Analysts Say Crisis Is Self-evident and Change Inevitable

INDUSTRY CRITICS

Pharmaceutical companies are enormous corporations that do everything in a big way. And that's their problem, according to industry analysts.

Critics maintain that the drug industry has succeeded to the point of failure. "In the last five years, they've had innovative blockbuster products in depression, heart disease, and schizophrenia that have raised the bar for what they need to achieve to grow," says Erik Verhoef, a pharmaceutical industry analyst with Susquehanna Financial Group.

The bar may now be too high, as evidenced by the drying up of the late-stage pipeline, he says. "Most late-stage, Phase III products are line extensions," according to Verhoef. "Companies are trying to get new indications, grow the market, or introduce combinations."

He cites the Food & Drug Administration approval this month of Pfizer's combination of its high blood pressure drug Norvasc (amlodipine besylate) with its anticholesterol blockbuster Lipitor (atorvastatin calcium). "Basically, they are trying to extend the patents."

Although there is some innovation in early-stage development, Verhoef says it will take six to 10 years for any of it to pan out. Ashish Singh, a consultant at Bain & Co., agrees. "It's like a pig in a python," he says. "There is so much happening in early-stage development that has to work its way out."

As it does, the python will inevitably evolve and become smaller, according to Singh. Changes in the industry will result from what Singh contends is a self-evident crisis. "It's a matter of input versus output," he says. "You don't see a return on investment."

Verhoef and Singh agree that currently only one major pharmaceutical company can continue pursuing blockbusters in a 1990s fashion: Pfizer. "With all its resources, Pfizer can afford to place bets on multiple therapeutic areas and target classes and see what sticks," Singh says. "For most of the pharmaceutical world, it's now more of an issue of making choices about where to play."

It is hard for companies in an industry that traditionally values the biggest portfolio and most profitable drug to set up the metrics necessary to vigorously prioritize a development pipeline, Singh says. But GlaxoSmithKline, Wyeth, and others are beginning to attempt this by restructuring operations into divisions that run like separate businesses.

He cites GSK's centers of excellence in R&D and Wyeth's recent establishment of business units for biopharmaceuticals, women's health, vaccines, and small-molecule pharmaceuticals. Generally, Singh says, managers of these groups have their own profit-and-loss responsibilities, which push them to make tough decisions on what to pursue, what to in-license, and what to drop.

Verhoef says the industry can no longer support behemoths that do everything. Even Pfizer is starting to move in a new direction with its recent acquisition of the biotech firm Esperion Therapeutics, which specializes in high-density lipoprotein, the so-called good cholesterol. "Pfizer basically took out their major competition [for Lipitor] for $3 billion, which I think was worth it," he says.

Verhoef adds that the deal validates the theory that biotech companies with strong pipelines will be turning increasingly to "big pharma" to get new products through clinical trials and the FDA review process. Such alliances will lend useful focus to efforts at the big drug companies. "The key thing big pharma needs to do," he says, "is get products through clinical development a lot faster. Taking 10 to 12 years going from labs to FDA submission is costing them money."

He says large drug companies will gradually become the commercialization partners to fast-moving, innovative biotech firms. "You would basically have very large sales and manufacturing teams on the big pharma side utilizing the nimbleness of smaller biotech companies in developing novel approaches to tough diseases," Verhoef predicts. "For pharmaceutical companies to say they've got core competence in manufacturing, sales, marketing, plant management, regulatory affairs, clinical development, and research seems very arrogant. Over time, it will make sense to divide and conquer."