In 2001, the global pharmaceutical industry was worth $364.2 billion, representing 12% growth over 2000, according to IMS Health sales data from more than 70 countries. Furthermore, IMS Health--which collects and analyzes pharmaceutical information--estimates that total pharmaceutical sales worldwide amounted to $392 billion in 2001. The data cover approximately 90% of all prescription drugs and certain over-the-counter (OTC) products.

The pharmaceutical industry is thus one of the world's largest and is also less prone to dramatic swings in fortune than some other industries are. However, regional performances differ markedly. The U.S. represents by far the largest single market and the most dynamic. The rise of the U.S. market has been one of the dominant themes in the pharmaceutical industry in the past decade: In 1992, the U.S. market accounted for only 34% of audited worldwide pharmaceutical sales; now it represents 50% and is expected to be worth $330 billion in 2006. Some drivers of its rise to prominence include rapid and sustained economic growth; high employment; pricing freedom; and most recently, direct-to-consumer (DTC) advertising.

Japan is the world's second largest single market for phar-maceuticals, but the market is currently stagnant because of price controls and the poor current economic environment in the country. It has almost halved as a percentage of the world total in the past 10 years. No individual European country dominates, but the continent as a whole represents a significant market. Each country has its own opportunities and threats, with issues such as pricing controls and parallel trading. One of the most interesting emerging markets is China, where many of the major Western and Japanese corporations have already established bases, seeing it as potentially lucrative territory.

In 2001, the top 10 therapeutic classes accounted for 32% of the total market. Four of the leading classes--cholesterol and triglyceride reducers, antipsychotics, oral antidiabetics, and systemic antihistamines--grew more than 20%. Antiulcerants, dominated by proton pump inhibitors such as Prilosec/Losec, Prevacid, and Aciphex/Pariet, remained the leading therapeutic area, although Prilosec lost its position as the best-selling individual product to Lipitor during 2001.

New areas of growth for the pharmaceutical industry are highlighted by an analysis of the fastest growing therapeutic areas. Some are simply new kinds of drugs for long-treated conditions, such as asthma and hypertension. Others, however, represent new or fast-growing markets, including disorders such as attention-deficit hyperactivity disorder (ADHD), Alzheimer's disease, and osteoporosis.

Some therapy classes that could see further growth include HIV antivirals (with new products such as Roche and Trimeris' fusion inhibitor Fuzeon), erectile dysfunction therapies (for example, Eli Lilly/ICOS Corp.'s Cialis and Bayer/GlaxoSmithKline's Levitra), interferons, and platelet aggregation inhibitors.

One of the main engines of therapy-class growth will be the aging population: By 2005, nearly 30% of the U.S. population will be over 50 years old. This will lead to increased demand for treating conditions such as hypertension, diabetes, high cholesterol levels, osteoarthritis, and menopause symptoms.

The top 10 leading products registered 22% growth in 2001 and accounted for $40.2 billion in audited sales. The COX-2 inhibitors, or coxibs, Celebrex and Vioxx, performed particularly well, especially considering that both were first launched for various pain and arthritis indications in 1999. Vioxx entered the top 10 list for the first time in 2001, and, thanks to the loss of its U.S. exclusivity in August, Lilly's iconic antidepressant Prozac dropped out of the top 10 ranks. Success in the all-important U.S. market is imperative if new drugs are to achieve blockbuster status.

Outside the top 10, some individual products registered impressive growth rates, led by Nexium, AstraZeneca's replacement for Prilosec. Like a number of new products, Nexium is an isomer of Prilosec, designed to be safer, faster acting, and more effective. Many drugs are administered in a racemic form; that is, a mix of chiral isomers. Often, only one isomer is responsible for the drug's efficacy and the other may be responsible for undesirable side effects. Other isomeric drugs include Lundbeck & Forest's Cipralex/ Lexapro (Cipramil/Celexa), as well as Schering-Plough's Clarinex (Claritin) and Aventis' Allegra (Seldane) antihistamines, both of which were developed by specialty company Sepracor.

After Prilosec's basic patents expired in the U.S. in October 2001, AstraZeneca dedicated huge resources to launching and establishing Nexium in the marketplace. It appears to have been successful, as Nexium accounted for more than 20% of new prescriptions in the proton pump inhibitor market by October 2002, having been launched in March 2001.

It is yet to be seen, however, how successful these marginally superior products will be when the originals lose exclusivity or move to nonprescription OTC status, both of which could happen with Claritin before the end of 2002. Some U.S. insurance companies have already said they will not cover the routine use of the new, more expensive products if an older, tried-and-tested drug is available as a cheaper generic.

