Articles » 2003 » July/August 2003 » Feature

—Gil Y. Roth
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Contributors

Editor: Gil Y. Roth
Associate Editor: Sarah W. Madley
Contributing Editors: Wayne Koberstein
Derek B. Lowe

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Highlights
Another year, another major move for Pfizer. Not content with wresting the #1 spot in Contract Pharma’s Top 20 Pharma Companies rankings away from GlaxoSmithKline in 2001, Pfizer made a $55 billion bid in 2002 to acquire Pharmacia, which ranked #9 in this year’s list. Approved in the spring of this year, the combined company (which will be called Pfizer) markets 10 of the top 37 drugs and 14 that are tops in their therapeutic categories.

Pfizer’s executive leadership. Bottom row, from right: Hank McKinnell, David Shedlarz, Karen Kate. Middle row, from right: Rob Norton, Jeff Kindler. Top row, from right: John Mitchell, Chuck Hardwick, Peter Corr.

One could argue that Pfizer doesn’t need the boost of Pharmacia. After all, the company marketed eight drugs with sales in excess of $1 billion in sales last year, in addition to alliance revenues of $1.6 billion, powered mainly by Celebrex. The most impressive aspect of Pfizer’s sales growth is that its top product, cholesterol drug Lipitor, increased sales by 24%, to nearly $8 billion in 2002. Pharma sales overall were up 12% in 2002, reaching $28.3 billion. The new company will have 12 drugs in the $1+ billion category.

On top of this, Pfizer is in the midst of rolling out six new products: Vfend, Geodon, Bextra (a followup to Celebrex), Spiriva (co-developed with Boehringer-Ingelheim), Relpax and Rebif (co-developed with Serono). So how did the company justify the acquisition of Pharmacia? Diversification!

David Shedlarz, executive vice president and chief financial officer of Pfizer, commented, “The combined company will be much less dependent on any individual product, therapeutic category or market, which will substantially increase operating flexibility.”

At the time the merger was announced, chairman and chief executive officer Hank McKinnell, Ph.D., remarked, “This is an extraordinary opportunity to combine two of the fastest-growing and most innovative pharmaceutical companies and to position Pfizer for sustained long-term leadership of the global pharmaceutical industry. By combining with Pharmacia, we are ensuring that our core capabilities in the discovery, development and commercialization of new medicines are strong around the world.”

The present-value jewel of the acquisition appears to be the COX-2 inhibitor franchise, including Celebrex and Bextra. In the past, Pfizer and Pharmacia co-marketed these drugs, but Pfizer executives contend that, coordinating the marketing under a single banner can result in greater overall sales. (They likely know what they’re talking about; after all, Lipitor was co-marketed by Pfizer and Warner-Lambert.) For the future, the acquisition helps build up Pfizer’s drug pipeline, and adds expertise in therapeutic areas where the company was lacking, particularly oncology.

Besides the Pharmacia acquisition, Pfizer is also engaging in an unprecedented R&D program to keep its pipeline growing. Pfizer spent nearly $5.2 billion in R&D last year (translating to $100 million each week), in search of new drugs. The pre-merger Pfizer had 100 new chemical entities in development, as well as 60 product enhancements. The combined company should have 120 NCEs and 80 enhancements, with an R&D budget of more than $7 billion (which may be pared down a bit, once overlaps are eliminated).

At the merger announcement, Dr. McKinnell commented, “By combining Pfizer with Pharmacia, we will have the financial and human resources to bring new product opportunities to the market and to fund them to their full potential. We met or exceeded all of our targets in the integration of Warner-Lambert, and we anticipate another successful integration, given that our organizations have worked so successfully on Celebrex and Bextra.”

During an April shareholder meeting, Dr. McKinnell remarked, “We cannot simply add Pharmacia to Pfizer. Changes will come in the basic drivers of our business growth: biomedical research, sales and marketing, global manufacturing and supply. We must respond to the realities of global business by making investments where we have the best climate for growth and opportunities for success.”

Despite the strength of Pfizer’s pipeline, the company has also engaged in a number of licensing and co-development agreements. In July 2002, Pfizer reached an agreement to co-promote Serono’s multiple sclerosis drug Rebif in the U.S. Pfizer paid Serono $200 million and will share all U.S. commercialization and development costs for the drug, which reached the U.S. market in March 2002. Rebif had international sales of $380 million in 2001, and was supported by a pair of clinical studies that showed the drug’s superiority to an existing MS treatment.

