Add the aging populations in most developed countries,
new research techniques and advances in biotechnology, and the
outlook for the industry appears rosy. But while the industry generates
plenty of cash, its fortunes rise and fall with successful innovation. By
definition, true innovation is unpredictable. And by all accounts, the
industry is spending more than ever trying to attain the holy grail:
blockbuster drugs that generate revenues of $1 billion per year, and
preferably much, much more. "The way the industry is structured right
now, from an economic standpoint they are depending on blockbuster
drugs for most of their income," said Ken Kaitin, professor of
pharmacology at Tufts University and director of the Tufts Center for
the Study of Drug Development. Certainly investors pay up for the
good prospects of blockbusters in the pipeline. For instance, while the
productivity of research and development in most of the industry is
going through a slump, Eli Lilly & Co. is bucking that trend. It is said to
have seven important drugs in its pipeline, with three that could get to
blockbuster status. That includes Lilly's new anti-impotence drug,
Cialis, which has been introduced in Europe and which Lehman
Brothers predicts will reach $2 billion in global sales. The market is
buying the Lilly story and values the company's stock at 22 times
earnings, compared with a multiple of 15 for the industry. Others keep
spending to stay ahead. Pfizer Inc., the industry leader in sales and
blockbuster drugs, is spending $100 million a week to find and
develop innovative therapies. Spending at AstraZeneca PLC comes to
$10 million per working day. As of 2001, the top eight pharmaceutical
companies in the United States were spending $30 billion a year on
R&D to fill their pipelines with the drugs of the future. All told, the
global pharmaceuticals industry spent $50 billion last year on R&D.
according to Stuart Walker, chief executive of the Centre for Medicines
Research International in Britain. Scrutinizing the potential in those
pipelines for blockbusters can be like reading tea leaves. Promising
therapies can wind up having serious side effects that discourage
development. Other drugs focus on too small a segment of the
population. And typically, blockbusters do not cure diseases: they
alleviate symptoms of chronic conditions, such as asthma or arthritis,
from which very large numbers of people suffer. Alex Hittle, a top
biotech analyst at A.G. Edwards in St. Louis, indulges in a little gal
lows humor. "We sometimes joke that when youre doing a clinical
trial, there are two possible disasters," Hittle said. "The first disaster
is
if you kill people. The second disaster is if you cure them. "The truly
good drugs," he continued, "are the ones you can use chronically for a
long, long time." A current blockbuster that falls into this category is
Lipitor, the cholesterol-lowering drug that has ratcheted up to an
estimated $7.4 billion in sales for Pfizer. Another megabrand
blockbuster is Prilosec, a heartburn and ulcer drug from AstraZeneca
that sold $3 billion in the United States alone last year before going
off-patent. Now a lower-priced generic version is eroding its sales. So
how does an investor find a new Lipitor or Prilosec before it proves to
be a blockbuster and lifts the company's stock? It isn't easy. Despite
an increasing amount of what the analysts call "news flow" about how
drugs have performed in various phases of research and development,
some industry analysts deride the possibility. "Everyone is always
wrong about blockbusters," said Scott Shevick, pharmaceuticals
analyst at Bear, Stearns. "The record of companies, analysts and
consultants in fore casting blockbuster drugs is abysmal." To prove his
point, Shevick cited the amazing and unforeseen success of Lipitor, a
statin that prevents the liver from using an enzyme that creates
cholesterol. Pfizer did not invent statins; Merck & Co. Inc. pioneered
them. Taking a cue from research done in Japan, Merck developed a
statin and undertook to educate the public about the then little-known
dangers of cholesterol. In a landmark study in Sweden involving 4,444
patients, Merck proved that its Zocor reduced the risks of heart attack
in heart patients and lowered cholesterol. The drug rocketed to $1
billion in sales. Meanwhile, Pfizer teamed up with Warner-Lambert Co.
on a new statin. Pfizer's marketing team cannily pinpointed a bit of
research from their clinical trials, which concluded that the drug
reduced cholesterol with a lower dosage than its competitors. That
safety factor, along with a lower price point, induced doctors to
choose Lipitor. "Pfizer's message was simply that lower was better,"
Shevick said. But Merck, apparently, was unconcerned about the new
competition. "The chairman of Merck said that Lipitor would only get
the low-hanging fruit," Shevick recalled � the implication being that
even the chairman of Merck did not recognize the drug's full potential.