TABLE 1. GLOBAL SALES North America led in sales and growth in 2001 TABLE 2. THERAPY LEADERS Four classes grew more than 20% in 2001 TABLE 3. NEW GROWTH Products for asthma were the fastest growing therapy class in 2001 TABLE 4. TOP 10 PRODUCTS Lipitor is now the world's top-selling drug TABLE 5. FASTEST GROWING Nexium's sales grew the most in 2001 TABLE 6. FUTURE BLOCKBUSTERS New drugs can lead to dramatic changes in health care TABLE 7. TOP 10 COMPANIES Merck had a slight lead in 1990 but fell to third place in 2000 TABLE 8. PATH TO DOMINANCE Mergers and acquisitions have affected virtually every pharmaceutical company TABLE 9. PHASED IN More than 5,000 products were in development as of October 2002

CONSOLIDATION. Pfizer's surprise $60 billion bid for Pharmacia in July 2002 led to a new outbreak of speculation on further consolidation within the industry. The news should not have come as such a shock given Pfizer's $90 billion merger with Warner-Lambert in 2000, which arose only after much wrangling for control of Lipitor's developer with American Home Products (now Wyeth). Lipitor, for hypercholesterolemia, is now the world's top-selling drug. Celebrex, for arthritis and pain, was developed by Pharmacia (originally Searle) and comarketed by Pfizer; it had one of the most successful launches in the history of the industry in 1999 and was the world's seventh best selling pharmaceutical by 2001.

Pfizer's merger with Pharmacia will propel it even further ahead in the rankings, giving it a total market share of almost 11% compared with nearest rival GlaxoSmithKline's 7%. Many believe GSK will try to regain its position as the world's leading pharmaceutical company, with Bristol-Myers Squibb and AstraZeneca mooted as possible targets. Novartis has made no secret of its plans to grow and already has a voting share of at least 21% in Swiss neighbor Roche. European dignity is at stake: Only four of the top 10 corporations are now based in Europe, compared with five in 1990, despite the mergers that led to the creation of AstraZeneca, Aventis, GSK, and Novartis.

There is, however, growing skepticism on the benefits of such megamergers. Merck & Co. and Lilly both believe that organic growth is ultimately more sustainable, and the increased research and development spending-- cited as one of the main drivers of mergers and acquisitions (M&A)--has so far not resulted in replenished pipelines. Indeed, the upheaval and uncertainty caused by M&A may lead to severe disruption of research projects. Since the merger between Glaxo Wellcome and SmithKline Beecham in December 2000, GSK has not launched one significant new product. Much of the growth from M&A arises merely from cost savings: Pfizer expects to save $2.5 billion by 2005 following its merger with Pharmacia, due to be completed before the end of 2002.

Whatever the pros and cons, megamergers are likely to continue in light of the increasing sales and marketing muscle needed to give new drugs a successful launch and then maintain their market share. In the future, the industry may well be dominated by a handful of marketing behemoths--the top 10 companies already control 47% of the market.

A split in opinion, however, relates to the future of R&D at these companies. Pfizer's R&D spending is expected to rise to more than $7 billion in 2003, from $4.8 billion in 2002. Yet some believe the marketing companies may eventually do little of their own R&D, instead licensing compounds for sale from smaller, specialized niche pharmaceutical firms or biotechnology companies.

If the ongoing genomics research reaches its ultimate conclusion, more drugs will be "personalized"--specific to a small, genetically defined group, or even to an individual--implying that large sales forces will be redundant. In the meantime, however, a number of biotechnology companies are struggling to survive in a harsh environment fueled by product failures and disappointed investors. In 2002, a number of biotechs announced "restructuring" programs, consisting of eliminating redundancies and other cost-cutting exercises, designed to narrow focus on the most promising pipeline drugs or technologies. Because the markets were not generally open to fund-raising schemes, companies had little alternative apart from M&A.

Amgen's $16 billion merger with Immunex in July 2002 was the largest in the biotech industry so far, and further, if smaller, deals appear to be forthcoming. It is generally accepted that genomics research will not lead to an overnight revolution, but the pressure is on companies like Human Genome Sciences and Millennium to live up to early expectations and survive long enough to get actual products into the marketplace.

