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Drug majors fail in core business

THE WORLDWIDE drug industry is clearly ailing.

Three major drug companies — Pfizer, AstraZeneca and Eli Lilly — all disclosed serious problems with important medicines last Friday, throwing a spotlight on the fact that the $500 billion drug industry is failing in its core business of finding new medicines.

The decline in drug research and development has been an open secret among analysts and scientists for years. But drug company executives have insisted that their industry is fundamentally healthy and their expensive research efforts will pay off.

Meanwhile, they have tried to offset their weakness in creating profitable new drugs with aggressive marketing campaigns to doctors and patients for existing drugs, big price increases, and efforts to extend patents on existing medicines. Those tactics have protected their profits but irritated consumers and governments that pay for drugs, causing a political backlash in the U.S. and Europe.

After Friday's announcements, that backlash seems likely to increase.

In less than 12 hours, Pfizer said that it had found increased risk of heart problems for people taking Celebrex, a painkiller that is one of the world's best-selling medicines. AstraZeneca reported that a trial of Iressa, a lung cancer drug approved in the U.S. last year, showed that the drug did not prolong lives. And Eli Lilly warned doctors that Strattera, its drug to treat attention-deficit disorder, usually in children, had caused severe liver injury in at least two patients.

The number of new drugs approved by the Food & Drug Administration has declined sharply since the mid-1990s, falling from 53 in 1996 to 21 in 2003, even as the industry has nearly doubled its annual spending on drug development, to about $33 billion.

Further complicating the process, many drugs already on the market do a reasonably good job, so the bar that new therapies must cross is high, especially because most are so expensive.

If companies cannot reverse the trend, investors will almost certainly demand that they cut their research spending. Meanwhile, governments, faced with growing drug costs for publicly funded programmes like Medicare and Medicaid, may well alter regulations on drug marketing or force the companies to cut prices, an analyst said. The result in the long-run may be an industry that is less profitable and less able to produce new drugs for patients.

Still, experts on drug development note that progress comes in fits and starts, and the flood of newly discovered biomedical information could lead to many new drugs in years to come. But traditional drug companies have not yet had much luck on the biotechnology front, though they have licensed some drugs from biotechnology companies.

While they struggle with new technologies, the companies are facing a steady stream of patent expirations on their most profitable drugs. To combat that dynamic, Pfizer and some other companies have used mergers or acquisitions to grow. But those deals do nothing to increase the industry's overall ability to produce new medicines, critics say, and may even hurt it as merging companies struggle to integrate their laboratories.

On the surface, the pharmaceutical industry seems relatively healthy. The industry's sales are rising strongly both in the United States and worldwide, with revenues up about 9 percent in 2003, to more than $490 billion, according to IMS Health, which tracks drug sales.

And the companies are very profitable. Excluding one-time charges, Pfizer, the world's largest drug company, is expected to earn more than $14 billion this year on sales of $51 billion, a profit margin that is among the highest of any big company.

Pfizer did get a small piece of good news on Friday. Federal regulators approved Macugen, a drug developed by Eyetech Pharmaceuticals Inc. and Pfizer to treat macular degeneration, a leading cause of blindness in the elderly.

The major drug companies have steadily increased research spending, investing in genetic databases that they hope will give them new insight into the way diseases progress, as well as technologies that increase the number of chemical compounds they screen for medical value. Pfizer alone now spends $7 billion a year on research, according to its financial filings.

During the 1990s, the companies were able to bring several major new categories of drugs to market, including medicines to prevent heart disease, treat depression and HIV and alleviate schizophrenia. But in this decade, companies have had few major breakthroughs aside from a handful of cancer and diabetes treatments.

Alex Berenson

New York Times News Service

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