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DEALERS or bandits? Observers often seem unable to decide which of these
descriptions fits the international pharmaceuticals industry. The sector
spends prodigious sums of money unravelling highly complex aspects of chemistry
and biology in the cause of making people healthier. Its products have undoubtedly
played a big part over the past half century in increasing the life expectancy
of the average person, in the developed world at least. Yet at the same
time a question mark remains in many people’s minds regarding the activities
of the international drugs companies, the biggest of which include Merck
in the US, Britain’s Glaxo, Hoechst in West Germany and Switzerland’s Ciba-Geigy.
These firms fight over the world drugs market totalling some Pounds sterling
70 billion a year, most of which is accounted for by sales in Western Europe,
North America and Japan.

In the battle for the top places in the industry, hard science plays
an important part. So do razor-sharp accounting practices, sophisticated
selling techniques and much corporate wheeler-dealing. The corporate manoeuvring
involves multibillion-dollar takeover battles and countless small and sometimes
temporary liaisons between the leading pharmaceutical players that sometimes
end in tears. It is not surprising that the public image of the drugs business
emphasises not so much the toiling white-coated scientist as the ultra-slick
salesman extolling the virtues of the latest ‘Whizzo Drug’.

The notion held by many that drug companies are somehow cashing in on
people’s illnesses is reinforced by the large profits that many of the leaders
in the industry make. Glaxo, Britain’s biggest drugs company, with its annual
sales of about Pounds sterling 2.5 billion, is a good example. In recent
years it has been churning out pretax profits totalling about 40 per cent
of annual sales – far above the rate for most other industrial groups in
areas such as engineering and electronics. The drugs groups themselves often
add to the climate of suspicion by revealing few of their activities to
the public, partly because of a fear of giving away secrets to rivals.

The commonly held views about the industry strike many inside it as
unfair. They point out that the sector is – particularly in the US and much
of Western Europe – a highly successful business and a strong export earner.
It has an especially good record in West Germany, Switzerland and Britain
in turning scientific ideas into useful products. In Britain the drugs sector,
with annual sales of about Pounds sterling 4 billion and a balance of payments
surplus of Pounds sterling 800 million, is one ofthe country’s few strong
science-based businesses. And pharmaceuticals is one science and technology
based industry where the West has had a much stronger record, so far at
least, than Japan. Of the world’s top 11 drugs firms, only one, Takeda,
is Japanese (see Table).

The drugs companies are directly concerned with something of burning
interest to almost every individual – safeguarding and improving human health
– and this is emphasised in how they present themselves publicly. As well
as this, a strong strand of public responsibility runs through many of the
scientists and managers in the industry. The drive to shed light on health
problems can also be seen in the sector’s spending on research and development
(R&D). Pharmaceuticals companies commonly spend between 10 and 15 per
cent of their annual sales on R&D, far more than the average in other
so-called high-tech industries such as telecommunications and electronics.
In many countries, the drugs sector is among the biggest civilian employers
of scientists and technicians.

This can be seen especially in the case of Britain, whose pharmaceuticals
industry employs 15 000 R&D workers. The British drugs sector’s sales
account for only about 2 per cent of Britain’s gross domestic product. In
R&D terms, however, the sector is far more important: it spends Pounds
sterling 700 million a year, nearly a tenth of Britain’s total R&D expenditure
counting both government and industry programmes.

Throughout the world drugs business, there is some pride in the purely
scientific achievements of the past 30 years. Examples include heart drugs
such as beta blockers, which permit patients to ‘manage’ cardiovascular
disease with minimal disruption to their lives. Another is the anti-AIDS
formulation Retrovir, made by the British drug company Wellcome and without
which the lot of the average AIDS sufferer would be even more depressing
than it is now. Many within the industry cannot understand the opposition
that its sector tends to stir up among outsiders. ‘We get criticised by
just about everyone,’ says one British drugs company executive. ‘No one
seems to understand how difficult life would be without us.’

In the drugs industry, though, social concern is only part of the story.
The sector is highly competitive, obsessed by the fact that the biggest
company – Merck of the US – has just 4 per cent of total world sales. In
other sectors such as branches of electronics and engineering the dominant
firm might expect to have a market share twice as high. That puts a lot
of pressure on the top 100 or so drugs companies, which between them have
about 80 per cent of world pharmaceuticals sales, to scrap for just a few
percentage points of extra market share in the line-up behind Merck.