GENERICS. The rise of the blockbuster drug has led to another, less welcome, phenomenon: the aftermath of patent exclusivity expiration for a blockbuster drug. August 2001 marked the U.S. patent expiry of Lilly's antidepressant Prozac. Most observers knew that the impact on Lilly would be severe, but few guessed that Prozac would lose more than 70% of its sales within two months, in what soon became a gut-wrenching example of the worst-case scenario. Although Lilly had managed the life cycle of Prozac to some extent, introducing a once-weekly version and seeking new indications (even going so far as to rebrand its active ingredient fluoxetine as Sarafem for premenstrual dysphoric disorder), none of its actions could stem the loss, and it was unsuccessful in its limited litigation against generics manufacturer Barr.

In the U.S. market alone, drugs with annual sales of more than $60 billion face patent expiration over the next decade; 13 of the leading 35 molecules will lose protection over the next five years. Generics manufacturers like Andrx, Mylan, and Dr. Reddy's are now prepared to aim high and challenge patents that still have some years to run. The main impetus is the promise of 180 days of generic exclusivity for the first Abbreviated New Drug Application (ANDA) with Paragraph IV certification; that is, claiming that it does not infringe the brand manufacturer's patents. The innovator companies frequently respond by suing for patent infringement, in what has become one of the most contentious tactics in the industry.

Toward the end of 2002, the fortunes of the two differing sides are in a state of flux. In October, a judge in New York delivered a long-awaited verdict in the Prilosec patent case. Prilosec's basic patent expired in October 2001, but AstraZeneca said it had formulation patents that protected the drug until 2007. Andrx and units of Merck KGaA, Schwarz, and Dr. Reddy's all claimed these patents were invalid. The judge eventually backed AstraZeneca but also said that Schwarz's ANDA was not infringing its patents, because it used a different coating for its generic omeprazole product.

The verdict was welcomed by the major brand-name companies and led Pfizer Chairman and CEO Henry A. McKinnell to comment: "They [generic manufacturers] take a chance, and if they get lucky and some judge rules in their favor, they get a big payday. And if they lose, there's no consequences except for some modest legal fees. This is a slight perversion of our legal system, and there are no consequences to losing. I'm hoping there will be enough positive outcomes for the research-based industry that the generics industry will conclude that this is a fool's errand." However, the bullish stance was short-lived.

Less than a week later, President George W. Bush unveiled plans to limit the ability of brand-name companies to prolong exclusivities and to speed up the entry of generic competitors. In his speech, he stated: "By this action, we will reduce the cost of prescription drugs in America by billions of dollars and ease a financial burden for many citizens, especially our seniors. Our message to brand-name manufacturers is clear: You deserve the fair rewards of your research and development; you do not have the right to keep generic drugs off the market for frivolous reasons."

The Bush Administration's action followed a series of investigations by the Federal Trade Commission into the legal wrangling that barred the timely entry of several generic products, including cheaper copies of BuSpar, Cardizem, and Taxol. The reforms should yield cost savings of more than $3 billion a year--vitally important to the overstretched Medicare system, especially in light of the failure of the Senate and House of Representatives to agree on a prescription drug benefit.

FDA will allow only one automatic stay per ANDA, and some patents will not be entitled to protections such as those covering packaging or those that are not linked to innovation and medical need. Some drugs singled out for attention by White House officials included Cipro, Paxil, Pravachol, Prevacid, Zocor, and Zoloft. The average U.S. branded prescription cost more than $72 in 2001, compared with under $17 for a generic equivalent (though many manufacturers do offer discounts on branded drugs to those on low incomes).

Although President Bush was generous in his praise of the innovative pharmaceutical industry in his speech outlining the measures, he pointed out that some companies were beginning to manipulate the law and use loopholes to prolong their lucrative franchises. It may be no coincidence that the Bush Administration took action only two weeks before congressional elections. The pharmaceutical industry and individual companies make generous donations to the Republican Party, but other large, powerful corporations and health insurance companies were becoming alarmed at the size of their drug bills and lobbied Congress to modify the Hatch-Waxman legislation, as did senior and consumer action groups. Individual states have also taken action to control Medicaid prescription drug costs.

The Hatch-Waxman Act--which amends the Federal Food, Drug & Cosmetic Act--took effect in 1984 and was designed to encourage the entry of generic products while providing financial incentives for innovative R&D, including an automatic 30-month stay of generic approval if the innovator company sues. This loophole has been most prone to abuse, and two different bills introduced on Capitol Hill had attempted to close it.

Whatever happens in the regulatory and legislative environment, it is clear that companies now need to plan for the loss of exclusivity for major products well in advance. Tactics include introducing follow-up products (Nexium and Clarinex) and combination products (Glucovance and Zocor/Zetia) and applying for a switch to OTC status (Claritin and Prilosec). The best outcome would be for money to be invested in R&D rather than litigation, leading to new potential blockbusters waiting in the development pipelines. Some companies, like Novartis and Merck KGaA, want the best of both worlds and have their own proactive generics units.

