NINE MEDICINAL CHEMICALS
Economic and social forces bring change WILBERT C. LEPKOWSKI, Washington, D.C.*
he word may be trite, but "change" is exactly what is happening in the drug industry today. It isn't the type of change seen only in market cycles or organizational boxes; it's more profound. It is change wrought by many economic and social forces that have matured and reached an apex at the end of this decade. We see evolving in and around the drug industry today: • Diversification, ever more quickly, into consumer-related ventures. The rise of "total health concept" companies. • Continual decrease in ethical drug profitability as costs increase faster than sales, the number of new, bigselling products declines, and corporate money flows toward stepped-up research and development into difficult areas and new marketing programs for nondrug products. • Government-sponsored medical care that could cover all prescription drugs, under all circumstances, for the elderly, and extend to coverage of young children. • Possible federal action against combination drugs of all types, not just antibiotic combinations. • Imaginative new disease-preventive drugs based on an understanding of the molecular events behind disease—drugs that directly enter into, and repair, the cell's metabolism.
T
* Formerly head, Southeastern News Bureau. 100A C&EN SEPT. 1, 1969
• Increasing availability of medical care to the 2 billion persons who make up the underdeveloped world. • Growing international competition from Japan and West Germany. • Possible dramatic new mergers between large, established companies to form super-sized health corporations.
figures compiled by R. A. Gosselin Co. Compare this climb with the average rise in such sales of somewhere between 5 and 6% during the 1958-68 decade. Manufacturers' drugstore prescription sales dollars, meanwhile, rose from $1.87 billion in 1967 to $2.04 billion in 1968, according to Arthur D. Little, Inc. Hospital drug buying rose an unexpectedly low 6%, from $644 million in 1967 to $679 million in 1968. The previous year's rise was a big 15%. A recovery could come in 1969, as C&EN projects sales as high as $842 million. One can question that outlook, however, depending on the hospital beds situation. As Gosselin's Richard Burr explains it, the hospital sales slowdown in 1968 could have come about because extended-care patients were beginning to occupy more bed space in hospitals. Such patients customarily use the same amount of drugs in a month as a short termer would use in, say, two weeks. Thus the drug-per-bed-day
For the moment, however, the current facts and figures for the U.S. pharmaceutical industry show another record year for sales of all drug and nondrug products: $10.04 billion last year, with an expected $11.2 billion for 1969, and $12.6 billion for 1970. Last year, pretax earnings jumped a whopping 23% from 1967— from $1.51 billion to $1.86 billionknocking for a loop last year's pessimistic predictions of continued slow growth. 1968 wasn't too bad a year in the prescription market. Drugstore prescription sales to consumers jumped 8%, from $3.90 billion in 1967 to 1968's $4.25 billion, according to
Drug industry sales continue to grow Billions of dollars
Total sales, all products U.S. sales of ethical drugs for humans Pretax earnings
1966
1967
1968*
7.28
8.32
10.04
10.9
11.2
11.2
12.5
12.6
12.6
3.16 1.43
3.37 1.51
3.63 1.86
3.9 1.9
3.9 1.9
3.9 2.0
4.1 2.2
4.2 2.2
4.2 2.2
* Preliminary data. * * C & E N computer forecasts. Sources: FTC-SEC; A. D. Little
Low
1969**
Medium High
1970**
Low Medium High
Overseas sales of U.S.-based drug companies growing vigorously Direct sales of ethical drugs Millions of dollars
20001
wmr-y
illll
1966 1967 1968 1969*1970* *PMA estimates. Source: Pharmaceutical Manufacturers Association
rate fell for that period, and thus depressed the expected upward slope in sales. Another factor in the drop in hospital sales could have been cuts in prices for antibiotics, which account for 25% of hospital sales. Antibiotic dollars sales increased only 0.1% ($161.6 million to $162.9) between 1967 and 1968, despite an undoubted increase in the volume used in hospitals. Generic drug sales continued their upward rise in 1968, hitting an alltime high of 8.2% of all new drugstore prescriptions. The figure in 1967 was 7.1%; it is expected to climb to more than 9% in 1969, Gosselin predicts. Observers believe the percentage is likely to plateau at around the 10% figure prevalent in England, where state medicine has been the practice for 20 years. The figure most disturbing to the U.S. pharmaceutical industry is the 9.7% net after-tax profit as a percentage of sales. That 1968 figure was the lowest percentage recorded in 13 years, falling significantly below the 1967 figure of 10.1%. Two important contributors to this lower profitability are the surtax and the firms' diversification into nondrug areas. Some of the gloom, however, was balanced by another profitability figure that rose during 1968: percentage return (before taxes) on equity, which hoisted itself from the 1967 level of 30.3% to 33.3% in 1968. The figure is still below the 1964-66 average of 34.9%, however. One interesting statistic, perhaps
