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Pharmaceuticals. For a decade or more, the word seemed almost interchangeable with "growth." The drug business was a miracle industry: While other segments of the economy restructured and retrenched, pharmaceutical labs kept churning out stunning cures for what ailed us. The strongest companies charged what they liked, and their profits grew by 25% or more a year. It looked so easy.
It was, in fact, too easy. Suddenly, the industry is scared stiff, confronted by a new order that sprang inevitably from the old. As America rushes headlong into health reform, powerful insurers, health-maintenance organizations, and other big buying groups increasingly are telling drugmakers what they're willing to pay. Hillary Rodham Clinton threatens price controls. Generic drugs are tearing into the margins of proprietary ones. New miracle cures are scarce.
"VERY ROCKY." Growth? Forget it. This industry has more prosaic concerns now, such as rethinking every aspect of how it does business. "There is going to be, for the next six to seven years, a very rocky situation for the whole industry," says Jacques F. Rejeange, president of the pharmaceuticals group at Eastman Kodak Co.'s Sterling Winthrop unit.
Drugmakers are struggling because they were late to acknowledge the market forces that drove consolidation of medical-supply companies last year, and hospitals before that. True, a few giants, such as SmithKline Beecham PLC, cut overhead when earnings faltered in the late 1980s. But only now are many companies taking a scalpel to their costs. "It's painful and tough, but I think we're doing what the rest of Corporate America has been doing," says William C. Steere Jr., chief executive of Pfizer Inc. and chairman of the Pharmaceutical Manufacturers Assn. (PMA).
Merck & Co. seems to understand now. On July 20, the much admired industry leader announced it was setting aside $775 million for restructuring charges, slashing its second-quarter net income by 73%, to $172.6 million, on an 8% sales gain. Merck is paying 2,100 of its employees to take early retirement and says it will trim hundreds more jobs as it struggles to confront an environment that Chief Executive P. Roy Vagelos calls "highly pressurized."
Merck's gloomy announcement came a day before similar tidings from Marion Merrell Dow Inc., which will take a restructuring charge of $180 million. Before that write-off, its earnings were off 20% for the quarter. In the past two years, members of the PMA have disclosed plans to cut some 23,000 jobs, or roughly 8% of their staffs worldwide. More slashing is on the way. Incoming Eli Lilly & Co. chief Randall L. Tobias ominously told analysts on July 20: "Our overhead structure evolved during a very different era. We must bring it into line with our current marketplace."
Top executives are taking the fall. Tobias replaced Vaughn D. Bryson, driven out in late June after he failed to cut overhead costs and bolster an anemic new-product pipeline. At Merck, president Richard J. Markham left abruptly on July 9 amid disputes over his ambitious plans. And at Glaxo Holdings PLC, Chief Executive Ernest Mario quit in March over "irreconcilable differences" on strategic decisions, he says, with Chairman Sir Paul Girolami.
The heads are rolling amid a broad shift of power from makers of medicines to their buyers. Managed-care organizations such as HMOs now count among their members an estimated 60 million Americans. They have leverage, and they know it. So do big hospital groups. "We're trying to give our business to the people that can help us reduce our costs," says Richard L. Scott, CEO of Columbia Hospital Corp. in Fort Worth. Columbia, whose bill for drugs and related supplies likely will rise to $900 million a year after it merges with Galen Health Care Inc. in September, plans to trim that tab by 10% or more in the next three months. "Clearly," says Scott, "buyers are in the driver's seat."
Ironically, drugmakers themselves have put buyers in control by chasing after too many look-alike medicines. So-called me-too drugs--virtually identical medicines that spring from corporate labs at roughly the same time--have made for plenty of price competition. Merck cut prices on its cholesterol-reducers Mevacor and Zocor this spring in the face of a cheaper rival, Bristol-Myers Squibb Co.'s Pravachol. And it's because Tagamet, the ulcer medicine from SmithKline Beecham, has undercut Glaxo's competing Zantac that prices for both are coming down.
VULNERABLE. Generic drugmakers are turning the heat up another few degrees. Of the 30 biggest-selling drugs in the U.S., 14 will be off patent by the end of 1996--a function largely of the cyclical nature of scientific discovery in the industry. That will leave about $10 billion in annual sales vulnerable to copying by generic-drug houses.
To compete, drugmakers including Merck and American Home Products have opened their own generic units, while Marion Merrell Dow has acquired clonemaker Rugby-Darby Group. But critics say such efforts promise only modest returns, while distracting research-based drug houses from their development efforts. Argues Albert I. Wertheimer, dean of the pharmacy school at Philadelphia College of Pharmacy & Science: "People are panicking."
Indeed, the big-name pharmaceutical makers have plenty to worry about in their own laboratories. Few blockbusters are on the way to take the places of the ulcer, cholesterol-reducing, and cardiovascular medicines that now generate billions of dollars in sales annually. In the early 1980s, Merck could boast of two such drugs in its pipeline. Now, it has few apparent new stars: Proscar, a much publicized prostate disease treatment, seems sure to fall far short of its billion-dollar-a-year promise. And too few breakthrough medicines are behind it. Says Mariola B. Haggar, drug analyst with Salomon Brothers Inc.: "Across the industry, we are facing a hiatus in terms of major blockbuster products."
A few big drugmakers are thriving, thanks either to past cost-cutting or productive research and development. Pfizer on July 21 posted a 24% gain in net income from ongoing operations, to $584 million, in the first six months of this year. Sales of its Diflucan antifungal drug and Zoloft antidepressant are growing nicely. And SmithKline Beecham, which wrung out costs in a merger in 1989, showed a gain of 17% in profits, to $595 million, on a 23% sales rise in the half.
But even those able to brag of big gains are treading cautiously. SmithKline CEO Robert P. Bauman was cool in announcing his results. He warns: "The health-care market is becoming increasingly difficult to forecast, and the long-term impact of these pressures is not clear." It is clear, really: The next decade will be painful. Health reform likely will heighten the turmoil. And the growth and glamor of old will never come as easily again.Joseph Weber in Philadelphia, with Stephanie Anderson Forest in Dallas and David Greising in Chicago