Lipitor gave Pfizer the firepower to take over Warner-Lambert in 2000
for $80 billion in stock, and it is now buying Pharmacia Corp. for
another $60 billion in stock. The company is considered the
800-pound gorilla of the industry: big, unavoidable, and all but
unstoppable, with five blockbuster drugs in its portfolio. Pfizer throws
its weight into marketing, with a budget that turns products into
megabrands with direct-to-consumer advertising. Lehman Brothers
estimates that Pfizer spent $1.3 billion to sell Lipitor in 2002. If
pinpointing the blockbuster of the future is difficult, it is still
worthwhile trying to evaluate how a pharmaceutical company's
pipeline is doing. Fortunately, that is easier these days than it used to
be: Many publicly held drug companies explain the progress of their
R&D pipelines on their Web sites, and important results frequently
make news. That is a turnaround from two decades ago, when for
competitive reasons companies kept their R&D progress top secret.
These days companies feel it is more important to keep investors in
the loop. But getting excited about a new medical treatment in its early
days is a gamble. For every 5,000 synthesized compounds
investigated, some 200 to 300 enter the pre-clinical phase of animal
testing. Compounds that prove effective and nonlethal in animals may
proceed to the development stage, which means clinical trials where
the compounds are tested on human subjects. For drugs that aim for
approval in the United States � a market essential to blockbuster
status, since U.S. prices are higher than those in other countries �
companies need approval from the Food and Drug Administration to
test on humans. Clinical development has three phases. Phase 1 trials
are designed to determine the metabolism and pharmacological action
of the drugs, side effects associated with increasing dosages and early
indications of effectiveness. Phase 2 is the beginning of controlled
studies on the effectiveness of the treatment for a particular symptom
in patients with a particular disease. By the end of Phase 2, more than
half the drugs tested are considered unattractive for studying in Phase
3 � expanded controlled trials with placebos on thousands of patients.
to evaluate the effectiveness and safety of the drugs, particularly in
comparison with drugs already on the market Evidence from Phase 3
gives companies some idea of whether they have a blockbuster on
their hands. From the beginning of clinical trials � which can take five
to seven years � only 21.5 percent of the drugs that started the
process ultimately get approval to go on the market. The approval
mechanism has become more efficient over the past decade. The FDA
wait is down to an average of 12 months. What is more, There is
some good news in all this. Since an FDA ruling went into effect in
1993 that encouraged collaboration of drug companies and the FDA
on the design and paperwork for clinical trials, 80 percent of all
applications filed have been approved. Of course, when a pipeline drug
with a lot of buzz fails to pass FDA scrutiny, or is delayed for
unforeseen reasons, it can be bitter medicine for stockholders. Witness
the events surrounding the FDA's demand for more information about
Erbitux, the cancer drug developed by ImClone Systems Inc. Erbitux
became a household word as Martha Stewart and ImClone's chief
executive, Samuel Waksal, were skewered by the media for having
sold their shares after allegedly learning about the FDA delay. But
Stewart was not the only one in trouble. Bristol-Myers Squibb Co. had
agreed to pay $2 billion for 20 percent of ImClone Systems and a 40
percent take on Erbitux. Bristol-Myers Squibb stock slid from $50 to
$30 on the Erbitux disaster, which coincided with legal problems the
company was facing on its cancer drug Taxol. Bristol-Myers Squibb
has since renegotiated its Erbitux deal for a lower sum and is rumored
to be a takeover candidate. Some analysts say Erbitux could still turn
out to be a blockbuster drug for colorectal cancer. If all this illustrates
the risk of invest ing in a pharmaceuticals pipeline, it should. Pipelines
are only a promise. They should be balanced by the threat that existing
blockbusters might soon lose their patent protection or be challenged
early by generic drug makers. Lehman Brothers' pharmaceutical team
predicts there could be as many as 11 blockbusters approved for
introduction this year. They consider the most promising near-term
pipelines to be Lilly, Roche Holding AG, Sanofi-Synthelabo SA, Serono
SA, Wyeth and Novo-Nordisk AS. Viren Mehta, president of Mehta
Partners, which does institutional research in health care and runs a
healthcare hedge fund, suggested that investors follow the same
principles in investing in pharmaceuticals that they would in companies
without pipelines: "Take advantage of the volatility that takes place
and buy cheap," he said, "and double up on good names when the
sector gets out of favor."
Find proven management and invest in people above all. Invest in
products with sophisticated marketing; look at companies in emerging
markets; be selective about money losing biotech companies, and
don't pay up when stocks get overpriced." Shevick of Bear, Stearns
advised investors not to be blinded by promises of technological
breakthroughs. "Value the business excluding the pipeline, and don't
pay any more than that," he said. "Remember, the record of
innovation in the industry is awful."
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