John E. Pepper, Procter & Gamble Co.'s new CEO, was quick to signal his priorities after taking the top job on July 1. Opening a $280 million health-research center outside Cincinnati on July 19, Pepper put drugs--both over-the-counter and prescription--near the top of his agenda. His lofty aim: to double P&G's $3 billion health business by 2000, and boost it to as much as 20% of sales in the next decade, twice its present share.
Rivals have heard that kind of talk before--and laughed it off after P&G promptly focused on beauty products or soap instead. After all, turning out new versions of Tide is safer, cheaper, and easier than devoting a dozen years and several hundred million dollars to drug bets that too often wind up failures.
FRESH BLOOD. But now, P&G seems serious. It is spending $400 million annually on health research--nearly double its R&D outlays on detergent or paper. It has formed 11 alliances to develop everything from an estrogen patch to blood-pressure treatments and has 30 more deals under discussion. And in an unusual break with its promote-from-within policy, it has lured some 30 researchers and regulatory specialists from such rivals as Upjohn Co. and Pfizer Inc.
Can the peddler of Pert and Pantene be anything more than a bit player in drugs? Even $400 million is small potatoes compared with the billion-dollar-plus research budgets of a Merck & Co. or Bristol-Myers Squibb Co. "The big are getting bigger. The small are going nowhere," says Neil B. Sweig, an analyst at Ladenburg, Thalmann & Co. "The only way to move forward in that business is by major acquisition."
Not so, insists Pepper. "Do you have to be a Merck, in the top five or six? I don't think so," says the CEO. Indeed, the company is shunning acquisitions that could give it critical mass instantly, preferring to innovate internally or through joint ventures. Says Thomas A. Moore, P&G's president of health-care products: "If you can't get innovation right, acquisition is a bad use of your shareholders' money."
No one disputes P&G's over-the-counter clout. Not with Vicks cough and cold remedies, Metamucil laxative, and Pepto-Bismol, anyway. And it's now hawking a new form of Crest toothpaste as a gum-disease fighter. Its Aleve pain reliever, launched a year ago, got off to such a fast start that the company temporarily couldn't make enough. P&G now claims 6.5% of the market.
P&G seems determined to succeed behind the pharmacy counter, too, and expand its $550 million prescription-drug business. But its stumbles show how risky drug research can be. Four years ago, P&G's etidronate seemed likely to garner $500 million a year. But P&G has been unable to win approval from the FDA to sell it as an osteoporosis fighter. One problem: The drug seemed in one study to actually increase fractures, though P&G calls the problem a "statistical quirk." P&G has given up on getting U.S. approval, even though regulators in 15 other countries have accepted it.
Instead, the company is focusing on the more powerful risedronate. Problem is, while P&G continues its tests, rival Merck is preparing to surge into the market with Fosamax, a drug some analysts say could be worth $1 billion a year before long. Merck will have a two- or three-year head start on P&G. "It's an uphill battle," says Merrill Lynch & Co. analyst Stephen Buermann.
VISIONARY. But P&G can claim victories. Early on, it saw the potential for a class of substances known as bisphosphonates in treating osteoporosis and is now in final human tests for risedronate, one of these chemicals. It led research examining whether peptic ulcers might be caused by a bacterium at a time when that theory, now accepted, was derided as a crackpot notion. P&G's "triple therapy"--the active ingredient in Pepto-Bismol and two antibiotics--is seen by some researchers as the gold standard for eradicating the H. pylori bacterium. P&G formally sought FDA approval for the therapy on May 26.
Rivals aren't yielding to P&G on such combination treatments, though. Glaxo Wellcome Inc. and Abbott Laboratories Inc. have filed U.S. applications for their own combinations. But P&G expects to deliver better value. After all, that has always worked in soap.
P&G'S NEW DRUG BETS:
RISEDRONATE Now in final human trials, this osteoporosis treatment would be the fourth entrant in the market.
AZIMILIDE Also in final human trials, this drug to prevent irregular heartbeats is one of many under development.
HELIDAC A peptic ulcer treatment aimed at killing the bacterium now seen as responsible for most cases, this drug is awaiting approval by the FDA.
ESTROGEN PATCH For menopause and prevention of osteoporosis, this product would enter a crowded field. A new-drug application will be filed with the FDA this year.