This is one reason for the industry’s highly sophisticated – some say
ruthless – marketing techniques and the relentless drive to increase turnover
and profits. One manifestation of this push has been the rash of mergers
in recent months, mainly involving American companies that see joining up
with rivals as the most promising way to close the gap with Merck. Another
goal is to provide what they see as the economies of scale in both research
and marketing which are required for the increasingly tough business battles
of the 1990s. The most prominent of these mergers have been the teaming
up of the US’s SmithKline Beckman with Beecham of Britain andthe link between
Squibband Bristol-Myers, both ofthe US. The last of thesedeals created a
giant groupwith sales of $8.6 billion anda stock market value of$25 billion.

The heated nature of the business climate in which drugs companies operate
is underlined by their importance to world stock markets. In the US, Britain
and Japan, the shares of the leading pharmaceuticals groups are among the
most actively traded of all stocks. Their stock value is extremely high.
Merck, for example, is worth roughly the same on the New York financial
market as IBM, a company much bigger in terms of sales. The reason for this
financial interest is that investors have seen they can make small fortunes
by backing a company before it develops a winning drug, and then cashing
in afterwards. Shares in Glaxo, which has leapt to prominence in the 1980s
through sales of its smash-hit ulcer drug Zantac, are worth a staggering
12 times their value 10 years ago, even allowing for the effects of inflation.

Zantac is now the world’s best-selling medicine, scooping more than
Pounds sterling 1 billion a year in revenues. And anyone who bought shares
in Wellcome when the company was floated on the British stock market three
years ago is sitting pretty. In that time the shares have appreciated by
a factor of five, mainly thanks to the good prospects for Retrovir.

For every story of investors retiring to the Bahamas on the strength
of drugs stocks, however, there are many more recounting the KK pressures
suffered by people in drugs companies as a result of the financial world’s
fierce interest in their activities. In London, Tokyo and New York, stockbrokers
and banks employ armies of analysts to pore over every utterance and research
report emanating from the big drugs companies. The sharp rises and falls
in investors’ confidence caused by real or imaginary ‘blockbusters’ sliding
in and out of the field of view of the financial analysts can add to the
pressures on drugs company executives.

Competitive and financial forces are not the only issues to be bothering
the drugs industry. Other factors which cause people in the business a great
deal of worry – and can affect the way the industry is viewed by the outside
world – include governments, ethics and the way the companies run their
R&D. In many developed countries (especially in Europe) the state foots
the bill either directly or indirectly for the lion’s share of pharmaceutical
spending. They are thus highly important customers for drug firms. Secondly,
government bodies are vitally involved in testing new formulations for safety.
The result is that the drugs industry can easily be hit by cost-cutting
drives by its main state-owned customers; it is also hemmed in by the safety
regulations.

Over the past 10 years the safety rules have become more onerous, driven
by the public scares over ‘rogue’ drugs such as thalidomide or Opren. That
has pushed up R&D costs; only about a quarter of the drug industry’s
R&D bill is accounted for by pure research, with the rest covering the
development needed to drive new products through the regulations. It has
also lengthened the time it takes to get a new formulation on sale. While
in the 1960s government approval for a new drug might take just a few years
the figure is now nearer 12 years.

This link with government departments can cramp a company’s entrepreneurial
style. Some pharmaceuticals researchers complain about the mountains of
scientific data which they have to submit to regulatory authorities before
new products can go on sale. The connections, however, can also work in
a company’s interests. This applies to the interactions between a medicines
company and the state health agencies which are key purchasers of its products.
In some countries – France is a good example – a pharmaceuticals company
can expect favours from the government on pricing issues if it proves itself
a ‘good citizen’. Thus if the company agrees to invest in a new factory
or a research establishment, so providing jobs, it may be allowed to charge
more for its latest product. Such negotiations, in Western Europe at least,
are often highly confidential. There is some hope, however, that some of
these deals may be opened out to greater public scrutiny. That could result
from new rules that the European Commission is drawing up to govern drug
prices throughout the European Community in the run-up to the planned abolition
of trade restrictions after 1992.

