Healthy Skepticism Library item: 2982

Warning: This library includes all items relevant to health product marketing that we are aware of regardless of quality. Often we do not agree with all or part of the contents.

Publication type: news

Johnson L.
Merck cuts symptomatic of larger drugmaker issues
FortWayne.com ( The Journal Gazette ) 2005 Dec 12
http://www.fortwayne.com/mld/journalgazette/business/13388475.htm

Notes:

Ralph Faggotter’s Comments:

This article identifies some of the problems besetting the pharmceutical industry-

“The reasons are many: Increased generic competition, pressures from health insurers to lower prices, rising drug development and marketing costs, fewer new blockbuster medicines, and worries about possible governmental price controls.”

It appears that the only way out of this financial dilema is to persuade an ever larger proportion of the population that they need to take medications.

In order to do this, you need to persuade healthy people that they are sick – or very soon will be.
You need to turn normal happy people into miserable hypochondriacs.

This little bit of alchemy turns out to be easily achievable through the magic of television advertising- which goes a long way to explaining why people living in the USA (which is one of only two countries to permit direct-to-consumer prescription drug advertising) feel so much sicker than their counterparts elsewhere in the world.

Full text:

Merck cuts symptomatic of larger drugmaker issues

Competition, costs have companies tightening belts

By Linda A. Johnson

Associated Press

TRENTON, N.J. – Merck & Co.’s recent announcement that it is slashing its work force by 11 percent and shuttering several plants is as much a reflection of pharmaceutical industry belt-tightening as of Merck’s financial and Vioxx-related legal woes.

The reasons are many: Increased generic competition, pressures from health insurers to lower prices, rising drug development and marketing costs, fewer new blockbuster medicines, and worries about possible governmental price controls.

The upshot is that double-digit profit increases, routine for drug companies through most of the 1990s, now look to be history.

It’s also why drugmakers feel a sense of urgency to focus on leaner, faster production and other ways to hold down costs just as the airline and auto industries have been doing, experts say.

Drug makers “didn’t have to worry about efficiency” before because they could demand virtually whatever price they wanted for products, said Albert Rauch, pharmaceuticals analyst at A.G. Edwards & Sons Inc. in St. Louis. “They just sort of got a little fat.”

And extraordinarily profitable. The five largest U.S. drug companies – Pfizer Inc., Johnson & Johnson, Merck, Bristol-Myers Squibb Co. and Wyeth – earned $29.5 billion in 2004 on sales of $160 billion.

Analysts estimate they will earn more than $37 billion this year as revenues rise to $162.4 billion.

Gross profit margins – revenues minus the cost of producing goods – also are still in the range of 70 percent to 80 percent, many times the 10 percent margins in some other industries.

Job cuts are one way of keeping margins high, and they are up 150 percent from the first 11 months of last year.

That amounts to almost 25,000 pink slips so far for the industry in 2005, according to John Challenger, CEO of outplacement firm Challenger, Gray & Christmas, who predicted “we’re going to continue to see increasing layoffs.”

Generic drugs, which now account for 53 percent of U.S. prescriptions, contribute to these pressures. Next year, drugs with $28 billion in annual sales lose patent protection, according to health information company IMS Health. Those include Merck’s Zocor and Bristol-Myers Squibb’s Pravachol, both for high cholesterol, plus Pfizer’s Zoloft and GlaxoSmithKline’s Wellbutrin, both for depression.

Brand-name drugmakers also must offer rebates and discounts to get on managed care companies’ lists of preferred drugs, a key factor, according to Tony Butler, pharmaceuticals analyst at Lehman Brothers.

Another problem is shrinking pipelines of new drugs.

“For at least 10 years, some of the brand companies were expending a lot of their effort and a lot of their time extending their monopolies instead of using their resources for innovation,” focusing on legal loopholes and minor improvements in drugs that could extend their patents, said Kathleen Jaeger, chief executive of the Generic Pharmaceutical Association.

Rauch said it’s also getting harder to find drugs that are better and safer than existing ones.

“Drug companies have become the next big target for lawyers,” after the asbestos and tobacco industries, he added, and their legal costs are mounting.

So the U.S. drugmakers have begun to change, and their European counterparts such as GlaxoSmithKline and Sanofi-Aventis likely will follow suit, Butler said.

When Merck Chief Executive Richard T. Clark announced plans on Nov. 28 to cut 7,000 jobs and close or sell eight factories and research facilities by 2008, he said the goal was to make the Whitehouse Station, N.J.-based company more competitive and efficient, starting with its supply chain and manufacturing.

Analysts say Clark has been studying manufacturing in the computer industry, which has steadily decreased prices while making better products.

Butler said Eli Lilly & Co. has been working on improving efficiency using a program for boosting productivity and quality. That system is favored by high-tech conglomerates such as General Electric and Honeywell International.

Pfizer, the world’s biggest drug company, in April said it plans to cut $4 billion in costs – about the same as Merck’s goal – partly by closing 23 of its 93 factories. That’s despite Pfizer having one of the highest operating profits of any company, 38 percent in the third quarter, Butler noted.

Bristol-Myers Squibb Co. and Schering-Plough slashed costs a few years ago when their profits were down significantly. And Wyeth is restructuring its sales force, one of the last areas companies usually target for cutbacks, to make more sales representatives part time.

Experts say they anticipate the cost-cutting to continue and even accelerate, particularly because the huge costs expected for the new Medicare prescription drug program are likely to drive the federal government to seek price controls or discounts to limit the program’s costs.

Despite all the cuts already announced at Merck, the company has said this is only the first part of its reorganization and it will announce further plans at its annual business briefing on Thursday.