g
MEDICINAL CHEMICALS
DRUG SALES AND EARNINGS SET NEW HIGHS ARTHUR POULOS, Assistant Managing Editor CHEMICAL AND ENGINEERING NEWS, Washington, D.C.
For each of the past several years annual drug sales have smashed through old record highs to set new ones. And this year promises to be no exception to the pattern as medicare gets into full swing.
However, drug
makers are concerned about rising costs and increasing government involvement in the drug industry and in health affairs
D
rug makers in the U.S. smashed all sales and earnings records in 1965, but producers aren't happy. Their discontent stems from growing government involvement in drug industry and health affairs. The industry views such activities as a direct threat to its own health as measured by profits. To ease this threat, the drug industry is diversifying into such fields as chemicals, cosmetics, and medical electronics and giving extra attention to international markets. There is little in the operating statistics to account for the wrinkled brows worn by drug industry executives these days. Total industry sales of all products reached $6.2 billion in 1965, up 15% from 1964. Earnings last year neared $700 million compared with $570 million in 1964. Total U.S. sales of ethical d r u g s products promoted only to the health professions—leaped nearly 14% from the 1964 level to a shade above $2.9 billion. In the interval 1956-65 domestic sales of ethical drugs for human use grew 7 3 % , while the gross national product grew 6 1 % . The outlook for 1966 is for a similar
U.S. drug industry sales continue upward climb Billions of dollars
Total (all drug products)
, Ethical drugs for human use
Sources: Federal Trade Commission—Securities Exchange Commission; Arthur D. Little, Inc.; C&EN estimate 90A
C & E N SEPT. 5, 1966
growth pattern. Results from the first half point to another strong year with full-year total sales likely to gain at least 10%. Earnings probably will keep pace. For 1967, sales should keep rolling along, climbing some 10% above 1966 totals. But the outlook for earnings is more clouded. If industry fears of profit erosion are realized, earnings may not keep pace with sales. Fewer new
drugs
Vigorous enforcement of the Federal Food, Drug, and Cosmetic Act by the Food and Drug Administration has the industry in turmoil. Some widely used drugs have been barred from the market until advertising claims are altered to conform with FDA requirements or because of alleged deficiencies in clinical test data. FDA says the industry has only itself to blame for this problem, and cites "sloppy" work at the investigational new drug (IND) or new drug application (NDA) levels. Many popular products, including some heavily prescribed tranquilizers, have been put on special abuse control lists. Hundreds of drugs in use for some time now must be proved by the makers to have utility or possibly be banned from the market. And slow FDA clearance of NDA's has reduced to a trickle the number of new drugs being brought to market. Drug makers feel that such aggressive, well-publicized policing activity by the Government is unnecessary. They feel that it needlessly gives the industry's public image a black eye, and that it inhibits the industry's efforts to seek new drugs. There is no doubt that the flow of new products—the drug industry's life blood—has slowed markedly. A quick review of the numbers of new products introduced each year for the past few years amply demonstrates the slowdown. New products (single chemical entities) marketed dropped to 28 in 1962 from 41 in 1961. The tough 1962 Kefauver-Harris amendments to the Federal Food, Drug, and Cosmetic Act get much of the blame for this. In 1963 only 18 new products found their way to market. The decline continued into 1964 when 17 new single
chemical entities were marketed. The extent of the decline shows up sharply when comparing the 1964 performance to the average of 38 new single chemical drugs marketed per year for the 17-year interval 1948-64. High point in the postwar period came in 1959 when 63 new single chemical entities were marketed. In 1965, 23 new single chemical entities were marketed (five were of limited commercial value). The drug industry began to entertain hopes that perhaps the logjam at FDA had finally been broken. Such optimism may well prove to be premature, however. In the first six months of 1966, only six new chemical products had received FDA clearance, compared with 14 in the first half of 1965. Despite this dreary picture and growing industry agitation, FDA Commissioner James L. Goddard insists that his agency is processing NDA's as fast as is compatible with safety. Dr. Goddard also declares that FDA does not intend to interfere with the drug industry's research effort. He says the FDA's tough but fair approach will stimulate the industry to do better work and thus turn out more really new drugs. Medicare and welfare
programs
Medicare is also viewed with apprehension by the drug industry, a seeming paradox because medicare is very likely to increase drug sales. Title 18 of Public Law 89-97 (medicare) provides for substantial government subsidy of medical expenses incurred by people aged 65 and above. Under the law the Government will pay for all drugs the aged use while in hospitals and nursing homes. How much new business medicare will bring the drug makers isn't clear yet. Close to 19 million elderly people—9.5% of the population—are eligible for benefits under Title 18. And the percentage of elderly in the population is slowly growing thanks to longer life expectancy made possible in part by new drugs. About 2.5 million such elderly are hospitalized every year. Estimates of how many more will be hospitalized under medicare range from a low of 5% to a high of 50%. To the drug industry such estimates are of more than academic value—each elderly person consumes an average of $25 worth of drugs while in the hospital. Thus, drug purchases by hospitals (as opposed to purchases by other segments) will likely grow in relative importance. Today hospitals account for more than one out of every six dollars of total U.S. prescription drug sales (manufacturers' selling price). Ten years ago hospitals accounted