In April 2003, Pfizer entered into a license agreement with Daiichi Pharmaceutical of Japan for a potential new anti-infective known as DK-507k, which is in development for both oral and intravenous administration to treat respiratory tract and other infections. Pfizer will obtain an exclusive license to DK-507k and will fund and conduct ongoing development, and market the product in all major world markets, except in Japan, China and other Asian countries. Daiichi has the right to elect to co-market the product in the U.S. In preclinical studies, DK-507k was shown to have superior activity against penicillin-resistant S. pneumoniae compared to currently marketed anti-infectives in its class.

The new, larger-sized company will occupy new digs and renovate some of its old ones. In May 2003, Pfizer announced plans to spend nearly $400 million in the next year to acquire an office building in Manhattan and revamp its existing real estate on the island. The company also plans to spend $400 million during the next five years to expand its Consumer Healthcare facilities in Morris Plains, NJ. This expansion will add approximately 900,000 sq. ft. to the 1.3 million sq. ft. the company currently has in that location.

To help advance its clinical studies, Pfizer is building a 60,000-sq.-ft., 50-bed Phase I research unit in New Haven, CT. The site is expected to open in 2005, and some of its clinical studies will be conducted in collaboration with Yale’s school of medicine.

In June 2003, the company opened a 200,000-sq.-ft. preclinical research building in Ann Arbor, MI. “The chemistry and biology labs within this new structure will enhance our effectiveness in discovery research,” said Dr. David Canter, senior vice president, Pfizer Global Research & Development (PGRD), and director of Ann Arbor Laboratories. “Its design provides flexible, functional and efficient workspace that will enhance creativity, productivity and interaction among our research colleagues.”

It’s not all expansion, though. Pfizer plans to close Pharmacia’s regional sales office in Princeton, NJ, incorporating the functions into its office in Parsippany, NJ. Also, the company will not occupy the former AT&T headquarters that Pharmacia acquired in July 2002. In addition, Pfizer’s still working on integrating its previous mega-merger, the acquisition of Warner-Lambert. The company reported $1.8 billion in savings in 2002 from that deal, surpassing expectations by approximately $200 million. In March 2003, Pfizer sold off the Schick-Wilkinson Sword shaving products unit, which came along with W-L, for $930 million to Energizer Holdings. The company also unloaded the Tetra fish-care products business and its Adams confectionery unit in 2002.

Will it be enough for Pfizer to succeed? Contributor Derek Lowe doesn’t think so. See Magical Realism at Pfizer, on p.43, for more details.

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Highlights
GlaxoSmithKline (GSK) comes in at #2 on our Top Companies list, within shouting distance of Pfizer, based on 2002 pharma revenues. Once Pharmacia’s results are incorporated into Pfizer’s numbers, however, it’ll take several more blockbusters to get GSK anywhere near Pfizer’s top spot in the list.

GSK’s biggest success in 2002 came with Seretide/Advair, its long-acting asthma inhaler, which doubled its sales to $2.4 billion. It finished the year as GSK’s #2 drug, and is on a pace for the top spot in 2003. The company is currently trying to get the drug approved for chronic obstructive pulmonary disorder (COPD) in the EU and U.S., as well as pediatric indication for Advair.

GSK spent a lot of time in court in 2002. The company lost a patent ruling in Augmentin, which led to a generic version of the drug reaching the U.S. market in July 2002. The company is appealing a decision that would give Andrx Corp. the right to market generics of Wellbutrin SR and Zyban. One U.S. court ruled that GSK’s patent for the hemihydrate form of Paxil was valid, but was not infringed by a rival’s generic, which has led to a GSK appeal. The company is also battling patent challenges against Zofran and Lamictal.

How is GSK dealing with the prospect of more of its drugs being challenged by generics? After all, Augmentin’s sales dropped 20% (by constant currency rates) in 2002, leading to a 12% decline in the company’s anti-bacterial market. In the first quarter of 2003, Augmentin dropped another 42%, as sales were cannibalized by generic Augmentin and GSK’s own efforts at moving prescriptions to Augmentin ES and Augmentin XR, which retain patent protection.

GSK isn’t quite putting a $100 million each week into R&D, á la Pfizer, but the company’s Centers for Excellence of Drug Discovery (CEDD) do employ more than 15,000 R&D staff in eight countries. In June 2003, the company finished the latest phase in its drug discovery initiative, opening an ultra-high-throughput screening (uHTS) facility at its Tres Cantos, Spain, research center.

