Drugs: Relief from the Pain

-- Drugmakers are set to launch a number of potential big sellers in 2003

-- There will be more licensing deals and possibly a big merger or two

The best thing most drug industry executives can say about 2002 is that it's over. The year was marked by patent expirations on blockbuster medicines, followed by competition from cheaper generics, and by a dearth of hot new products. Even drug-company shares, long thought to be a safe haven in tough economic times, dropped right along with the overall market.

In 2003, those trends should start to reverse. Fewer products will go off patent, while some potential big sellers should hit the market. "It still won't be as good as what we saw in the heyday" of the 1990s, says Norman M. Fidel, health-care portfolio manager at Alliance Capital Management LP. "But while we barely had earnings growth in 2002, we should get back to close to low double digits in 2003."

The biggest reason for that improvement: Fewer blockbuster drugs will lose sales to cheap knock-offs. In 2002, sales fell off a cliff for a number of big drugs due to generic competition. Victims included Merck & Co.'s (MRK ) hypertension drug Prinivil and Bristol-Myers Squibb's (BMY ) diabetes drug Glucophage. There will be some similar pressure in 2003, particularly as new over-the-counter versions of Schering-Plough's (SGP ) blockbuster allergy medicine Claritin eat into sales of that big seller. But for most companies, patent expirations will be fewer this year.

At the same time, new-product launches, though hardly overwhelming, are beginning to ratchet up. Several promising new therapies are expected to roll out in 2003, including Abbott Laboratories' (ABL ) Humira for rheumatoid arthritis; Levitra, a Viagra competitor from Bayer (BAY ) and GlaxoSmithKline (GSK ); and Crestor, a cholesterol-lowering therapy from AstraZeneca (AZN ). Eli Lilly & Co. (LLY ) is also likely to launch Strattera, for attention-deficit hyperactivity disorder, and a new antidepressant called Cymbalta.

But turning those products into best-sellers will be a challenge. Consumers are already feeling the squeeze from higher insurance co-payments for prescriptions, and that trend will continue in 2003. "The shifting of the cost burden from payers to consumers is causing a significant slowdown in prescription [growth]," says Pfizer Inc. (PFE ) Chairman and CEO Henry A. McKinnell.

Compounding that pressure are less than robust pipelines at many companies. Unable to accelerate the discovery and development of new miracle drugs, more pharmaceutical companies will look to license products from the few biotech companies with promising compounds--or acquire those firms. The problem is, all the players seem to have the same idea. "Those deals have gotten more competitive and more expensive," says Pfizer's McKinnell. That's one reason Donald Meltzer, global co-head of mergers and acquisitions at Credit Suisse First Boston, expects more deals to be made for products at an earlier stage of development.

Look for at least one or two big deals to be inked in 2003. Among the companies viewed as vulnerable to a takeover: Schering-Plough, which is in the midst of a CEO search, and scandal-plagued Bristol-Myers Squibb, which is suffering from patent expirations, bloated wholesaler inventories, and fallout from its partnership with ImClone Systems Inc. On the buyer's side, analysts will also be watching Johnson & Johnson, which has a strong share price to use as leverage in deals. "J&J's pharmaceutical division needs some improvement," says Liu-Er Chen, portfolio manager of the Evergreen Healthcare Fund. "There's a good chance they'll do something."

The biggest question mark for the industry, however, is Washington. And of 2003's many political issues, one of the hottest will be the effort to pass a Medicare prescription-drug benefit. Right now, Medicare covers only drugs administered in a hospital or doctor's office. Most political observers believe there's a decent chance that a Medicare drug benefit will pass in 2003. And with Congress in GOP hands, the betting is that any new law will favor drugmakers by eschewing strict government price controls. "I think with the election behind them, they'll come together and do it," says Merck Chairman and CEO Raymond V. Gilmartin.

At the same time, most industry execs are encouraged that the Food & Drug Administration finally has a commissioner after nearly two years without one. New-drug approvals slowed noticeably while the agency was leaderless. And while no one expects a rapid shift in policy, industry players are relieved that Commissioner Dr. Mark B. McClellan has been talking about an "opportunity" to accelerate approval times. McClellan contends that the recent renewal of a law requiring industry funding for drug reviews should give the FDA much-needed additional resources. That can only help the industry climb out of an unusually tough downturn.

By Amy Barrett in Philadelphia, with John Carey in Washington

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