for only 10% of all U.S. prescription drug sales. Chances are good that hospital drug purchases will grow faster in coming years than they did during the past decade. One survey group predicts that hospital drug purchases will exceed total current ethical drug sales for all markets by 1970. And therein lies the rub. Drugs, to be eligible under medicare, must be listed in official compendia such as the U.S. Pharmacopeia or the National Formulary, or be listed in hospital formularies. Nearly half of the 200 most widely prescribed drugs don't appear in such listings, and thus apparently won't be paid for by the Government under medicare. Probably more worrisome than medicare to the drug industry is Title 19 of Public Law 89-97. Under this provision millions of people regardless of age—some say 35 million—became eligible for federal- and statesubsidized medical benefits. To the drug industry such legislation looks like a big step toward governmentsubsidized cradle-to-the-grave medical care. Generics
Drug spending patterns are changing Use of generic name drugs advances Per cent of new prescriptions in retail drug stores
4
m i
Mill 11111 1963
1964 1965 1966 est
Sources: R. A. Gosselin Co., C&EN estimate
Private consumer spending for all drugs is rising Billions of dollars
worrisome
Also very disturbing to the drug industry is the pressure it sees mounting for hospitals to buy generic name drugs instead of brand name products. Hospital administrators, pushed by government accountants to hold medicare costs down, are likely to consider greater use of generic products. Some Congressmen are calling for laws which would require that federal funds used for health programs be used to buy only generic name drugs. To drug makers, generic name products add up to bad medicine, both literally and figuratively. The producers contend that the buying of generic name drugs will lead to the use of inferior drugs. But there is added concern that generics are generally less profitable than brand name products. The specter of widespread use of generic name drugs looms especially large in welfare programs. In 1965, federal payments for drugs under welfare programs totaled $117 million, up from $100 million in 1964 and $42.8 million in 1960. Welfare prescriptions now account for 5% of all retail prescription sales. The outlook is for a rapid upswing in welfare payments for prescription drugs in the next few years. Because there will be much pressure on program administrators to hold costs down, the pressure to use generic name drugs will rise. To help gage what welfare health programs might mean to it, the U.S. drug industry is analyzing what
i i i i i i i i i i i i i i i 1962
1963
1964 1965. est.
Sources: Pharmaceutical Manufacturers Association, C&EN estimate
Federal welfare payments for prescription drugs are up 125,
Millions of dollars
ioa
i i i i i i i
75 50 25 0
II 1962
1963
1964
1965
Source: Welfare Administration
Hospital purchases of drugs are more important 5QQ Millions of dollars (manufacturers' selling 400 price) 300] 200 100| 0
.II II
1962
1963
1964
1965
Source: R. A- Gosselin Co. S E P T . 5, 1966 C & E N
91A
happened in Great Britain under the National Health Service Act of 1948. (This program provides for prescription drugs for all at no cost or at a nominal fee.) Annual costs of the service have climbed from $690 million in 1948-49 to $3.4 billion in fiscal 1965. The number of prescriptions filled (England and Wales) quickly jumped to three times the preservice level of 68 million, approached 230 million in 1956, then slipped back to about 200 million in 1962 when a small fee was asked. They now stand close to the 245 million mark. The population of England and Wales totals about 48 million. In comparison, about 50 million welfare prescriptions were filled in 1965 in the U.S. British government expenses for prescriptions hit $352 million in 1965, up almost 20% from 1964. Of special interest to the drug industry is the fact that in England and Wales some 30% of all prescriptions are filled with generic name products. In fact, prescriptions for generic name products outnumber those for products of the top 10 drug makers combined. In the U.S., 6.2% of all new prescriptions filled in retail drugstores in 1965 were filled with generic name drugs. Small though this total is, it is 17% higher than in 1963. One reason for the growing penetration of generic name products is that patents on some big-volume products such as tetracycline are starting to run out. Since more major drug patents are due to expire this year and next, use of generic name products may grow. There is little doubt that use of generic name drugs is also growing because of pressure on hospital, state, and federal purchasing agencies to hold costs down. These are the centers of generic buying that the drug industry is most concerned about because drug purchases by hospitals and welfare agencies promise to become the fastest growing segment of the drug market. The drug industry has good reason to be concerned. Wide use of generic name products can hammer down sales totals and profits. For example, in 1965, nearly one third of all prescriptions for tetracycline were filled with generic name products, up from 8% in 1963. The upshot is that while unit-package volume of tetracycline jumped almost 100% in the past five years, dollar volume slumped 18%. Some of the dollar loss is due to lower prices for the brand name products, but generics played a big role. Lower selling
expenses
There is a bright spot for the industry in the welfare drug picture, though.
