Transcript Big Drug Makers See Sales Decline With Their Image

Big Drug Makers See Sales
Decline With Their Image
By ALEX BERENSON
New York Times
November 14, 2005
http://www.nytimes.com/2005/11/14/business/14pharma.html?hp&ex=1132030800&en=691feac5073da300&ei=5094&partner=homepage
Fading Brands
Meanwhile, insurers and some
states are taking advantage of the
backlash against the
industry to try shifting patients to
older, generic drugs, arguing that
they work as well as newer and
more expensive branded
medicines.
Overall, prescriptions continue to
rise slightly, but an increasing
share of prescriptions are going to
generic drugs. Also, consumers
seem to be less responsive to
aggressive drug marketing.
Trust
• "A lot of the demand that the industry has created over the
years has been through promotion, and for that promotion to be
effective, there has to be trust," said Richard Evans, an analyst
covering drug stocks at Sanford C. Bernstein and Company.
"That trust has been lost."
• In the background, new competitors are forcing the old-line drug
giants to struggle to keep pace. Biotechnology companies like
Genentech are taking the lead in finding new treatments for
cancer, a promising and lucrative field.
• Executives of the major drug companies say they expect public
scrutiny in the wake of problems with Vioxx and other drugs.
But they say they are concerned that consumer mistrust has led
to unrealistic expectations about drug safety and risks, stunting
the development of new medicines.
• "I think there is an overall unreasonable expectation right now
that there is such a thing as a risk-free drug," said Sidney
Taurel, chief executive of Eli Lilly & Company.
The Drug Industry
• The drug industry, dominated by US-based companies, is not in a fullblown crisis, and layoffs are occurring mainly on the margins of its work
force. Pfizer will make about $8 billion in profit this year, on sales of
about $51 billion, and invest more than $7 billion in research and
development - although the company's research spending fell 6 percent
in the third quarter of 2005 compared with the same period in 2004.
Overall, the industry spends more than $30 billion annually on R&D.
• But for the companies, and for patients who are counting on industry
research to produce new treatments for diseases like rheumatoid arthritis
and diabetes, these are trying times. Shares of Pfizer are near their
lowest levels since 1997, closing Friday at $22.43, and a broad index of
drug stocks has fallen 25 percent in five years. In contrast, shares of
biotechnology companies are soaring.
• Without new drugs to promote as patents expire, and with the bar set so
high by the blockbusters of the last decade, the old-line companies have
depended on stopgap measures to protect sales, like reformulating
existing drugs so they can be taken once a week instead of once daily. At
the same time, they have used consumer advertising to drive patient
demand. But consumers have become more skeptical and insurers have
rebelled against high prices for drugs that are not therapeutic
breakthroughs.
The Economics
KEY: Big Fixed Costs
R&D and advertising are
fixed costs.
WHY? They are not related
to current production.
Production costs are fairly
low, generally, at the
margin.
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