November 4, 1999
The Health Unit is a partnership with the Henry J. Kaiser Family Foundation.
MARGARET WARNER: The news began leaking out yesterday: Two of America's pharmaceutical giants were planning to merge, to create the largest prescription drug maker in the world. Today, the two New Jersey firms, American Home Products and Warner-Lambert, formally announced plans to create a new company, American Warner, Inc., in a deal valued at roughly $71 billion. American Home Products, the larger of these companies, makes the hormone-replacement drug Premarin, the world's most prescribed medicine. Its over-the-counter products include Advil and Robitussin. Warner-Lambert makes Lipitor, the top-selling cholesterol drug in the U.S. Its over-the-counter products include the antihistamine Benadryl, and Listerine. The two companies have not been problem-free. Last year, the federal government restricted the use of Warner-Lambert's diabetes drug, Rezulin, after it was linked to liver damage. American Home Products recently paid $4.7 billion in a legal settlement with users of diet drugs Redux and Pondimin. Still, this morning, American Home President John Stafford and Warner-Lambert President Lodewijk de Vink sounded upbeat.
JOHN STAFFORD: Lodewijk and I have known each other for many years, and worked together on lots of things in the industry. And the two companies have great respect for each other. We have every confidence that this will be successful.
MARGARET WARNER: The two men said they were confident the transaction would survive antitrust review by federal regulators. But at midday, a third drug maker crashed the party with a surprise bid of its own. The new player is Pfizer, Inc., the maker of the anti-impotence drug Viagra, as well as Visine and Bengay. Pfizer, the largest of these three companies, made an $82 billion offer to buy Warner-Lambert. That's $11 billion more than the American Home Products deal. Whichever company ultimately acquires Warner-Lambert, it would be just the latest in a series of mergers in the pharmaceutical industry.
|A transforming industry|
MARGARET WARNER: Late today Pfizer filed suit against American Home Products and Warner-Lambert over their merger deal. To analyze today's developments, and what they say about the pharmaceutical industry, we're joined by Francis Palumbo, director of the University of Maryland's Center on Drugs and Public Policy; Viren Mehta of Mehta Partners, an investment advisory group that specializes in the pharmaceutical and biotechnology industries; and Dr. Sidney Wolfe, director of Public Citizen's Health Research Group. Welcome, gentlemen. Mr. Mehta, what is driving the sudden interest in Warner-Lambert? Give us some context about the industry to help us understand this.
VIREN MEHTA, Pharmaceutical Industry Analyst: The industry is in throes of major transformation driven by the new tools of science that is forcing companies to have large amount of cash flow so they can rapidly capitalize on the new science and market them around the world.
MARGARET WARNER: And so you're saying that these companies just feel they're too small to what, compete globally and do what they need to do?
VIREN MEHTA: Indeed. They have been managing with one, two, three percent market share of the worldwide pharmaceutical business, and they are recognizing that they had to partner with their competitors and enrich them. They cannot continue to afford to share that bounty while investing more and more in R&D.
MARGARET WARNER: What would you add to that Mr. Palumbo?
FRANCIS PALUMBO, University of Maryland: I think the companies also want to make sure that they have a broader line of products than they currently do because in this era of managed care and formularies, which are the list of drugs that patients can get their prescriptions from, the companies want to be as broad as possible so that they can get as many of their drugs on the formulary as possible, and they can do this by merging with or acquiring other drug companies.
|The cost to consumers|
MARGARET WARNER: So, Dr. Wolfe, what is the implication of this merger and others for consumers?
DR. SIDNEY WOLFE, Public Citizen: In less than ten years, there have been 29 significant mergers in the pharmaceutical industry. And given that one of the purposes of the mergers is to save administrative costs, not to have as big a marketing drive as the individual companies had, where are the savings? There's really no evidence that the savings that occur when the mergers are accomplished are being passed on to patients. We're also concerned about the research implications. In a number of these mergers, one of the companies says they don't have any new drugs in the pipeline and therefore they're merging with another one that does. That's true in the case today. And yet, in my view, one of the concerns I have is that the company that didn't have any new drugs in the pipeline and might have worried about it, and might have done something, the pressure is taken off. There are fewer focal points from which research is coming.