U.S. sales of finished ethical products grow steadily Therapeutic
group
Analgesics Antacids Antiarthritics Antibiotics Antihistamines Antiobesity Antispasmodics Ataraxics Biologicals Cardiovasculars Cough and cold preparations Diabetic therapy Diuretics Hematinics Hormones Muscle relaxants Psychostimulants Sedatives Sulfonamides Vitamins and nutrients Others Total ethical sales Sources:
Manufacturers' 1963 $90 50 20 400 33 65 53 185 80 110 80 72 65 36 175 27 25 65 50 200 539 $2,420
Arthur D. Little, Inc., C&EN estimates
Part and parcel of the welfare health movement is a trend toward centralized buying of drugs by states and other jurisdictions. Dealing with fewer purchasing agencies could save the drug makers considerable money. Today the average cost of selling a dollar's worth of ethical drugs is close to 32 cents. This figure compares with a cost of 7.6 cents to sell a dollar's worth of chemicals and a 13.3cent average selling cost per dollar of sales for 350 manufacturing firms surveyed by the Sales Manpower Foundation of the Sales Executives Club of New York. Ethical drug companies employ relatively large sales forces for the dollar volume they generate because the salesmen must call on thousands of physicians, pharmacists, and wholesalers. Centralized buying agencies could help drug firms shave sales costs
C&EN SEPT. 5F 1966
Cardiovasculars lead list of top 1 0 therapeutic categories under investigation in 1 9 6 5 Per cent of Therapeutic compounds under category active investigation Cardiovasculars 18.9% Antibiotics 7.4 Cancer chemothera py 7.2 6.3 Antivirals Ataraxics 5.7 Psychostimulants' 5.4 Hormones 5.2 Antiinfectives 5.2 Analgesics 3.5 Diuretics 3.3 Total, top 10 68.1% All others Source:
31.9%
Arthur D. Little, Inc.
Ratio of drug exports to imports narrows 1940
Ratio, exports to imports (based on dollar value)
••••
1947 • • • • • • 1952 •
1957 • — — 1960~p|HlHH 1961 • • • I I I 1962 pHHUIII
i
S ^ S
1963 • • • • 1964
••••
1965
b^H 0
10
.Source: Business and Defense Services Administration 92A
selling price, millions of dollars 1964 1965 1966 est $140 $127 $105 52 55 57 40 32 24 390 437 450 37 39 32 80 70 76 67 72 61 190 210 225 100 100 90 165 190 135 97 105 83 77 84 92 70 82 87 36 32 35 215 245 270 30 31 28 37 41 36 68 62 66 46 50 52 200 216 220 720 582 675 $2,589 $2,923 $3,115
20
30
40
because these agencies will buy large amounts of drugs with relatively little sales cost to the producers, albeit at lower-than-drugstore prices.
