Drug companies seek new cures as threats to their profits multiply

As prescriptions for branded medicines fall, the industry is struggling for answers

When a newspaper poll at the weekend asked which subject the Fahrenheit 9/11 film-maker, Michael Moore, ought to turn his caustic lens on next, the answer that came back was the US pharmaceutical industry.

When a newspaper poll at the weekend asked which subject the Fahrenheit 9/11 film-maker, Michael Moore, ought to turn his caustic lens on next, the answer that came back was the US pharmaceutical industry.

Big Pharma's reputation, especially in the US market where it makes most of its money, has sunk to new lows. Drug companies stand accused of profiteering through sky-high prices, of corrupt marketing practices and of suppressing data that suggests many drugs are ineffective or, worse, unsafe.

The US is the most lucrative drug market in the world, accounting for about half the global industry's sales. The absence of government price controls has allowed a much higher mark-up on the manufacturing costs of drugs. The crescendo of complaints is making it easier for the political authorities to pick away at Big Pharma's multi-billion dollar profits, and the industry is bracing itself for a big assault if John Kerry wins the presidential election.

But are the threats gathering even faster than had been feared? How should the industry read the sudden and scary drop in the number of prescriptions written in the US for branded medicines over the past few months? And is this data connected to collapsing trust in the industry, and to the industry's own response to its predicament?

These are the immediate questions that investors want addressed, as the global market leader, Pfizer, today, AstraZeneca tomorrow and GlaxoSmithKline next week set out their interim results. Many are nervous that the results could include some nasty surprises. Last week, Pfizer was forced to admit its revenues this year will be $1bn (£540m) below forecasts, in part because of poor sales of some medicines.

Data compiled by the market research group IMS showed a 4.2 per cent drop in US prescriptions for branded drugs in the quarter covering April, May and June. It was the seventh successive quarter of decline, but this one was more severe than expected and much harder to explain. While generics, the cheap copycat medicines that come in when patents expire on the branded medicines, are growing strongly, even they are not performing as well as anticipated. Overall prescription numbers are barely up 1 per cent. It is hard to believe that there are fewer ill people around, one analyst said wryly.

So it is a riddle, and only a few of the potential answers could provide any comfort to Big Pharma. One multinational was suggesting yesterday that the situation could be explained by a combination of factors: fewer springtime allergies affecting the asthma market and a drop in advertising of depression drugs now that several brands have lost patent protection.

Then there's the new over-the-counter alternatives to treat heartburn. And there's the health scares in hormone replacement therapy. Some even blame a mild flu season, which meant fewer people went to the doctor and fewer extra ailments were picked up as a result.

Many commentators, though, are not so sanguine. "The erosion rate of the pharmaceutical business model of the mid-to-late 1990s is clearly accelerating," Andrew Baum of Morgan Stanley told clients in a recent investment note. After years of rising prices, prescriptions in the US are now much more sensitive to drug prices, since patients are increasingly often required by their health insurers to contribute part of the cost.

"The rise in co-pay appears to have had a profound impact on physician prescribing and patient compliance. Rising co-pay is closely associated with fewer patients filling prescriptions for high priced products," he said.

More people are describing US branded drug prices as a rip-off because they can fall by up to 90 per cent when generic competition enters the market. The industry protests that it must recoup the phenomenal cost of developing a drug in the five to 10 years before patents expire. The volume of prescriptions fell in the second quarter, but the value of prescriptions of branded drugs held steady - suggesting more price increases.

Stewart Adkins, pharmaceuticals analyst at Lehman Brothers, warns that the industry should be very worried about the loss of trust it is facing and the public's declining belief that drugs offer value for money.

"There are 40 million uninsured people in the US ... and many others who are only partially insured. These people are likely to miss out one dose in three. The costs to the managed care organisations have been going down because of collective buying, but if the industry raises list prices [paid by senior citizens] that will lead to a further loss of trust."

Big Pharma counters that it has offered millions of uninsured seniors with discount cards. GlaxoSmithKline and Pfizer have the biggest such schemes. But Mr Adkins says: "By the time you are having to offer discount cards, in a sense you have lost the battle."

And then there are the health scares. Hormone therapy prescriptions collapsed after long-term use was linked with the increased risk of breast cancer. Recently, worries over the side-effects of anti-depressants such as Paxil (sold as Seroxat in the UK) have risen. GlaxoSmithKline, which makes Paxil, is appearing this week before a House of Representatives committee investigating whether the industry withheld evidence that these drugs are linked with teenagers' suicide .

GSK has been accused specifically of withholding negative trials results to avoid any damage to sales. A fraud suit launched against GSK by Eliot Spitzer, the New York state attorney general, has crunched the venality of Big Pharma marketing practices and health scares together as one issue. The publicity is likely to reduce demand for anti-depressants, make doctors more wary about prescribing them, and forced Big Pharma to remind its salesmen of their codes of conduct with regard to making claims for the products. Prescription volumes for anti-depressants have been among the most disappointing over the past few months.

Results tomorrow from AstraZeneca, the UK's number two drug maker, will offer the first clues as to the success of Crestor, its newly launched anti-cholesterol pill. There is a high-profile consumer group campaign in the US to have Crestor banned on safety grounds. It is proving difficult to convince doctors that the drug offers worthwhile advantages.

Crestor is often criticised as a "me-too" drug, similar to many already on the market - including the world's best seller, Pfizer's Lipitor - rather than a revolutionary new chemical entity (NCE). The number of NCEs launched in the US has collapsed in recent years.

Big Pharma's woes can only be reversed when the numbers pick up, says Göran Ando, the chief executive of UK biotech group Celltech and a former research chief at Pharmacia, the US giant taken over by Pfizer. He said: "I see a lot of promise in pipelines across the biotech and pharmaceuticals industry, but a lot of it is at an early stage. It is high risk, but potentially very high yield. In particular there have been real breakthroughs in cancer treatment. The hurdles, though, are getting higher. The biggest opportunities now will be for drugs that can do more than the usual thing of helping a random two-thirds of patients and doing nothing for one-third."