The other thing that is most concerning to me is that we have in this concentration of power a corruption of the political process. The industry outspent the tobacco industry in the last couple of years in terms of lobbying Congress and the bigger they are, the more money they spend, they're able to extend patents on drugs. There is currently a battle where companies are incurring millions of dollars to extend patents on drugs, so that the political process is likely to be even more corrupted by the increased amount of power that these mergers represent.
MARGARET WARNER: All right. Mr. Mehta, let's look at one of those points, which has to do with research. And is there evidence that we've seen a lot of these mergers, as Dr. Wolfe said, that that has increased research by the drug companies or can it be the other way around?
VIREN MEHTA: Well, the research expenses are going up, but what we must recognize is that the science that is driving the new round of product discoveries is in its infancy. To use the language analogy, we're in a babbling phase. And when we go through this transition, it is always an inefficient process of investing more while keeping the existing cost structure in place. And that is where the rub comes in.
|Do mergers mean less research?|
SIDNEY WOLFE: I think I'm concerned about the total expenditures. If two
companies are spending a couple billion dollars on research, when they
merge, it is entirely possible that the total amount of expenditures will
VIREN MEHTA: I'm not sure that that is really true.
MARGARET WARNER: Let him finish.
DR. SIDNEY WOLFE: We haven't seen this yet.
MARGARET WARNER: Mr. Mehta, go ahead.
VIREN MEHTA: I think the issue really is, are they investing the larger bounty more productively? And the evidence is mixed so far, and it is partly because of the management inefficiencies but mostly because of the earlier stages in which we are traveling through this journey to the more perfect drugs.
MARGARET WARNER: All right, Mr. Palumbo weigh in on this debate here about the implications for research and new drugs.
FRANCIS PALUMBO: Well, first of all, I think that companies can't really rely on the same level of patent protection that they had in the past. Indeed they want to get more patent protection, and Dr. Wolfe is correct, they're lobbying for that all the time. But at the same time...
DR. SIDNEY WOLFE: Extending patents.
FRANCIS PALUMBO: At the same time -- extending patents, thank you. At the same time with managed care and the competition to get drugs out to formularies, drugs are coming on and going off various formularies for prescription payment plans and effectively reducing what we call the life cycle of the drug, the amount of times that company can really get a profitable product. So in effect the patent runs out before it really does -- in terms of sales.
MARGARET WARNER: Let's go back to the merger question. What is the evidence...do you agree with Mr. Mehta, that the evidence is really quite mixed in terms of what these companies do once they do merge in the research area?
FRANCIS PALUMBO: Well, of course it's mixed because you have all different kinds of companies doing these mergers. So if you have two strong companies merging, you may see the R&D continue on down a very nice path. But quite often what you see are two companies merging, one of which doesn't have a lot in the pipeline. So they're happy to hook on with another company because now they have a life again where they thought they might be on the slippery slope.
MARGARET WARNER: Mr. Mehta, now respond to Dr. Wolfe's point about costs. And this is one that, of course, comes up in any merger. Are you having the kind of consolidation that eventually either drives up costs or certainly keeps costs from falling?
|The cost of drugs|
MEHTA: I think that the transition is also plaguing us in terms of the
cost efficiencies. We can learn from the information technology experience
that in the '60s and '70s, cost of newer products continued to rise but
in the '80s and '90s, a law has come into effect where every 18 months
the power of research doubles and the cost is cut in half. We are in '60s,
'70s era when it comes to discovering new drugs. The costs are twice what
they used to be, if not three or four times. I suspect that in next 10
to 20 years as we perfect the new scientific tools, we are going to be
able to double up drugs more efficiently. It will take months rather than
decades, and it will take tens of millions of dollars rather than hundreds
of millions of dollars to get a new drug on the market. At that time I
think everyone will be a winner but the journey is going to be somewhat
MARGARET WARNER: What do you make of that theory, Dr. Wolfe?