not open to extended interpretation, shows that ethical drug sales as per cent of stockholder's equity have been dropping continually since 1960. Then, the figure was 88%; last year it was 64%. One thing is fairly evident in all this: The drug industry simply isn't as profitable as it once was. Added to that is the reasonable certainty that the industry isn't likely to return to the high profit levels of the past. All in all, 1968 was hardly a disaster, and 1969 shouldn't be so bad either. Nevertheless, the industry is closely re-examining itself. Companies are trying to learn how to live with and through an era of lower profitability. They know that the pressures now keeping the lid down on profits will persist and probably even worsen. One profit depressant is that the hospital market is growing, not-withstanding last year's sales slump. That means purchases of drugs on a highly competitive basis by these institutions. Another is that drugstores are getting bigger and more discountoriented. A third reason is that the government and private insurance firms are increasingly assuming payment for drugs under reimbursement plans. Finally, with the slowdown in the development of new drugs, and with patents on many big-selling brand-name drugs soon to run out,' generics will be grabbing ever increasing shares of the consumer market unless industry breaks out with a spate of new, high-volume drugs.
The predominant industry strategy to offset ethical drug losses has been diversification into related areas. One company emphasizing diversification is Abbott Laboratories, which lists such products and ventures as antibiotics, hormones, vitamins, hospital supplies, artificial sweeteners, plastics additives, fuel-oil additives, golf balls, household gloves, agricultural products, and a nondairy coffee creamer, Pream. Several companies—Smith Kline & French, Norwich, Pfizer, and Sterling—have gone into cosmetics. Solidly entrenched in gum and candy are Warner Lambert, Squibb BeechNut, and American Home Products. Such activities help keep down profits in the beginning because they require companies to add new marketing programs not at all like the accustomed detail-man, journal-advertising form of salesmanship. One set of figures underscores the extent of diversification away from ethical drugs. Last year, such commodities represented 36% of total industry sales ($3.63 billion for ethicals vs. $10.04 billion total sales). In 1960 ethical drug sales took up 48% of the total. One organizational possibility for raising profitability comes from Richard Hughes, drug expert on the staff of A. D. Little. "I think some drug companies could make out better by merging with each other," he says. "We may see in the future more drug firms combining this way. Because of increasing R&D expenses, most drug firms are directing their R&D efforts to those areas ofSEPT. 1, 1969 C&EN
101A
fering the greatest rewards. Thus, they are duplicating one another's efforts. With rising costs, it seems to me that some change will be necessary to offset this extensive duplication of effort. One possibility is cooperative effort in clinical testing. This cooperative effort could be taken even further—consolidation of activities and elimination of duplication for greater efficiency." That movement should make interesting watching as other forces continue to press down profits. Take, for example, the Government's role as a purchaser of drugs. In 1968 the Government's direct purchases of drugs increased to $184.6 million, from $166 million in 1967. Add to this reimbursement programs under medicare amounting to $297.6 million in 1968 and $177 million in 1967. Don't forget state payments, either: $80 million in 1967; $92.6 million in 1968. Federal medicare officials are pushing, with approving nods from the Pharmaceutical Manufacturers Association, extension of medicare reimbursement for drugs to the elderly under all circumstances. (Currently such aid is limited only to patients in hospitals or nursing homes.) Of course, this would raise problems for the Government to fund such an extended program. If this program goes through Congress, drugs purchased for the elderly by federal and state government will constitute an eyebrow-raising 43.7% of total ethical sales by 1971. In 1968 the percentage for that age category was only 13.8%. Another trend to watch is the Nixon Administration's plan to extend medicare benefits to the very young. And, therefore, a few more percentage points would be added to that 43.7%; children under six account for more than 107c of ethical drug sales. Again, funding could be a considerable problem. The Government and we taxpayers, of course, are not only drug customers but drug watchdogs. The two regulatory developments of deepest significance in recent months were: • Completion by the National Academy of Sciences of its lengthy evaluation for effectiveness of all drugs marketed between 1938 and 1962. • Release to the public of the HEW Task Force Report on Prescription Drugs. Big trouble for the industry could rise out of the academy study. The Food and Drug Administration has already taken action against several antibiotic combination drugs and is readying crackdowns on other combination categories. At the very least, companies that never prepared a New Drug Application for products they are still marketing will 102A C&EN SEPT. 1, 1969
Outside research spending climbing
Generic name drug use slowing Percentage of new prescriptions in retail drug stores
1966 1967
1968
Millions of dollars
1966
1969* 1970*
1967 1968 1969* 1970*
*C&EN computer forecasts. Source: Pharmaceutical Manufacturers Association
*C&EN estimates. Source: R. A. Gosselin Co.
