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Big Changes for Big Pharma

By Amy Tsao The fear factor surrounding some commonly used pain-relieving drugs is at fever pitch. Merck (MRK) pulled Vioxx from the market in October due to strong evidence of an increased risk of cardiovascular problems. And questions also have been raised about the safety of Celebrex, made by Pfizer (PFE), and about naproxen, which is sold without a prescription as Aleve by German drug giant Bayer (BAY).

The revelations of elevated risk for heart attack and stroke with long-term use of these so-called Cox-2 inhibitors could result in billions of dollars in potential liability and considerable damage to a hugely profitable drug category. Beyond the immediate financial consequences, drug companies now must take a hard look at how they do business, analysts say. And that could mean quite a hangover for Big Pharma in 2005.

Everything from budgets for consumer advertising and physician marketing to how drugmakers disclose study information and make decisions on research projects are now under new scrutiny. The problems with the Cox-2 inhibitors "will cause a shift in the internal review of pharmaceutical companies and how they look at risk and reward," says Weidong Huang, analyst at TimesSquare Asset Management in New York City (see BW Online, 12/27/04, "Candor Can Immunize Big Pharma").

How will drug companies cope? Here are some of the likely changes coming in the post-Cox-2 world:

More cautious regulation. Over the last decade, the Food & Drug Administration has dramatically shortened the time it takes to review new drug applications. But many critics contend that the agency has been too hasty to issue approvals. "The risk-benefit ratio had been balanced toward efficacy and away from risk," says Huang.

The FDA is now likely to strike a more conservative stance, particularly with drugs apt to be taken by large populations, such as treatments for inflammation and pain (including new Cox-2s in development) and neurological diseases like Alzheimer's and depression. In such drugs "even low incidence of risk will be less tolerable to the FDA," says Huang. Pharmas will likely be asked to do more studies that assess safety and side effects as part of the FDA's review process.

Retooled new drug pipelines. If the FDA does focus more on safety, drug companies could be deterred from working on treatmenst for chronic conditions like high cholesterol. With the increasing potential for litigation if something goes wrong and a more costly process for proving the safety of big-selling medications in larger patient populations, the prospect of "developing drugs for chronic diseases becomes less attractive," Huang says.

Some companies will shift their business models away from developing blockbusters (drugs with revenues of $1 billion annually or more) toward more specialized products that require less promotion.

Swiss drugmaker Roche could be one model to follow, because it has "fewer mass-market products," says Mehta Partners' analyst Max Jacobs. It has thrived by selling drugs for hepatitis, HIV, and cancer - all of which require a smaller marketing budget since the patient populations are generally smaller, and the specialist physicians who treat them are fewer.

Roche's drugs are selling well because they address more serious medical needs. Roche's sales will grow by 6.2% annually over the next several years on average vs. Pfizer's 1.4%, figures Mehta Partners. "We hope companies will be wise enough to change the business model," says Jacobs.

New limits on consumer ads. The financial impact to makers of Cox-2 inhibitors might have been less pronounced if the drugs hadn't been so heavily promoted to consumers. Ed Saltzman, president of pharmaceutical consulting firm Defined Health in Milburn, N.J., sees a cautionary tale in what has happened. He figures the industry is headed toward a more rigorous system of policing its own promotion and marketing.

"One of the goals of this advertising is to get [some drugs] used in many more people than need it," Saltzman says. "When the smoke clears on the Cox-2 issue, more than anything else, fingers will be pointing at how certain drugs are promoted." When Celebrex was shown to have cardiovascular risk at higher doses, Pfizer stopped running consumer ads for it. "I believe Pfizer pulling Celebrex [ads] is the first step toward marketing self-regulation," says Saltzman.

However, direct-to-consumer advertising on TV and in magazines and newspapers isn't likely to stop. "Companies have to spend on [such] ads, given how thin [in potentially lucrative new products] their pipelines are," figures Jacobs.

More disclosure about possible side effects. In October, Merck yanked Vioxx from the market after learning about increased cardiovascular problems in a study of the drug in colon-cancer prevention. However, within days of the withdrawal, physicians and researchers who worked on Vioxx trials claimed that Merck had been trying to sweep cardiovascular risks under the rug for years.

Merck wasn't alone, Huang says. Earlier in 2004, makers of antidepressants also came under fire for their selective reporting of clinical trials that showed increased risk of suicide in teenage patients. "There will be no more selective disclosure," says Huang. "That's the main change that follows these dramatic events. The cost of not disclosing data is higher now." Drugmakers are also likely to try to protect themselves from possible future litigation by using more disclaimers in their ads.

More up-front patient testing for specific drugs. Companies that produce targeted cancer drugs already make predictive testing a part of their treatment routine. For example, doctors can determine which women are more or less likely to benefit from Genentech's (DNA) breast-cancer treatment Herceptin by how they fare in a blood test for certain gene mutations. But that kind of predictive testing is still rare. Drugmakers haven't embraced it, since it could reduce the patient population.

Now a consensus is growing among analysts that such testing needs to be incorporated into drug development whenever possible. "The knowledge and science aren't always there, but we do need to find ways to grapple with who benefits from certain treatments and who doesn't," says Saltzman.

A more skeptical market. Doctors and health insurers will likely put increased pressure on drug companies to show that their products are worth the cost. "The health-care system will be more rigorous in valuing the cost-effectiveness of drugs," says Daniel Hoffman, president of consulting firm Pharmaceutical Business Research Associates in Glenmoore, Pa. Many cultural factors "will keep consumers from changing their attitudes about medicine appreciably," he adds. But chastened by the revelations surrounding Cox-2 drugs, patients are likely over the long run to use more scrutiny when considering treatments.

All in all, the controversy surrounding Cox-2 treatments has been a searing experience for everyone, from Big Pharma to the corner drugstore. And the impact will reverberate throughout the New Year. Tsao is a reporter for BusinessWeek Online in New York

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