Kill or cure for the drug business?

Aug 26th 2005
From The Economist Global Agenda

An American jury has awarded huge damages against Merck for a death associated with Vioxx, an anti-inflammatory drug that the firm withdrew last year. Further hefty awards against Merck and other big drug firms could cause great pain but might help to change the way they do business to the benefit of consumers

THE public’s attitude to the world’s leading drug companies has always been somewhat ambivalent. On the one hand they expect “Big Pharma” to deliver ever more effective cures for the ills that beset them; on the other they decry the vast profits that the industry makes as in some way exploitative. On Friday August 19th a handful of Texans did what they could to tip the balance back towards the consumer.

By a majority of ten to two, a jury in Angleton, a small town near Houston, decided that Merck, one of America’s largest drug companies, was liable for the death of Robert Ernst. Mr Ernst died in May 2001 of a heart condition that the jury concluded had been brought on by Vioxx, an anti-inflammatory drug manufactured by Merck. Vioxx was withdrawn in September 2004 after a study showed that the product raised the risk of heart attacks in some patients. The jury awarded Mr Ernst’s widow $253m, mainly comprising punitive damages, having decided that Merck was well aware of the potential risks associated with the drug. One document suggested that the firm was alerted to the troubling side-effects of Vioxx as long ago as 1997, two years before it came to market.

The decision could have unpleasant consequences for Merck. If its liability is upheld on appeal, Texan law will automatically restrict damages to around a tenth of the jury’s award. But this will come as little comfort for Merck as more than 4,000 other suits have already been filed in America, and hundreds of others are expected from overseas. In total, some 20m patients have been prescribed Vioxx around the world.

Merck initially promised to fight every one of these lawsuits but softened its line slightly this week when its general counsel, Kenneth Frazier, said the firm would consider making out-of-court settlements with people who had taken Vioxx for a long time. Estimates of the total payout Merck faces go as high as $20 billion. That would be a terrible blow, even for a company with profits of $6 billion last year. Merck’s market capitalisation has fallen by about $38 billion since Vioxx was withdrawn.

Headaches all round

The scale of Merck’s problems will spread alarm through an industry that has seen both its reputation and money-making potential take several heavy hits of late. Many of the ailments that afflict the big drug firms are a result of changes in the industry that began in the early 1990s. Most importantly, the advent of the blockbuster drugs on which Big Pharma relies also ushered in an era in which the focus shifted to profit-maximisation through heavy marketing, sometimes at the expense of scientific inquiry.

By some measures, this shift has done wonders for the big drugmakers—worldwide sales have nearly doubled since 1997 to around $500 billion. But in recent years sales growth has fallen well below the level seen in the booming 1990s. The “pipeline” of potential blockbusters has started to dry up—indeed, analysts think Merck's unpromising pipeline will hurt its profits more than any legal challenges in the long term. And competition from the generic drug firms that produce copycat versions of patented medicines has intensified.

At the same time, a slew of safety fears, including those over Vioxx, has further sullied the industry’s reputation. Pfizer faces lawsuits over Bextra, a drug that, like Vioxx, contains COX-2 inhibitors. Novartis and GlaxoSmithKline (GSK) will have to decide the future of the COX-2 drugs in their pipelines. Eli Lilly recently reached a $690m settlement with thousands of users of Zyprexa, its schizophrenia drug. GSK could also face legal challenges over Seroxat: on August 22nd, new findings suggested previous warnings that the anti-depressant increased the risk of suicide among teenagers should be extended to adults.

The trial in Texas highlighted the efforts drug companies will go to in order to boost their profits and market share. America, which accounts for some 40% of global drug sales, introduced legislation in 1997 that allowed direct-to-consumer advertising of pharmaceuticals. Since then, the sums spent there on promotional advertising have more than trebled to around $19 billion a year, while research-and-development (R&D) budgets generally lag some way behind. Drug firms now use an array of promotional techniques to encourage doctors to prescribe their products. The jury in Texas disagreed with Merck’s assertion that it had marketed Vioxx responsibly. The jurors were convinced that the firm knew of the heart risks associated with the drug but was reluctant to admit to them for fear that sales would falter.

The accepted practice in the drugs industry of not publishing bad test results has faced challenges of late. Last year, GSK settled a lawsuit over Seroxat with Eliot Spitzer, New York’s attorney-general. Mr Spitzer accused the firm of suppressing data showing a link between its product and teenage suicide. Since then, other drug firms have followed GSK’s lead and begun to publish the results of clinical trials on the internet.

Increased openness by Big Pharma is a step towards more responsible marketing. If more juries follow up the decision in Texas with big awards, drug companies are likely to reassess their aggressive marketing of new drugs as soon as they come to market. They may also want to rethink their heavy reliance on a small, and in some cases dwindling, supply of blockbusters.

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