Research spending by drug companies rises 375
Industry
Millions of dollars
diversifying
The drug industry is fighting profit erosion in several ways. Practically all of the major drug producers are busy diversifying their product fines. Most of the effort is directed toward getting into markets such as proprietary drugs (products promoted to the general public), fine chemicals, cosmetics, and medical electronics. Furthermore, many drug companies are emphasizing international operations. The move to proprietaries, cosmetics, and chemicals is not surprising. Much of the know-how, both product and marketing, already exists in most drug companies. Many proprietary products being marketed by ethical drug companies are offsprings of wellestablished ethical products, usually in cough and cold, analgesic, and sedative product areas. Most of these proprietary products are being marketed through drugstores, often by subsidiary companies. Although marketing to pharmacies is thoroughly understood by drug makers, they use subsidiary companies to reduce the risk of incurring criticism from the medical profession. Doctors generally prefer that the products they prescribe be identified with solid, wellknown ethical drug houses, not purveyors of widely advertised, generally available nostrums. Marketing of cosmetics is also a natural move by drug companies. Most of the drug makers have the formulating capability needed for making cosmetics. And much of the marketing effort is through the familiar drugstore and through seasoned marketing or-
Overseas sales of U.S. drugs growing fast
250
125
1962 1963 1964 1965 1966 ,, rv ^ est. 1HU.S Overseas ^ H
Sources: Pharmaceutical Manufacturers Association, C&EN estimate
Number of new drugs marketed drops New single chemical entities
1962 1963 1964 1965 1966* »Six months. Source: Pharmaceutical Manufacturers Association
ganizations obtained by acquisition of cosmetics firms. Many of the big drug companies make their own chemical intermediates from which they synthesize drug products. Economics of scale usually dictate that production facilities be fairly sizable—frequently more than adequate for captive needs. Further, research programs usually turn up many chemicals of no immediate or apparent
use to a company. Thus, having substantial production capacity plus a good flow of chemicals, a drug company will usually try to get into the chemicals market. Proprietaries, cosmetics, and fine chemicals may lack the glamour of ethical drugs, but they do represent solid business. Cosmetics sales have been growing at about 8% per year. Proprietary drug sales matched that pace in 1965, and sales of chemicals are equally strong. There are other pluses, too. Cosmetics and proprietaries enjoy relative freedom from severe restrictions by government agencies, though there are signs that this freedom may be coming to an end. Chemicals are relatively less vulnerable to obsolescence. Diversified product lines are less subject to the seasonal influences that characterize some of the big-volume drug groups, thus helping to level out fluctuations in drug sales curves. Occasionally a proprietary drug or cosmetic product comes along which enjoys all the explosive sales success of a new ethical drug. The move to medical electronics is something else again. Drug companies are setting up electronics departments or joining with established electronics firms to develop medical electronics products such as clinical testing and diagnostic instruments. Sales of electronic clinical instruments are growing at a rate of about 20% per year and are likely to sustain or exceed this pace for several years to come. The diagnostic instrument field has barely been touched. Fast developing medical know-how coupled to highly sophisticated electronics promises some exciting developments in diagnostic methods. Drug companies feel that this field is a natural extension of their drug product activities, so they are
Great Britain's 1948 "medicare" boosted prescription drug sales Millions of prescriptions
1,200 1,000
Millions of dollars Direct sales, ethical drugs
800 600 1963
400
1964
200 1965
1963 1964 1965 1966 Sources: Pharmaceutical Manufacturers Association, C&EN estimate
0
50
6SI.
100
150
200
250
Source: National Ministry of Health S E P T . 5, 1966 C & E N
93A
making sure they get in on the ground floor. Drug companies have also firmly espoused the global company concept. They see no reason to restrict their marketing efforts to 200 million people when they can market to 2 billion people worldwide. But there are other strong motives for going abroad. Relative freedom from restrictive government policies is one. While many nations require that drugs be proved safe, American firms feel that restrictions overseas are more realistic and easier to live with. One result of fewer restraints is that the fruits of research reach the marketplace sooner with salutary effects on sales. Overseas sales of ethical drugs by U.S.-based companies have been impressive. They edged across the billion-dollar mark in 1965, accounting for about 2 5 % of total industry ethical drug sales. Some 40 U.S. drug companies now conduct business overseas. They operate 277 manufacturing plants and are building new facilities at a rapid rate. About 30% of existing plants are in Europe and nearly 40% are in Latin America. One result of this buildup of production capacity abroad is that exports of drugs have slowed, slipping an average of 6% per year in recent years, while imports are still growing. The ratio of drugs exports to imports was only 4.5 to 1 in 1965, compared with 36 to 1 in 1952. The rapid growth of U.S.