Saturday, July 02, 2005

Does it even matter?

Wanting to evolve and being able to evolve are two separate matters entirely.
July 3, 2005
Blockbuster Drugs Are So Last Century

DRUG companies do an awful job of finding new medicines. They rely too much on billion-dollar blockbuster drugs that are both overmarketed and overprescribed. And they have been too slow to disclose side effects of popular medicines.

Typical complaints from drug industry critics, right? Well, yes. Only this time they come from executives at Eli Lilly, the sixth-largest American drug maker and the company that invented Prozac.

From this placid Midwestern city, well removed from the Boston-to-Washington corridor that is the core of the pharmaceutical industry, Lilly is ambitiously rethinking the way drugs are discovered and sold. In a speech to shareholders in April, Sidney Taurel, Lilly's chief executive, presented the company's new strategy in a pithy phrase: "the right dose of the right drug to the right patient at the right time."

In other words, Lilly sees its future not in blockbuster medicines like Prozac that are meant for tens of millions of patients, but rather in drugs that are aimed at smaller groups and can be developed more quickly and cheaply, possibly with fewer side effects.

There is no guarantee, of course, that Lilly will succeed. And some Wall Street analysts complain about the recent track record of the company, saying that it has habitually overpromised the potential of its drugs and taken one-time charges that distort its reported profits. In the last year, Lilly's stock has fallen 21 percent, while shares in the average big drug maker have been flat.

Still, since late 2001, Lilly's labs have produced five truly new drugs, including treatments for osteoporosis, depression and lung cancer. The total exceeds that of many of its much-larger competitors. And at a time when the drug industry seems adrift, that Lilly has any vision at all for the future is striking.

"The challenge for us as an industry, as a company, is to move more from a blockbuster model to a targeted model," Mr. Taurel said at Lilly's headquarters here recently. "We need a better value proposition than today."

For five years, drug companies have struggled to bring new medicines to market. But Lilly executives say they believe that the drought is not permanent. Advances in understanding the ways that cells and genes work will soon lead to important new drugs, said Peter Johnson, executive director of corporate strategy.

Moreover, Lilly expects that drug makers without breakthrough medicines that are either the first or the best in their categories will face increasing pressure from insurers to cut prices or lose coverage.

If that vision is correct, the industry's winners will be companies that invest heavily in research and differentiate themselves by focusing on a few diseases instead of on building size and cutting costs through mergers, as Pfizer has done. Lilly, which spends nearly 20 percent of its sales on research, compared with about 16 percent for the average drug company, may be well positioned for the future.

"We do not believe that size pays off for anybody, especially size acquired in an acquisition," Mr. Taurel said.

But if Lilly is wrong about the industry's direction, or if its research efforts fail, it could wind up like Merck, the third-biggest American drug company, which has also adamantly opposed mergers and bet instead on its labs. After its own eight-year drought of major new drugs, Merck has had a 65 percent decline in its stock price since 2000, and its chief executive was forced out in May.

Mr. Johnson acknowledges that Lilly's strategy is risky. "You can't make a discovery operation invent what you want them to invent," he said.

So Lilly is seeking to improve its odds and to cut research costs by changing the way it develops drugs, said Dr. Steven M. Paul, president of the company's laboratories.

Bringing a drug to market cost more than $900 million on average in 2003, compared with $230 million in 1987, according to estimates from Lilly and industry groups. But the public's willingness to accept side effects is shrinking, and some drug-safety experts and lawmakers want even larger and longer clinical trials for new drugs, increasing development costs. If nothing changes, Lilly expects that by 2010, the cost of finding a single new drug may reach $2 billion by 2010, an unsustainable amount, Dr. Paul said.

"We've got to do something to reduce the costs," he added.

The biggest expense in drug development comes not from early-stage research, he said, but from the failure of drugs after they have left the labs and been tested in humans. A drug that has moved into first-stage human clinical trials now has only about an 8 percent chance of reaching the market. Even in late-stage trials, about half of all drugs fail, often because they do not prove better than existing treatments.

To change that, Lilly is focusing its research efforts on finding biomarkers - genes or other cellular signals that will indicate which patients are most likely to respond to a given drug. Other drug makers are also searching for biomarkers, but Lilly executives are the most vocal in expressing their belief that this area of research will fundamentally change the way drugs are developed.