The facility, located outside Madrid, is the first of several large construction projects in a GSK program of automating selected steps in drug discovery. A new facility will open in Harlow, UK, later this year and in Upper Providence, PA in 2004. Expansion of automation capabilities is also going forward at existing facilities in Stevenage, UK, and Research Triangle Park, NC.

GSK’s global uHTS program is designed to quadruple the annual capacity for experiments while reducing cost per experiment. Also, automation in chemistry and associated projects should optimize the quality and diversity of the GSK compound collection to speed the drug-discovery process, company executive project. The result, they hope, is a two-year reduction on the time taken from first screen to the point in the R&D process where a drug candidate is progressed to development for clinical studies.

“This isn’t just about machines and new buildings. It is about accelerating the improvements we are already seeing in early R&D productivity and sustaining them for the years to come,” commented Tadataka Yamada, chairman, R&D.

The facility houses uHTS robotic systems that will be capable of doing 300,000 experiments a day and managing the large amounts of information gathered. In addition, the facility houses the GSK compound library in an automated liquid compound store that can house as many as 2.8 million individual samples.

Peter Goodfellow, senior vice president of discovery research, commented, “Automation on this vast scale frees our scientists from repetitive tasks and enables them to focus their attention on the best way to provide the CEDDs with leads of greater potency, selectivity and developability.

“If we as a pharmaceutical industry don’t make new drugs, we don’t deserve to survive. We’ll have to reinvent the way we do R&D because it’s not working today,” said Mr. Goodfellow. “The drugs that are on the market today have taken up to 20 years to go from research to the medicines cabinet—we’d like to do that quicker.”

What’s the R&D initiative led to? Some analysts believe GSK will have as many as 12 products (seven new, five line extensions) approved by the FDA in the next two years. The company finished 2002 with 123 projects in development, including 61 NCEs, 23 vaccines, and 39 line extensions.

In addition to the CEDD program, GSK has worked to boost its pipeline by forming alliances and collaborations with a wide array of partners. The company signed two dozen major collaborations since 2001 (see the table on p. 46 for a partial list of alliances).

In the immediate future, GSK has a number of new drugs pending. Levitra, a treatment for erectile dysfunction, was approved in the EU and was launched there in March 2003, with FDA approval pending. In December 2002, the company filed NDAs for Ariflo (chronic obstructive pulmonary disease) and protease inhibitor 908 (HIV). GSK launched its Pediarix vaccine in January 2003; this vaccine adds protection against hepatitis B and polio to the company’s Infanrix vaccine, resulting in six fewer injections for infants.

GSK has also sought sNDA approvals from the FDA for several of its drugs, including Lamictal (long-term management of depression in bipolar disorder), Valtrex (reduction of risk of transmitting genital herpes), and Coreg (reduction of risk of death among heart attack patients with impaired cardiac function).

GSK made news recently after facing a mini-revolt from shareholders at its recent annual meeting. Attendees at the meeting acrimoniously voted down a remuneration resolution for chief executive officer Jean-Pierre Garnier. The contract included a $36 million “golden parachute” payout to the executive, with provisions to allow him to gain retirement benefits several years early.

Chairman Sir Christopher Hogg, said, “Although [the payment] resolution is advisory, the board takes this result very seriously. The major reason for this negative vote has been the fact that there are elements of our senior level remuneration package which do not accord with what is regarded as best practice by shareholders. That is something that the Board is aware of and it was one of the reasons that the Remuneration Committee decided to appoint Deloitte & Touche some months ago to conduct a completely independent review of our approach . . . We look forward to consulting further with leading shareholders in the coming months on our proposals to balance these objectives.”

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Highlights
Generics took their toll on Merck in 2002. The company’s drug revenues increased less than 2% last year, as patent expiries of Vasotec, Vaseretic, Pepcid, Mevacor, Prinivil and Prinzide led those products to a 38% drop in sales. In January 2003, the company got bad news from a British high court, which ruled that several patents protecting Fosamax were invalid. Merck is appealing the decision; a generic version of the osteoporosis drug would be a major blow for the company, which took in revenues of $2.2 billion from Fosamax last year, an increase of 38% from 2001. The patents were upheld in a U.S. court in November 2002.