At present, generics account for approximately 45% of all prescriptions. IMS believes the generic segment will outperform to 2006, with a compound annual growth rate of 13%, despite low profitability and reference pricing driven by the upcoming patent expiries and encouragement of generic prescribing in both the U.S. and Europe. Indeed, Germany intends to introduce molecule prescribing only, where no brand names will be used, while the Michigan Blue Cross/Blue Shield health insurer is heavily promoting the use of generic equivalents in the U.S.

R&D. With the continuing losses of exclusivity for major drugs, it is vital that pharmaceutical companies constantly develop new products. Although generics and some specialty companies bypass the process--the specialty companies by buying or licensing developed products or by modifying existing ones with drug delivery technology--R&D is still the fundamental driver of the majority of firms. Many of the smaller discovery and genomics-based biotechnology companies are beginning to move out of the laboratory and into the clinic, realizing that developing and marketing their own drugs is far more profitable and capable of driving sustainable growth than are licensing deals.

Bigger, better R&D is also frequently given as one of the main reasons for mergers and acquisitions. In view of the trebling, compared with a decade ago, of the industry's annual R&D spending to $30 billion and the explosion of data stemming from genomic research in the 1990s, one would expect to see pipelines brimming with exciting new drugs. In reality, unfortunately, the industry is currently experiencing what some describe as a "productivity crisis": Only 37 New Active Substances (NASs) were launched in 2001, and this is a 20-year low.

This year appeared to offer no relief. In October, the European Union's regulatory board--the European Agency for the Evaluation of Medicinal Products (EMEA)--announced a 7.8% cut in its annual budget, to $65.4 million, reflecting a 50% drop in marketing applications. By the end of September, EMEA had received only 25 applications, compared with 58 in 2001. An EMEA official said, "We are concerned for the drug industry that the new medicines are not coming through and the implications that has for public health." The situation on the other side of the Atlantic was little better: FDA had received 16 New Drug Applications, down from 24 the previous year.

What are the reasons for this downturn in productivity? Opinions vary. Some blame the spate of M&A activity for causing disruption in the lab amid reviews of spending and therapeutic focus. It is estimated that it now costs $800 million to develop a new drug, so only the most promising candidates can be chosen, requiring careful consideration. A normal cycle may be another explanation, as the industry comes to grips with new technologies and methods. Moreover, most of the "low-hanging fruit" in terms of drug targets, such as enzymes, has already been picked.

Until October 2002, FDA was without a permanent commissioner, leading some observers to accuse it of being overly cautious, though given the high-profile withdrawals of products like Rezulin and Baycol, this was perhaps to be expected. These withdrawals have certainly been one factor behind the demand for larger, more complicated clinical trials and delays for products such as Erbitux and Vanlev. Away from the lab, manufacturing issues have also led to approval hold-ups at some companies, for example, Lilly.

Interestingly, more than 30% of NASs launched in 2001 were biotechnology derived. These included Lilly's sepsis drug Xigris; Roche's pegylated alpha-interferon for hepatitis C, Pegasys; and Amgen's second-generation erythropoietin, Aranesp. Many biotech products, such as monoclonal antibodies, have shorter development times because they often have fewer side effects, are targeted to a smaller patient group, or are being tested for nonchronic diseases representing a significant medical need, for example, various cancers.

Some antibody products launched in the past few years have almost reached blockbuster status, such as Johnson & Johnson/Schering-Plough's Remicade, for Crohn's disease and rheumatoid arthritis , Amgen/Wyeth's Enbrel for rheumatoid arthritis, and Rituxan/MabThera for non-Hodgkin's lymphoma from Idec, Genentech, and Roche.

TECHNOLOGY. Patience will be required to see the fruits of genomic research (probably 10 to 15 years), but the impact of the Human Genome Project is already being felt with the launch of products such as Herceptin and Glivec, which work in genetically distinct forms of breast cancer and chronic myeloid leukemia, respectively.

Genomic data, proteomics (the analysis of differences in protein characteristics induced by different disease states, possibly leading to 10 times as many targets as genomics), and technologies such as combinatorial chemistry and high-throughput screening mean that companies can now examine in a single day compounds that would have taken years to evaluate previously. Being able to pick the right one is key.

Before such pharmaceuticals become more widely available, genomics is likely to have a more immediate effect in helping select the appropriate patients for such treatments. In August 2002, FDA approved the inclusion of information regarding a fluorescence in situ hybridization (FISH) test from Abbott in Herceptin's labeling: It can detect HER2 gene amplification in breast cancer cells, picking out the approximately 35% of women for whom Herceptin will be effective.

