Big Drug Makers See Sales Decline With Their Image

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Big Drug Makers See Sales Decline With Their Image

• By ALEX BERENSON
• New York Times
• November 14, 2005

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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.
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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.

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The Drug Industry

• The drug industry, dominated by US-based
  companies, is not in a full-blown 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 RD.
• 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.

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The Economics
Total Revenues
Profits
D
MR

• KEY Big Fixed Costs
• RD and advertising are fixed costs.
• WHY? They are not related to current production.
• Production costs are fairly low, generally, at
  the margin.

AC
Total Costs
AFC
MC
Q