Consumer spending for drugs continues to increase Retail, millions of dollars
Ethical drugs All drugs
1966
1967
1968
3.04 4.20
3.25 4.65
3.58 5.1
Low
1969* Medium
High
Low
3.8 5.4
3.8 5.5
3.9 5.5
3.9 5.6
1970* Medium High
4.2 5.9
4.2 6.0
* C & E N computer forecasts. Source: Pharmaceutical Manufacturers Association
be compelled to do so. That alone could cost a considerable amount. As for the task force report, the Nixon Administration is reviewing the document in the face of PMA's heavy criticism of it. Especially galling to the industry was the report's assertion that most drugs are not new chemical entities but are duplicates or combinations of older drugs and that, therefore, industrial research and development "provide only minor contributions to medical progress." In response, PMA says new forms of old drugs do indeed comprise most of drug sales. As A. D. Little points out, however, one must not overlook the fact that new products introduced in the past five years accounted for nearly one half of the growth in the domestic drug industry in 1968. But research does precede the development of totally new drugs; it meets many blind alleys, and is extremely expensive. Duplicates, PMA goes on, are not necessarily to be sneered at because a new duplicate product, compared to another version of the same drug, "may permit more rapid assimilation, lower dosage, and diminished side effects." There does indeed seem to be a
minor crisis in industrial R&D. Raymond A. Gosselin points out that one of the more amazing aspects of the rise in ethical drug sales in 1968 was the virtual absence of significantly selling new drug entities. Only 11 new drug formulas were put on the market last year and not one was therapeutically broad enough to bring much of a return. Innovation, in other words, is in a slump. Thus, it is understandable that no issue is getting more painstakingly assessed in corporate meeting rooms today than the direction of drug research. Last year the industry spent about $472 million on R&D, which includes not only the search for new products, but testing and trials of drugs for FDA clearance as well as answering questions on existing products or developing claims or new uses for old products. In 1969 the figure could run close to $500 million, although only about $300 million of that will be devoted to developing new compounds, according to A. D. Little. There are signs that investigational new drug activity is rising, but it often takes five to 10 years for a drug to rise from the ranks of an IND to a market product. A. D.
Number of new drug products marketed lagging
Exports and imports of medicinal products rising Millions of dollars
New single chemical entities marketed in the U.S.
500 400 EXPORT 300 200 IMPORT 100
1967
1968
1968
1967
1966 1966
1969*
1969* * Estimate. Source: U.S. Department of Commerce
* First six months. Source: Paul DeHaen, Inc.