Using biomarkers should make drugs more effective and reduce side effects, Dr. Paul said. If all goes as planned, the company will know sooner whether its drugs are working, and will develop fewer drugs that fail in clinical trials. The company may even be able to use shorter, smaller clinical trials because its drugs will demonstrate their effectiveness more quickly.

To improve its chances further, Lilly has focused its research efforts on four types of diseases: diabetes, cancer, mental illness and some heart ailments. In each category, it has had a history of successful drugs.

The company hopes to reduce the cost of new development to about $700 million a drug by 2010. Because Lilly now spends about $2.7 billion annually on research, that figure would imply that the company could develop as many as four new drugs a year, compared with just one a year if current trends do not change.

Among the company's most promising drugs in development are ruboxistaurin, for diabetes complications; arzoxifene, for the prevention of osteoporosis and breast cancer; and enzastaurin, for brain tumors and other cancers.

The flip side of Lilly's plan is that drugs it develops may be used more narrowly than current treatments. For example, the company may find that a diabetes drug works best in patients under 40 with a specific genetic marker, and enroll only those patients in its clinical trials. While doctors can legally prescribe any medicine for any reason once it is on the market, insurers would probably balk at covering the drug for diabetics over 40 or for patients without the genetic marker.

"The old model was, one size fits a whole lot of people," said Mr. Johnson, Lilly's strategist.

Last month, Lilly's vision of targeted therapies gained some ground - albeit at another company. The Food and Drug Administration approved BiDil, a heart drug from NitroMed that is intended for use by African-Americans. The approval, based on a clinical trial that enrolled only black patients, was the first ever for a drug meant for one racial group. While race can be a crude characterization of groups, it can serve as an effective biomarker, scientists said.

Lilly's road map may look appealing. But some analysts question whether the company is as different from the rest of the industry as it would like to believe.

While it professes to see a future of narrowly marketed medicines, Lilly is more dependent than any other major drug maker on a single blockbuster drug: Zyprexa, its treatment for schizophrenia and manic depression. Zyprexa accounted for about $4.4 billion in sales last year, 30 percent of the company's total sales.

And while Lilly executives say they want to avoid marketing its drugs too heavily or in anything less than a forthright way, federal prosecutors in Philadelphia are investigating its marketing practices for Zyprexa and Prozac. Last month, Lilly said it would pay $690 million to settle 8,000 lawsuits that contended that Zyprexa could cause obesity and diabetes and that the company had not properly disclosed that risk.

Lilly says that it acted properly in marketing Zyprexa and that is cooperating with the federal investigation. Still, the controversy has hurt Zyprexa sales, which fell 8 percent in the United States last year.

Some of Lilly's newest drugs have been commercial disappointments. The company and analysts hoped that annual sales of Xigris, a treatment introduced in late 2001 for a blood infection called sepsis, could reach $1 billion; Xigris's sales were $200 million last year. Sales of Strattera, for attention deficit disorder, slowed after a report in December that the drug can cause a rare but serious form of liver damage.

Michael Krensavage, an analyst at Raymond James & Associates who rates Lilly shares as underperform, said that Lilly's emphasis on targeted therapies might be a defensive response to the industry's recent inability to produce blockbusters.

Rather than targeted treatments, "drug companies would hope to produce a medicine that works for everybody," Mr. Krensavage said. "That's certainly the goal."

Mr. Krensavage also criticized Lilly's accounting, noting that the company has taken one-time charges in each of the last three years that have muddied its financial results. Lilly said its accounting complied with all federal rules.

Despite the company's recent stumbles with Zyprexa, other analysts say Lilly is well positioned, and they praise Mr. Taurel for looking for innovative ways to lower the cost of drug development.

"Sidney has a better concept of what's happening outside his four walls and is far better in reflecting that in how the company runs on a day-to-day basis than any of his peers," said Richard Evans, an analyst at Sanford C. Bernstein & Company.

Mr. Taurel acknowledged Lilly's dependence on Zyprexa and the fact that some new drugs had not met expectations. But he said the transition to targeted therapies would take years, if not decades. With earnings last year of $3.1 billion, before one-time charges, and no major patent expirations before 2011, Lilly can afford to make long-term bets, he said. "Our model needs to evolve," he said. "For the industry and for Lilly."

Copyright 2005 The New York Times Company.


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