THE ETHICS OF MARKETING

The drugs industry is known for its highly creative sales and marketing
techniques generally aimed at doctors. Some 80 per cent of the industry’s
sales come from prescriptions while the rest comes from products bought
directly over-the-counter. The big companies employ a range of devices to
win over the doctors. They use computers to draw up lists of ‘innovatory’
doctors who stand a good chance of being persuaded to prescribe specific
new formulations, which command a high price and good profit margins. The
sales force also tries to home in on ‘opinion leaders’ in the medical community.

In Britain, the companies place a special emphasis on winning the trust
of hard-pressed general practitioners. These doctors, with only patients
to talk to for most of the day, often find themselves isolated from scientifically
literate people. So by engaging in scientific chit-chat and swapping technical
literature the drug rep can win the doctor’s trust. That may lead to more
prescriptions for the company. This effort at cementing ties with doctors
is highly expensive. To cover the whole of Europe or the US, a big drugs
company might need to employ between 1000 and 2000 sales people or ‘detail
men’ who spend all their time talking to doctors or other medical people.
One result is that sometimes the sales pressures smack of what might delicately
be called over-exhortation.

Cases in point are the stories of pharmaceuticals firms inviting doctors
to elaborate, all-expenses-paid ‘sales conferences’ to receive plugs for
the latest wonder drugs. The drugs industry also hands out a range of free
gifts – anything from note pads to computers – to physicians as part of
the drive to build up a good relationship.

Such links between sales rep and customer are common enough in many
other industries. However, when it comes to health care, high-pressure sales
techniques and free gifts have led to some sweeping criticisms of the industry.
‘The drugs business is like a jungle,’ says one prominent opponent of the
sector. In the wake of this kind of comment, in some countries, Britain
included, trade associations acting for the drug sector have drawn up codes
of practice designed to curb the enthusiasms of the more imaginative reps.
Every now and again, however, excesses are brought to light.

R&D MANAGEMENT

The new drugs which come on to the market emerge after up to 10 years
of carefully planned development. Their gestation is in many ways as complex
as big technology projects such as space shuttles or nuclear power stations.
The programme for a typical new drug starts with pure research where a scientist
might try a new approach to altering the mechanisms connected with, say,
heart disease. After toxicity and animal tests, it ends with massive trials
on possibly tens of thousands of patients to work out the details of the
drug’s effectiveness. Only after this will a relevant national health authority,
such as the Food and Drug Administration in the US or the Department of
Health in Britain, license the companies to sell the drugs.

There are some favourable trends in R&D. New techniques in areas
such as biotechnology and computer modelling of protein structures should
help the industry to find the mechanisms behind important illnesses such
as cancer and brain disorders. From this should follow, in theory, new money-spinning
products. The downside, however, is the increasing cost of development,
mainly due to the lengthier and more complex tests that governments require.
The result is that drugs companies are having to run faster to stand still.
American pharmaceuticals companies now spend some$5 billion a year on R&D,
four times as much as a decade ago,but the rate of introduction of new products
has remained constant. In the past few years, many big pharmaceuticals firms
are spending as much as between 10 and 20 per cent more on R&D a year
– at a time when overall sales are growing by no more than 5 per cent a
year in many countries.

The pace at which drugs companies pour resources into R&D is a source
of fascination, and worry, both inside and outside the industry. Merck,
for instance, spends $700 million a year on research and development and
is a legend for the way in which it has been able to translate this into
dozens of high-selling products. The company is unusual in the pharmaceuticals
world for having as its chairman a scientist – Roy Vagelos – rather than
the usual marketing man or accountant. Many, however, doubt that all the
other top-flight pharmaceuticals companies can match Merck’s rate of innovation.
‘They can’t all carry on spending this amount of money on research,’ says
one drugs industry observer. ‘Something is going to have to give.’ Doubts,
for instance, have been expressed about Glaxo’s scheme to build a Pounds
sterling 500 million research centre in Stevenage, Hertfordshire, to act
as a new focus for its R&D efforts. The centre, due to be finished by
the mid-1990s, may have to be scaled back, according to some in the industry.

Apart from more mergers, in which rival groups assemble their research
programmes with a certain amount of cost cutting, the answer to the rising
research bills may well be more finely honed management techniques within
R&D. A related problem with R&D is that few can agree on just how
innovative the drugs industry really is. Those inside the business point
to breakthroughs such as Zantac, which has revolutionised the treatment
of ulcers, and heart drugs such as Merck’s Vasotec, which has made the lives
of people suffering from cardiovascular disease far more bearable.