Research spending by drug companies slowing 1966
U.S. Overseas
344.4 30.2
Spending for ethical drugs for human use, millions of dollars 1967 1968 1969** 1970** Low Medium Medium High Low
379.5 33.5
472* 39.0
450 42
480 43
490 45
495 47
510 49
High
520 51
* A. D. Little estimate. * * C&EN computer forecasts. Source: Pharmaceutical Manufacturers Association
U.S. domestic sales of pharmaceutical products' Therapeutic group
1966
Analgesics Antacids Antiarthritics, nonhormonal Antibacterials Antibiotics Antihistamines Antiobesity Antispasmodics Ataraxics and tranquilizers Cardiovasculars Cough and cold preparations Diabetic therapy Diuretics Hematinics Hormones Muscle relaxants Psychostimulants Sedatives Sulfonamides Vitamins and nutrients Others, including biologicals Total U.S. ethical sales Total sales, proprietary products Total domestic sales
140 60 60 46 450 36 80 64 280 185 110 90 86 38 274 32 42 65 48 220 756 3162
Millions of dollars, manufacturers' selling price 1970f 1968 1969** 1967
* Purchases of consumers, not factory shipments. * * Arthur D. Little estimates. t C&EN estimates and computer forecasts. Source: Arthur D. Little, Inc.
160 65 63 60 458 35 82 70 315 200 125 99 96 36 300 35 48 66 48 225 780 3366
175 68 68 64 510 37 80 74 350 215 145 104 110 38 331 34 50 69 46 235 827 3630
200 72 74 68 540 39 84 79 390 240 155 110 122 40 360 40 56 72 48 240 850 3879
872 4238
970 4600
1000 4879
215 78 94 70 556 39 86 82 430 257 179 120 130 40 395 40 60 74 46 248 910 4200
Little estimates it takes seven years and $7 million to develop a successful new product. Medical treatment is more complicated today, with the real frontiers being disease prevention and chronic physical and mental diseases. A new approach to drug therapy is being called for—something more biochemically sound—and so some companies are establishing molecular biology divisions. More practically, such therapeutic possibilities as enzymes and agents affecting nucleic acid metabolism are emerging. In commenting on what he terms the "terrible" slowdown in the entry of new drug products, consultant Paul de Haen says that much of the problem stems from new scientific knowledge having passed by industry. "What we have put out in the recent past has been based on fundamental knowledge established in the 1930's. Since the 1950's we have known that two drugs given together can raise Cain with the body, but no one paid attention to that fact. There is a tremendous lag time. Look at antibiotic combinations. It's been known for years and years that many are not effective, and the industry knew it, too." Industry must come up with lots of money to pursue emerging new therapeutic ideas. Some greenery is expected to come from profits on brand-name products. But patent rights to these are slowly fading. Some examples are Lilly's analgesic Darvon, its antibiotics Ilosone and Ilotycin, and its semisynthetic penicillin V-Cillin; Smith Kline & French's tranquilizers Thorazine and Stelazine; Abbott's Erythrocin group of antibiotics; and UpJohn's Medrol group of corticoid hormones. Each is among the industry's top 25 ethical best sellers. Moreover, even considering that it takes some years for a drug to catch on with physicians, few of the remaining top 25 were introduced after 1960. So hard times in drug innovations are indeed here. Meanwhile R&D expenditures, along with expenses, go up and up. Last year the industrial R&D budget of $472 million reached an alltime high of 13% of domestic sales. Not included in this was a record $35.9 million in veterinary research expenditures, plus another $12.3 million in government-sponsored work. Cardiovascular drugs continued to lead the 1968 investigational column, accounting for 14% of all compounds under study, according to A. D. Little. But the figure fell by three percentage points from 1967. In fact, the degree of intensity of work on cardiovascular agents has held about steady during SEPT. 1, 1969 C&EN
103A
Research spending increasing for veterinary ethical drugs
Hospital drug buying increasing rapidly
Low
Millions of dollars Medium
High
1970*
53.8
54.8
54.9
1969*
45.9
46.9
47.2
Year
1968
41.0
1967
35.0
1966
28.0
* C&EN computer forecasts. Source: Pharmaceutical Manufacturers Association
Millions of dollars, manufacturers' selling price
1000
750 500 250
1966
the past five years. Not so steady has been activity in cancer chemotherapy. Work on new drugs against cancer has fallen, on the basis of percentage of total products under study, from second to sixth since 1964. Anti-infectives continue strong, reflecting, perhaps, sustained interest in foreign tropical diseases caused by bacteria, fungi, worms, and amoeba. A category worth noting is antivirals. Though many have proved disappointing over the years, companies do think antiviral drugs constitute better treatment for viral diseases than the very specific, expensive, and unprofitable vaccines. A. D. Little has made an interesting tabulation of currently studied drugs that it considers promising and of
Source: R. A. Gosselin Co.