DR. SIDNEY WOLFE: Well it's an interesting theory but the facts is thus far in the wake of these 29 mergers and acquisitions savings have not been passed on to the consumer. The clear benefactor in this increased amount of power that happens with mergers and acquisitions are the stockholders if they're in and out at the right time, the CEO's and the people at the corporate level. There's really no evidence thus far that patients have benefited. And I'm afraid that the evidence thus far is that the patients may have been harmed. I am very, very worried about this and unlike a lot of other industries where it's just purely economic, we're talking about health and safety issues here, and a few of the wrong kind of moves that I suspect may happen with these kinds of mergers just multiplying are going to pay off in terms of damage to patients.
VIREN MEHTA: I think we can agree that perhaps the consumers have not benefited, but I'm not sure that there is much evidence that they have been harmed. I would submit to you that it is really a question of really finding better tools that will yield better drugs, and we are just in early stages of our efforts.
MARGARET WARNER: Mr. Palumbo, what do you think of the implications of this for the cost of drugs?
FRANCIS PALUMBO: Well, I think first of all that the manufacturers have not been hurt in all of this. But I think the retailers have been hurt. If you look at the way drug pricing is, the manufacturers basically get their price. Now they do provide rebates and discounts and so forth, but they're still making a fair profit on the products. The retailers on the other hand are working on tremendously small margins now because of the competition at the retail level. So drugs at that level have become more of a commodity.
Given that, we see drugs going on and off different formularies, and patients may not be harmed in their pocketbook as much as they may not have access to drugs that they had last week because now something has changed because of the financing. If I can just make one more point -- the reason that I say they may not have been harmed as much in their pocketbooks is because 65 percent of the drugs that are prescriptions that are dispensed are now paid for by some third party where the patients pay $5 or $10 and have no clue what the real cost of that drug is. One, the patients who are getting hurt are the ones who are paying out of pocket that other 35 percent of the patients. They'll continue to get hurt until there are other programs in place to help them pay for the drugs.
|A global drug industry|
MARGARET WARNER: Mr. Mehta, let me ask you about one final point, all of you, quickly on this. The Wall Street Journal in an article today said that really they thought that the industry was ripe for a new wave of consolidation and that we're moving into a new era in which there is going to be a totally global drug industry with just a handful of big companies. Do you think we're headed that way?
VIREN MEHTA: In fact, that is inevitable because when we try to make a list of companies that may not be interested in participating in this round of consolidation, we are hard pressed to come up with even one name and it is because to have capacity to market your drugs around the world, 5 percent market share is no longer enough.
MARGARET WARNER: Do you agree?
FRANCIS PALUMBO: I agree. It's virtually impossible, for example, for a new player to come into the field. I think in the whole history of bio tech companies Amgen is about the only one that has actually ever made it into the big leagues on their own without help from another big company. And that's just a symptom of what Mr. Mehta says.
MARGARET WARNER: And I assume that this is a bad idea?
DR. SIDNEY WOLFE: The goal to break past two or three percent is good for investors and so forth there's really no evidence that patients have benefited from it. I'm concerned about the harm that has already happened and will continue when these kinds of things are allowed to go through.
MARGARET WARNER: All right. Go ahead, Mr. Mehta.
VIREN MEHTA: I was just going to comfort Dr. Wolfe by saying that in about ten to twenty years we will face a very major wave of deconsolidation just the same magnitude as we are facing consolidation when better drugs targeted to specific patient populations at much lower prices begin to come out.
DR. SIDNEY WOLFE: The sooner the better.
MARGARET WARNER: Thank you, gentlemen, we have to leave it there. Thanks very much.
FRANCIS PALUMBO: Thank you.