-based drug firms abroad has moved some of them into a dominant or near dominant position in some countries. Greatest penetration seems to have been in the United Kingdom. Nine U.S. company subsidiaries rank among the 20 top drug companies in the U.K. on the basis of the number of prescriptions filled with their products. These nine companies now account for 2 1 % of all prescriptions in the U.K., according to R. A. Gosselin Co. (Dedham, Mass.). Gosselin maintains a prescription survey organization in the U.K. The sharp rise in prescription activity there has aroused much interest in the British drug market on the part of U.S. drug companies and has led Gosselin to expand its U.K. organization from one man in 1961 to 16 today. To keep the sales tide swelling, U.S. drug companies are pouring increasingly large sums into research overseas. In-house research spending by overseas subsidiaries in 1965 totaled $19 million, up $3.4 million from 1964. Overseas subsidiaries also sponsored $5.6 million of outside research in 1965. As recently as 1961 all research spending abroad by U.S.-based drug companies totaled only $11.4 million. Despite heady success abroad, U.S. 94A C&EN SEPT. 5, 1966
drug companies aren't neglecting their domestic markets. Here, too, drug makers are relying on a proved approach—heavy research spending to keep new products coming. The industry spent $339 million for research in 1965, up $41 million from 1964. Drug research teams today are investigating more than 2000 compounds and new IND's are being filed at the rate of 60 per month. Major research emphasis is on therapeutic categories such as cardiovascular drugs, antibiotics, psychotherapeutic drugs, and analgesics, according to a study by Arthur D. Little, Inc., Cambridge, Mass. (ADL develops drug sales trend data and other drug industry surveys using prescription audits, such as those done by R. A. Gosselin Co., plus hospital sales data and other sources.) Antibiotics The biggest dollar-volume drug group in 1965 was antibiotics with U.S. sales of $437 million (manufacturers' selling price), 12% above the 1964 level. The size of the gain is notable because it came in the face of price attrition for several major antibiotic products and the growing use of lower priced generic name products. Helping bump the sales curve up were strong sales of several new antibiotic products. Another reason for the sales surge was a fairly severe winter with an accompanying rash of colds and respiratory infections. For 1966, ADL expects antibiotic sales to reach $450 million. Much of the gain will come from widening acceptance of newer products. Cardiovascular
drugs
Showing one of the biggest percentage gains among major drug groups were cardiovascular drugs. U.S. sales in 1965 spurted 22% above the 1964 level to $165 million, says ADL. This performance very nearly matched the 2 3 % sales gain this group registered in 1964 compared with 1963. Sales should continue to expand in 1966, reaching $190 million, predicts ADL. Since 1951 only sales of diuretics and psychotherapeutic drugs have outpaced those of cardiovascular drugs. A steady flow of new products plus much emphasis on the treatment of heart ailments has contributed heavily to this performance. Attention will continue to be focused on heart problems in the coming years, because heart disease is the number one killer disease in the U.S.—and its incidence is still rising. Medicare and welfare programs will also help sales of cardiovascular drugs since the aged are the greatest sufferers of heart disease.
Sales of psychotherapeutic drugs should also benefit from various welfare programs. The flow of people into doctors' offices and hospitals will probably accelerate and use of tranquilizers should grow rapidly. Sales of tranquilizers and psychostimulants totaled $247 million in 1965, up $21 million from 1964. ADL expects sales of psychotherapeutic drugs to reach $266 million in 1966. Apparently the spectacular sales growth turned in during the past decade by these drugs is slowing somewhat as the market reaches maturity. Hormones Also likely to slow a bit is the sales growth rate of hormone products. After gaining 2 3 % above 1963 totals to $215 million in 1964, U.S. sales of hormones gained only 14% to $245 million in 1965. ADL predicts sales of hormones will grow about 10% to $270 million in 1966. Approaching saturation of the market for oral contraceptives plus the marketing of lower priced products are the major reasons for the flattening of the sales curve for hormones. Sales growth of oral contraceptives had been a major stimulus behind the standout performance of hormone sales in recent years. Vitamins New severe restrictions on label claims plus lower prices should hold growth of ethical vitamin sales in 1966 to less than 2 % above the $216 million recorded for 1965. Vitamin sales totals have suffered from declining prices for several years. Drug companies are finding development of successful new vitamin products having higher price tags an elusive target. Animal health
products
Strong marketing efforts helped push sales of animal health and nutrition products to about $300 million in 1965. Sales should gain about 6% in 1966. Apparently the potential of this market has barely been scratched. Some major producers of animal health products say sales of $1 billion by 1970 are reachable, given imaginative new products. Such products are needed to help cut the annual $2.7 billion loss in the U.S. from animal and poultry diseases. With the potential rewards so great, this is one challenge that the drug makers are likely to provide plenty of research money and talent to meet. If money and t a l e n t two things the drug industry is long in—can provide the answer to its problems, the drug industry has little to worry about.