Critics, however, maintain that the genuine leaps are relatively rare.
Many of the 50 or so new drugs which appear on sale each year are, according
to this view, ‘me-too’ products, slightly improved versions of other medicines
that a rival in the business has already produced. Some backing for this
view comes in a recent report from Scrip, a specialist newsletter for the
pharmaceuticals business, which says that of the 53 new medicines introduced
worldwide in 1988, only four can be regarded as ‘breakthrough products’
in the sense of benefiting patients with hitherto untreatable diseases.

More ammunition for the critics came in recent findings from a US Senate
inquiry. This said that of the 348 new drugs introduced by big American
manufacturers between 1981 and 1988, 292 made ‘little or no’ contribution
to existing drug therapies. Only 12 were rated as showing an important therapeutic
gain. This hardly inspires confidence in the innovatory qualities of the
industry as a whole. The me-too products may also, so this argument goes,
clog up regulatory agencies, cutting the time given to testing of more important
drugs. Such attitudes are rejected by people within the industry. ‘People
talk about copy-cat products,’ says one person close to the drugs business.
‘But what they don’t realise is that they might improve, even by an incremental
amount, on what has gone before. Also don’t forget that every patient who
uses a drug is different. Even though there are dozens of heart drugs on
the market, what works for one person may be totally unsuitable for another.
It is only by having lots of ‘me-too’ products that a doctor can experiment
to find out what is best for his patient.’

When bracketed with drugs companies, finance can provoke either disquiet
on the part of the industry’s critics or subdued admiration from accountants.
The companies are adept at presenting profitability in the right light.
In many countries, the image of a drugs company may be harmed if it looks
as though it has been making too much money. Some AIDS activists, for example,
have criticised the Wellcome’s subsidiary in the US for charging some $8000
for a year’s supply of Retrovir. And in some countries – Britain is the
best example – the prices that companies are allowed to charge are directly
linked to profits. Here again it may suit a company to minimise the profit
which it shows in its accounts.

FINANCIAL ENGINEERING

The industry can also manipulate the profits which it shows in specific
countries. It can do this both as a result of a structure of the business
and because of the way medicinces are made. Many of the biggest drugs groups
are part of large multinational chemical companies. Ciba-Geigy and Sandoz
of Switzerland, ICI of Britain, Bayer and Hoechst of Germany, the US’s Merrell
Dow and France’s Rhone-Poulenc all fit into this category. Many of the chemicals
needed to make a drug are quite cheap apart from a few key substances which
are at the centre of the production chain. These substances, called intermediates,
are commonly manufactured by subsidiaries of the same company that sells
the finished drug. A drugs company looking to depress its profit in one
country can arrange to buy its intermediate from a subsidiary in another
country at particularly high prices.

Patent law is among the most contentious subjects within the industry.
More than virtually every other kind of science-based product, drugs depend
on strong patent protection if they are to produce large sales for their
makers. A producer can claim a patent on the basis of the drug’s chemical
formula. The problem is that patents normally last for about 20 years. As
it generally takes 10 to 12 years to push a drug through the R&D programme,
many products have only 8 to 10 years of patent protection after the formulation
goes on sale. The company then has to fight to make a profit before the
patent runs out and competitors can copy it.

This is a major reason for the relentless efforts put into boosting
revenues in the first few years after a medicine is put on the market. ‘In
pharmaceuticals, much more so than in other industries, it’s no good waiting
a few years to get your earnings from a new product’, explains a former
chief executive at a leading drugs company. ‘By then it will be too late
because your competitors will be ready to move in.’ This is why drugs company
chiefs around the world spend so much time attempting to persuade legislators
to give them a better deal over patents.

A favourite idea is to change the patent laws with respect to drugs
so that a new drug is protected for a set period – say 16 years – after
the date it is first sold rather than from the time of the patent’s issue.
The industry has won some relief in the US, where a patent’s term can be
extended if a new drug has taken a particularly long time to develop. Companies
now want to see similar measures enacted within the European Community.
‘It is the one issue that unites us all,’ says one European executive. In
return some in the industry argue, it might be less secretive, less feverish
in sales and marketing and possibly spend more of its research cash on the
genuine breakthroughs rather than the me-too products. Whether such a state
of affairs comes about will be one of the more interesting industrial policy
questions of the 1990s.

Peter Marsh is a journalist on the Financial Times.