Despite the loss of several patents (and possibly more), Merck has held fast to its “no mega-merger” policy. In fact, in April 2003, Merck finalized plans to strip its company down, by spinning off its pharmacy benefits management (PBM) division, Medco Health. The unit had become a drag on the company’s earnings. Despite generating nearly $33 billion in revenues, Medco Health contributed $361.6 million in net income. In contrast, Merck’s pharma business posted revenues of $21.4 billion (including several markets not included in our Pharmaceutical Revenues numbers above), and net income of $6.8 billion. I suppose we could come up with a better example of a high-volume, low-margin business than Medco Health, but it might take a while.

Originally, the company planned to sell shares in the PBM business through an initial public offering, but legal issues (there were allegations that Medco Health improperly promoted Merck drugs, despite the “Chinese wall” that was supposed to be in place) and the aforementioned tough margins left the company no choice but to go with a 100% shareholder spinoff. Merck’s chairman, president and chief executive officer Raymond V. Gilmartin, commented, “With the separation [of Merck and Medco Health], the market can now value each of the companies as ‘pure plays’ in the pharmaceutical and PBM businesses, respectively. We continue to believe that by establishing Merck and Medco Health as two separate companies, we will enhance the potential for success of both businesses, thereby increasing shareholder value.”

Merck received some good news from the FDA in 2002, with several product approvals and expansions. Zetia, co-developed and marketed with Schering-Plough, represents the first product in a new class of cholesterol drugs that work by blocking absorption in the intestine. Merck and SP are pursuing a combination Zetia/Zocor tablet and plan to file for approval sometime in 2003. Zocor, which had sales of $5.6 billion in 2002, faces the loss of patent protection in several markets in the EU, as well as Canada. So a combination treatment with Zetia could extend Zocor’s life beyond its basic patent.

Emend, a treatment for nausea and vomiting induced by chemotherapy, was approved by the FDA in March 2003. The initial market for Emend isn’t huge (by Merck’s standards), reaching approximately $500 million at its peak. But Emend may also become a treatment for depression, which would open the door for multi-billion-dollar annual returns.

Also in March, the FDA approved Cozaar as the first hypertension medicine to help prevent stroke in patients with hypertension and left ventricular hypertrophy (LVH), although there was some question as to whether the benefit extended to black patients. Arcoxia, a COX-2 inhibitor, was launched in Europe, Latin America, and some parts of Asia, though Merck has held out on filing its NDA in the U.S. (for ankylosing spondylitis).

Singulair’s sNDA received approval for seasonal allergy symptoms; the company had hoped to combine it with SP’s Claritin in a single-tablet formula, but Phase III tests showed little benefit to the combination. The expanded indication seems to have benefited the drug; its first quarter 2003 sales put it on a pace to reach $2 billion for the year, which would give Merck five products in the $2 billion-plus category.

Two of the company’s biggest products, Fosamax and Cozaar/Hyzaar, resulted from external collaborations, so the company is familiar with the in-licensing/co-development process. At the company’s December 2002 annual business meeting, executive vice president and chief financial officer Judy C. Lewent said, “Merck has redefined its structure to enable us to evaluate a broad spectrum of possible collaborations and to respond quickly to opportunities in the marketplace. Our activity in this area has increased significantly over the past two years and we see this strategy of increasing importance in the future.”

The company entered several collaborations and alliances in 2002-3, though not quite as many as GlaxoSmithKline:

In March 2003, Merck completed its tender offer for Banyu Pharmaceuticals. The move expanded Merck’s presence in Japan, the world’s second largest pharmaceutical market, and further strengthened its research capabilities. Merck had owned 51% of Banyu since 1984. As a result of the tender offer, Merck now owns 95% of Banyu common stock. It’s the company’s largest subsidiary.

“Our highly successful collaboration with Banyu began nearly 50 years ago with a joint venture and has evolved over time in response to the needs of patients and the market,” said David Anstice, president, Human Health, who is responsible for Merck’s business in Japan, Australia, New Zealand, Canada and Latin America. “This tender offer is a result of the natural evolution of the relationship between the two companies and the changing conditions in both the Japanese and global pharmaceutical markets.” For more on the merger, see How Dare They Buy Low? on p. 52.

Can Merck’s policy of avoiding mega-mergers hold up for another year? There was speculation that a huge success for Zetia/Zocor would lead Merck to buy the troubled Schering-Plough, but the latter’s recent hire of Fred Hassan as chief executive officer (see p. 84) puts the kibosh on that notion. It seems that Merck trusts its development pipeline, and its R&D chief, Peter S. Kim, to guide the company through its recent post-patent malaise.

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