The pharmaceutical industry is coming to the end of the blockbuster era, analysts say. Patent expiries and a steep drop-off in clinically significant innovation is forcing drug makers to develop new strategies for shoring up margins as pricing comes under increasing pressure from generic competition, health care programmes, and mounting public outcry for change. Cost cutting is inevitable in every aspect of the business, analysts say, including R&D and marketing, where astronomical spending no longer boosts the bottom line.

"The four-dollar pill costs 20 cts to make," says Andrew Foreman, analyst at investment bank Friedman Billings Ramsey (Arlington, VA). "The company making money going forward will be the one that can get the cost of making that pill down to 5 cts or 10 cts, because the four-dollar pill is about to cost two dollars."

Tough times for drug makers may spell bad news for suppliers of advanced pharmaceutical ingredients (APIs) and drug intermediates. But there is an opportunity for suppliers who can assist in reducing costs and discovering significant drugs for new frontier therapeutic markets, Foreman says.

Analysts say the drug industry is hitting a brick wall on product discovery. "Pharmaceutical companies got used to producing a number of blockbuster drugs every year, but that's no longer happening," says Howard Saftlas, pharmaceutical industry analyst at Standard & Poor's (New York). "The traditional methods of drug discovery have run dry. Also, for years industry has aimed at major categories such as cholesterol reduction, hypertension, and depression, and the market is served with well-tolerated drugs in all these categories. Now the industry is aiming at more esoteric targets, and it's a tougher nut to crack."

Technology Shift

Large producers are looking for new directions in drug development, such as genomics, but that is proceeding at a slower pace than anticipated, Saftlas says. Biotechnology offers another route to novel drugs, and investments in new production are mounting, fueled by concerns over a shortfall in capacity and the promise of a fast-growing market. "Competition is building between small-and large-molecule approaches," he says. "It's yet to be seen what impact that will have."

The drug industry's woes are frequently front-page news. Large pharmaceutical companies are facing increased competition from generic firms; some early forays into biotechnology have faltered; and there is constant sniping at the high product prices, the empty new drug pipelines, and the recently skyrocketing expenditure on marketing--an expense that has been added to R&D spending in defense of high drug prices. FDA is also cracking down on manufacturing problems, and on clinical trial results in the wake of failures such as Bayer's cholesterol-lowering drug Baycol.

Earlier this month, attorneys general for 29 states, the District of Columbia, Puerto Rico, and the Virgin Islands sued Bristol-Myers Squib, claiming that the company illegally fended off generic competition for its Taxol anticancer drug by garnering specious patents. Bristol-Myers is also being sued for alleged attempts to thwart generic competition for its BuSpar anti-anxiety medication.

Bristol-Myers' hopes for Erbitux, a monoclonal antibody licensed from ImClone Systems (New York), were dampened when the initial drug application for the product was rejected by FDA because of problems associated with human trials.

Schering-Plough agreed last month to pay $500 million to address cGMP concerns at plants in New Jersey and Puerto Rico, and confirmed it is the subject of a criminal investigation by EPA in Puerto Rico.

Cancer drugs top the list of potential new markets, Glassell says. "Cancer is essentially a disease of aging, and as drugs cure other diseases, incidences of cancer will go up," he says. "Biotech takes aim at cancer." Analysts say biotech and genomics are getting off to a slow start--at least slower than expected, but Glassell warns against defining the role of biotechnology by early failures such as ImClone's.

The development of biologic and biotech drugs will bring a change in the supply of fine chemicals, APIs, and intermediates, Glassell says. "The conventional wisdom is that there will be a polarization," he says. There will be large, broad-based fine chemical companies such as Degussa, DSM, and Lonza that have traditionally been the lead suppliers of the major pharmaceutical companies; and there will be smaller specialized firms, some in biotechnology, others with niches in drug discovery technology or hazardous chemistry," he adds. There will also be a split between suppliers to the major pharmaceutical companies and the suppliers to the generic pharmaceutical producers that will be playing an increasing role in the market. About two-thirds of Cambrex's business is in generics, he adds.

Not every emerging pharmaceutical company is entirely focused on biotechnology. Atherogenics, for example, develops both large- and small-molecule drugs for its niche in inflammatory diseases such as rheumatoid arthritis and asthma, says Mark Colonnese, senior v.p./finance and administration and CFO.

Atherogenics attempts to do as much of the early-stage discovery and development in-house, such as screening of chemical libraries and the design of novel chemical entities. It contracts with companies such as Cambrex for bulk production of APIs, Colonnese says. The company has four programmes in clinical trial for arterial sclerosis, rheumatoid arthritis, and solid organ transplant rejection, he says. It has two technology platforms, one developed by its founders at Emory University, and one licensed from the National Jewish Research Center.

Major companies will partner as well as compete with emerging drug discovery companies that are focusing on the underdeveloped markets, Colonnese says. Atherogenics plans to partner with a majorcompany for large-scale production and marketing of successful products, he says.

-- Chemical Week