Genomics research is likely to reveal that what is now considered as one disease state--for example, asthma or hypertension--is actually a collection of conditions stemming from different genetic backgrounds, each requiring its own set of therapies. This may do away with the "one-size-fits-all" blockbusters of today, but it will mean drugs that are safer and more effective. It has been estimated that in a number of commonly treated conditions, less than 50% of patients actually benefit from taking the drugs they are prescribed.

As well as increasing the number of drug targets and producing more focused treatments, genomics should also lead to faster drug development times as a result of the ability to carry out smaller, more targeted trials in the genetically appropriate patient groups. And although the failure rate may be high in early-stage (Phase I) clinical trials, laterstage studies should have a much higher chance of success. The cost of developing individual products should therefore fall, while profitability increases, and governments/insurers may be more prepared to pay extra for such premium products because of gains in efficacy and safety.

Instead of having two or three "megabrands" in their portfolios, pharmaceutical companies may thus end up with 12 to 15 smaller, but still highly lucrative drugs, with the risk of high-profile safety problems much reduced.

Other applications of molecular diagnostics include an aspect of so-called pharmacogenetics: picking out patients who should not be given particular drugs because of the risk of dangerous side effects. In 1997, Abbott began a collaboration with French genomics company Genset to identify the 4% of patients susceptible to hepatotoxicity due to its asthma drug Zyflo, and at the beginning of 2002, GSK said it had "proof of principle" that it could develop a test to identify those in whom its HIV drug Ziagen could lead to a severe, possibly even fatal, hypersensitivity reaction (again, approximately 4% of the population).

GSK, alongside Roche, is one of the major companies most active in genomics research, but most of the top 20 companies have long ago jumped on the bandwagon, leading to lucrative deals for companies such as Millennium, deCODE Genetics, and Human Genome Sciences.

THE FUTURE. The pharmaceutical industry may have recently suffered a downturn in productivity and investor goodwill, but a number of factors remain in its favor. These include the aging population; concomitant rising incidences in diseases such as diabetes, cancer, and cardiovascular conditions; increasing access to emerging global markets, with major untapped potential in, for example, China; and the ongoing developments in medical research, particularly that relating to genetics.

More than many other industries, as a provider of much-needed medications, the pharmaceutical industry has the potential to be the recipient of significant gratitude and respect. Initiatives such as the drastic price reductions for HIV/AIDS and tropical disease treatments to developing countries; the Together Rx drug discount card in the U.S., which is a prescription savings program for eligible Medicare enrollees; and the development of safer, more effective drugs all stand to work in its favor, as does a satisfactory resolution of the patent situation.

A number of companies have already signaled that they will abandon the chase for "me too" products and aim to develop treatments for significant unmet medical needs instead, such as autoimmune disorders, heart failure, obesity, Crohn's/

inflammatory bowel disease, psoriasis, and, especially, cancer. Drugs developed over the past two decades have already led to dramatic changes in medicine, with treatments for conditions like high cholesterol levels, severe sepsis, erectile dysfunction, and Alzheimer's disease now available.

Although newer drugs may be more expensive, there is a growing realization that they may actually lead to a reduction in overall health care costs, thanks to fewer sick days and lower rates of hospitalization and surgery. Even now, pharmaceuticals still account for less than 20% of the total health care spending. There is also room for growth in the major markets, with unmet medical needs, DTC advertising, and better informed patients demanding new medicines, a greater emphasis on primary care, health promotion and disease prevention programs, growth in private insurance sectors, and increasing self-medication.

Many smaller biotechnology companies may fall by the wayside as their products or technologies fail to become established, but others will flourish and see keen licensing or indeed acquisition interest from the bigger pharmaceutical companies. These bigger companies, in turn, will continue to grow and jostle for position through M&A activity and by managing the life cycles of their lucrative marketed products and simultaneously investing billions of dollars in R&D to keep up a steady flow of new, important drugs.

SELENA CLASS is an editor with IMS Health, a leading market research and consulting firm that tracks and analyzes pharmaceutical information (http://www.imshealth.com). C&EN commissioned IMS Health to prepare this special report. All data are from IMS Health.

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PHARMA OVERVIEW
The pharmaceutical industry has recently suffered a downturn in productivity and investor goodwill, but a number of factors remain in its favor

DRUGMAKERS PLAY IN CONTRACT FIELD
Several big-name drug companies have a lesser known business serving their competitors

FDA WALKS A FINE LINE
Agency tries to find the right balance between thoroughness and efficiency in drug approval

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