Number of investigational new drugs undergoing active research continues upward 3000
2000
1000
1966
Major therapeutic categories being investigated Category
1967n 1968 1969* 1970*
*C&EN estimates.
1967
1968
1969
Source: U.S. Food and Drug Administration
Per cent of total number of compounds undergoing clinical study 1966 1967 1968
Cardiovasculars 12.3% 17.8% 14.7% 6.8 7.6 Psychostimulants 7.6 7.7 5.5 5.8 Hormones 7.6 7.0 5.4 Anti-infectives* 5.5 7.6 7.6 Antibiotics Cancer 5.0 7.3 chemotherapy 3.8 5.5 4.7 6.1 Tranquilizers 3.1 3.7 3.2 Analgesics 2.9 3.0 1.7 Antiarthritics Cholesterol 2.7 2.4 2.7 reducers 2.1 2.6 4.1 Antivirals 2.4 2.1 2.6 Anticonvulsants 2.9 2.2 1.3 Anesthetics 2.4 2.1 2.1 Muscle relaxants 2.0 2.0 2.2 Antispasmodics 2.0 2.9 1.7 Diuretics 18.3 28.1 27.6 Other * Includes antibacterials, fungicides, sulfonamides, anti-TB, amoebacides, and anthelmintics. Source: Arthur D. Little, Inc. 104A C&EN SEPT. 1, 1969
$389 million, a 10.6% growth over the 1967 figure of $351.9 million. A reasonable expectation for 1969 is $403 million. Imports are rising, too, reaching an all-time high of $97.4 million last year, against $89.1 million in 1967. Predicted for 1969 is an import total of about $105 million. The balance of pharmaceutical payments has remained quite constant over recent years, however. For every dollar of foreign drugs brought into the U.S. during the past five years (excluding those sold abroad by the U.S.-based foreign companies), American companies exported $4 worth. Overseas sales of U.S.-based companies continued up, rising to about $1.5 billion last year, compared with $1.34 billion in 1967. For this year, C&EN's computer forecast indicates the figure could easily touch $1.7 billion. Notably, this category of sales has risen faster than total sales since 1964. Total sales have gone up 66%, while overseas sales rose by 9 3 % . It is far too early to sound taps for the pharmaceutical industry. As Ray Gosselin said in a speech earlier this year, "It is safe to say that all indications point to a continuation of the growth of the ethical pharmaceutical business. Changes are occurring within several components which make up the total industry. However, the changes appear to be healthy ones. The drug business is still in good shape."
Government drug purchases and reimbursements rising Direct purchases
therapeutic importance. The tabulation sheds light from another angle on what is being emphasized today. A. D. Little considers promising no less than 18 different heart- or bloodrelated drugs. Next in number comes the tranquilizer mental stimulant category with 16. Further down with nine comes antibiotics and next, with seven, analgesics. Note the further quietude in cancer chemotherapy. The research picture can thus be described as difficult and unpredictable. Equally difficult, but perhaps more predictable, is the international economic outlook. For the first time, the U.S. fell to second place last year in nonbulk pharmaceutical exports. The winner was West Germany, with foreign sales totaling $425 million. U.S. share was
Department of Defense Public Health Service Veterans Administration Federal supply contracts Communicable disease center Total direct purchases Reimbursement programs, medicare and medicaid Department of Defense Public Health Service Veterans Administration Medicare, hospital Medicaid, hospital Medicaid, outpatient Office of Economic Opportunity Total reimbursements State-supported reimbursements under medicare Source: drugs
HEW, task force on
Millions of dollars 1967 1968
111.0 125.7 4.1 4.5 39.5 44.9 3.5 6.2 5.5 6.0 166.0 184.6
0.2 7.4 0.7 0.5 2.9 1.5 115.0 185.3 33.0 36.7 62.0 65.7 0.5 0.0 117.0 297.6
80.0
92.6
prescription
