Drugmakers: Prescribing For The Hangover To Come

Just for amusement, staffers at drug industry powerhouse Merck & Co. sometimes kick back and play the Drug Research Uncertainty Game. In the computer simulation devised by Merck's financial wizards, players develop drugs and decide how much money to funnel into research. If they spend enough and are blessed with a few breakthroughs, balloons and confetti pop onto the screen. But make a bad choice or suffer lousy luck, and Devour Inc. marches over to snap up sad-faced Drugs-R-Us.

Lately there has been more champagne than chagrin for Merck and most of the world's major drug corporations. The industry has been an astounding money machine. Profits last year for 31 U. S. drugmakers combined soared 34%, while recession-hit earnings for all industries fell 4%. More impressive, generous margins allowed the drugmakers to clock the gains while boosting sales only 18%. And worldwide, the group was one of the best-performing of this year's Global 1000 in 1990 (table).

Britain's Glaxo Holdings Ltd. more than doubled its market value, as did SmithKline Beecham Corp., the newly merged drugmaker based in Britain. But the big winners this year were the Americans, who justly claim bragging rights to most of the breakthrough medicines of the previous 20 years. Merck glided into the No. 15 spot in the ranking of the world's most valuable companies, from 18th last year. Pfizer Inc. was one of the world's top gainers, adding 79% to its market value. But like a real-life uncertainty game, the glittering performance of the past year could tarnish a bit in the next five years. For one thing, some drugmakers have been fattening their profit margins by simply charging high prices. As the health care crisis in the U. S. and elsewhere deepens and policymakers and big buyers of drugs look for ways to rein in costs, the party could come to an end. The drug companies "are obvious targets for regulatory action," says Daniel J. Duane, managing director of Prudential Securities Inc.'s global fund.

More disturbing, few blockbusters are coming down the pike to power growth the way such $1 billion annual sellers as Merck's antihypertensive Vasotec and Glaxo's ulcer fighter Zantac have. Finally, a squeeze is on for efficiency, driven partly by a consolidation wave sweeping the industry. Warns Jan Leschly, chairman of the ethical drug unit of SmithKline Beecham: "The climate is much more difficult. It takes staying power."

LAB GRABS. Already, profit growth is slowing. At Glaxo, for instance, pretax profits grew only 13.3% last year, a far cry from the increases of more than 50% clocked only a few years ago. Likewise, the latest profit-growth rates at U. S.-based Bristol-Myers Squibb Co. and Merck pale next to the sharp gains they logged in the 1980s.

That's one reason the industry's leaders are worried about productivity in their labs. Analyst Hemant K. Shah figures only some 15% of industry revenues in the U. S. now come from drugs introduced in the past five years. The problem: Big-money areas such as cardiovascular medicine are glutted with "me too" drugs, while in the areas of greatest need and opportunity, the science remains murky, and that means more spending on research to sleuth out truly novel medicines.

Treating central-nervous-system disorders, for instance, is difficult and expensive. Warner-Lambert Co. has been unable to win Food & Drug Administration approval for a much-anticipated Alzheimer's disease drug, Cognex, because experts question whether the drug's dubious effectiveness justifies some risky side effects. And Eli Lilly & Co.'s blockbuster antidepressant Prozac has been blamed for causing users to commit violent crimes. The company says no data proves the connection.

The scramble to fill R&D pipelines is one reality forcing companies to cast about for prolific partners around the world. Hunger for new drugs drove Merck into promising ventures with Sweden's Astra and U. S.-based multinational Du Pont Co., for instance. What's more, cross-border licensing for drugs is on the upswing: Japanese players such as Yamanouchi Pharmaceutical Co. and Sankyo have gone global by licensing drugs to Merck and Bristol-Myers Squibb. The tack now is to lock up promising compounds fast and then move the drugs through government approvals simultaneously around the world. Companies can no longer afford to keep a strictly domestic focus, nor can they give short shrift to marketing while building up labs.

Still, mergers and size alone won't guarantee success. The onetime darling of the industry, SmithKline, ranked No. 6 in the world when its star drug, Tagamet, lost sales badly to Glaxo's cleverly marketed Zantac in the mid-1980s. Then, when generics tore into SmithKline's sales of the blood-pressure medicine Dyazide, the company merged in 1989 into Beecham, the British over-the-counter drugmaker.

After hundreds of millions of dollars in R&D spending, the London-based company just couldn't deliver the blockbusters it needed. Even now, while it basks in gains from merger-related savings, SmithKline Beecham remains on the prowl for big new drugs. Eminase, its new heart-attack treatment, is struggling against better-known or cheaper drugs. What's more, SB is having trouble coming up with an effective over-the-counter version of Tagamet, whose patent expires in 1994. So even while U. S. and British drugmakers seem to be enjoying their glory days, Devour Inc. is always waiting in the wings.

                                             Share-price gain   Country
                          Market value           Percent change
                              Billions             from 1990
       1. MERCK                  $46.0              44 %           U.S.
       2. BRISTOL-MYERS SQUIBB    42.4              32             U.S.
       3. JOHNSON & JOHNSON       30.2              42             U.S.
       4. GLAXO HOLDINGS          30.0              52         Britain
       5. ABBOTT LABORATORIES     22.7              37             U.S.
       6. ELI LILLY               21.2               2             U.S.
       7. PFIZER                  19.5              79             U.S.
       8. AMERICAN HOME PRODUCTS  18.7              12             U.S.
       9. SMITHKLINE BEECHAM      17.1              53         Britain
      10. ROCHE HOLDING           15.3              
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