Problems With Drugs Leave Top Pharmaceutical Companies at Risk

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The disclosure on Friday that three of the world’s most prominent pharmaceutical companies – Pfizer, AstraZeneca, and Eli Lilly – have serious problems with flagship medications has led to bipartisan calls for an overhaul of the Food and Drug Administration’s drug analysis and approval process. Patients were not the only ones exposed to more risk as the stock market subtracted more than $30 billion in collective value from the three stocks.


On Friday, the American equity market was hit with several pieces of bad news. Pfizer announced that the antiarthritic painkiller Celebrex had been linked to increased heart attack risks during an anti-cancer drug trial. AstraZeneca reported that a trial of its lung-cancer drug Iressa had not led to increased life expectancy. Eli Lilly warned the medical community that Strattera, an attention-deficit disorder drug, had been linked to liver damage in two patients. Investors wasted little time in selling, sending Pfizer’s stock down 11.1%, AstraZeneca down 7.7%, and Eli Lilly down 2.4%.


The emergence of drug safety problems, as in the case of Merck, can pose even greater long-term risks. In fact, the ongoing legal and financial woes of Merck, stemming from its late September announcement that its anti-arthritis drug Vioxx was linked to liver damage and gastrointestinal ailments, have posed an existential threat to the company. The company faces 475 investor lawsuits and has lost more than $26 billion in market value. Several Wall Street analysts have estimated that costs for Merck’s legal settlement might run as high as $18 billion.


Part of the problem with drug safety questions has to do with the FDA itself, said the Cato Institute’s Health Policy Studies director Michael Cannon. He said the FDA is simply too cumbersome and hidebound to efficiently and quickly evaluate all potential applications for a drug. “There need to be a number of different organizations that can creditably analyze and evaluate a drug, and then produce those results for peer review,” he said.


Currently, the FDA rules on one thing at a time, Mr. Cannon said, and has no effective checks and balances placed on it. “Couldn’t a leaner FDA, one with multiple testing units, have been evaluating other applications for the drug when they were first examined it?”


Mr. Cannon said pharmaceutical company investors suffer mightily under the FDA’s current approach. “Whenever anything goes wrong – even if it’s not terminal – the public reacts out of shock and fear because something was clearly not anticipated.”


The spate of recent announcements about drug safety led to calls from politicians to reform the Bush administration’s FDA. Senator Kennedy, a Democrat of Massachusetts, released a statement that said, in part, “We need an FDA that looks out for the health of patients and not just the health of the pharmaceutical industry. Lives are at stake, and the President should put an FDA leadership team in place right away, with no ties to the industry it regulates, and that’s committed to reform.”


The White House chief of staff, Andrew Card, said yesterday that the FDA was doing a “spectacular job.” He defended the agency, which faces scrutiny after advising doctors to consider alternatives to Celebrex, the Associated Press reported.


Mr. Card said, “I would like the FDA to continue to do the job they do.” He appeared on ABC’s “This Week,” and said, “I support the FDA. They do a spectacular job. When you think about all of the new technologies and the new drugs that are coming into the marketplace, and they have to review them all to make sure that when they come into the marketplace, they live up to the expectation of improving health care.”


Pfizer’s chairman and chief executive, Henry McKinnell, defended Celebrex yesterday, saying, “For millions of patients, Celebrex is the best option, or, in some cases, the last option, to live a normal life with the pain and inflammation of arthritis.” Also yesterday, the company announced it would immediately stop TV, radio, newspaper, and magazine ads marketing the drug to consumers.


Despite the losses taken by Pfizer’s shareholders, and the filing of three separate class-action suits, analysts offer a relatively optimistic prognosis for the company. “What killed Vioxx was its connection to patient risk in its core anti-arthritic mission; Celebrex was being tested to see if there was an expanded market, in this case, the giant anti-cancer market,” said a Wall Street analyst, speaking on background due to his firm’s investment-banking relationship with Pfizer. “They will survive, but will have lower profits and revenues for the next two years, or until fears subside.”


An investment analyst, Michael Latwis, posting onTheStreet.com, said, “The sell-off was overdone, with fear overwhelming short-term sentiment.” He said the $3 billion worth of market valuation removed in Friday’s sell-off effectively valued the company as if Celebrex’s $3.3 billion in annual sales was no longer in its portfolio.


Merrill Lynch analyst David Risinger wrote in a research note to clients that he doubted the FDA would halt sales of Celebrex. Nonetheless, he said drug sales could decline to $2.5 billion and margins could come under pressure as prices get cut.


For Manhattan-based Pfizer, the bad news comes after a particularly good several months. Celebrex had sharply increased its market share of the prescriptions written for anti-arthritic pain in October – to 63.5% from 48.7% – according to IMS Health, a market research firm tracking the pharmaceutical industry. IMS estimated that with Vioxx off the market Celebrex had more than $260 million in sales in October alone.


In late October, the company announced it was beginning a program to buy back up to $5 billion in stock over the next year. Stock buy-backs are usually seen by the investing community as a sign that management views its stock price as too low, and that the company will be generating excess cash flow to buy the stock. Moreover, Pfizer had expressed comfort with the consensus Wall Street view that it would earn up to $14 billion on more than $51 billion in sales.


This anticipated success had led Pfizer’s management to announce a $1 billion expansion of its East 42nd Street headquarters, and add more than 2,000 executive jobs in New York through the end of next year, according to Site Selection magazine. A company spokesman said the plan was still on track.


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