The $20bn Drugs Disaster

HAILED as a miracle drug when it first came on the market in 1999, by last autumn the arthritis painkiller Vioxx had become a pariah. A new study had just shown that those taking it were at greater risk of suffering heart attacks and strokes.

The data was so disturbing that a US Food and Drug Administration (FDA) whistleblower stood before a panel of US senators and condemned it as “what may be the single greatest drug safety catastrophe in the history of this country or the history of this world”.

The whistleblower, Dr David Graham, believes a staggering 88,000 to 139,000 Americans have suffered heart attacks and strokes as a result of taking Vioxx. “This,” Dr David Graham, a senior FDA official, told a stunned Senate committee last November, “would be the rough equivalent of 500 to 900 aircraft dropping from the sky” Some experts calculate the global toll for deaths linked to Vioxx at up to 60,000.

The effect on the drug’s manufacturer, New Jersey-based Merck, could be equally catastrophic. The company has set aside hundreds of millions to pay to victims of Vioxx but it could be forced to fork out between $10bn (Pounds 5.5bn, E8.1bn) and $50bn after a landmark ruling 10 days ago.

A US jury found Merck negligent in the death of a Texas man and awarded more than $253m to his family, the vast majority in punitive damages. The company has said that it will appeal but its shares fell 7.7% on fears the outcome would release a flood of civil actions. The essence of what emerged from the court during the five week hearing is that Merck did not disclose to patients all it knew about problems with the drug. E-mails showed staff were discussing fears of cardiovascular risks dates as far back as 1997.

By seemingly sweeping the risks under the carpet for the best part of a decade, Merck could now be facing tens of billions of dollars in potential liabilities. Though it does not set a precedent, the Texas case will strengthen the hand of those planning to sue Merck. Some 4,200 lawsuits were being prepared before last week’s verdict. That number is now set to climb sharply.

When Vioxx was withdrawn, 20m people around the world, including 400,000 in Britain, were using the drug. Doctors have formally reported the deaths of 103 people in Britain, but the real figure may be as high as 2,000 according to some experts.

VIOXX was developed in the 1990s, along with other drugs in the same class such as Pfizer’s Bextra and Celebrex. The drugs, known as cox-2 inhibitors, were designed to ease pain without the risk of stomach problems sometimes caused by the previous generation of painkillers such as ibuprofen and aspirin.

Vioxx was based on Nobel prizewinning research by Sir John Vane, a British pharmacologist who had found that aspirin blocked two chemical messengers. One triggered the heat and pain of inflammation, while the other protected the stomach from ulcers. He reasoned that by blocking one but not the other, it ought to be possible to give relief without the usual risks.

Merck was so keen on the drug, it recruited an army of consultants and spent $160m on advertising. In Britain, where direct advertising is banned, the promotion was almost wholly through doctors. “The world of relief is about to change,” the promotions materials said. “True once-daily dosing for osteoarthritis patients … Selective, strong, simple.” Elderly people suffering from arthritis were the main patients, but doctors also prescribed Vioxx for other kinds of pain and to reduce the inflammation caused by sports injuries. Vioxx also showed potential for inhibiting tumours, for example in colon cancer.

Early studies suggested Vioxx might increase the risk of heart attacks and strokes, but the dangers were not made clear to the public until after the drug had been approved by the FDA and taken by millions of people.

Last autumn a study into the drugs usefulness at treating colon cancer threw up some extremely worrying data: 3.5% of patients taking Vioxx suffered from cardiovascular problems, including heart attacks and bleeding in the intestine, compared with 1.9% of similar patients not taking the drug.

The news led Merck to pull the drug from the market voluntarily; some $30bn was wiped off the company’s shares overnight.

In February, an FDA advisory panel concluded Celebrex and Bextra also posed increased cardiovascular risks but should remain on the market with strict warnings. But in April, the FDA called for the withdrawal of Bextra, citing the cardiovascular risk in addition to a rare but potentially deadly skin reaction caused by the drug.

Celebrex remains on the market. Last winter its sales slumped but they have already started to recover. Though likely to be under peak levels, Celebrex sales could hit $2bn this year. The bounce back comes despite warnings that Celebrex – like Vioxx and Bextra – can cause cardiovascular problems in some patients.

For all the blots on the copybook of this class of drugs, cox-2s are still valued by some physicians as a type of anti-inflammatory drug designed to be safer on the stomach than more conventional painkillers. The dearth of other effective painkillers and the growing ranks of baby boomers suffering from aching joints will drive growth in the market, doctors and analysts say.

Merck has another cox-2 drug, Arcoxia, that is already approved in 54 other countries and generated worldwide sales of $100m in the first half of this year.

GlaxoSmithKline (GSK), Novartis and even Merck are investing millions in clinical research to prove the safety of new cox-2s, which must clear newly raised hurdles to gain FDA approval. Last April, GSK’s experimental painkiller ’381 moved into phase III clinical trials for osteoarthritis and rheumatoid arthritis. The results of the trials for the former are due at the end of this year; next year the company expects to start long safety studies under the auspices of the FDA.

Trials have already shown that ’381 is more effective than Celebrex, giving a clue as to why the industry is so keen on this class of painkillers.

Provided the industry defines the drugs’ cardiovascular risks and benefits clearly, and companies are able to find their way through a potential regulatory thicket, it looks like the painkillers will still be moneyspinners. The worldwide market for cox-2s surpassed $7bn in 2004, and had been projected to reach $9bn by 2010, before the Vioxx and Bextra withdrawals sent the market tumbling.

WHAT of the prognosis for Merck? The Texas verdict will embolden plaintiffs to pursue cases. The next case will be heard in New Jersey in mid-September. In the UK alone, thousands are expected to sue.

The total litigation liabilities are hard to predict. Wyeth’s liability for diet drug fen-phen has amounted to about $20bn (again, the company failed to issue stern enough warnings about possible side effects) but Bayer’s Baycol withdrawal has cost only about $1bn so far – a tenth of the bill originally mooted.

Merck is facing liabilities for Vioxx likely to total a “material number” but probably less than the $20bn or even $50bn bill some analysts are predicting, Goldman Sachs says.

Luckily, Merck has $6bn in cash along with other opportunities to raise billions more cash through a put option.

Analysts and industry alike are pouring cold water on the consequences for the rest of the industry. Product liability issues tend to be company specific and can’t really be extrapolated, according to Goldman Sachs. Bextra has not yet ignited the same deluge of cases because its maker is not accused of suppressing vital safety information.

Mark Tracey, Goldman Sachs’s pharmaceutical analyst, told The Business: “With focus on cyclicals and oils, people overlook this sector’s operational rude health. Pan-European pharmaceutical companies franchise sales growth averaged 12% in the first half and earnings per share 20% and seven raised guidance – the ‘E’ in the ‘P/ E’ is moving. Once cyclicals are on the wane, Vioxx is not something that is going to stop fund managers buying pharmaceutical stocks.”

But the Vioxx verdict has created a febrile atmosphere. Last week GSK’s anti-depressant Seroxat, linked to suicidal thoughts in children and adolescents, was again placed under the microscope. A study in the journal BMC Medicine suggested adults also be warned of the dangers associated with the mood enhancing drug. That warning triggered a wave of selling in GSK stock.

There is also a sense of deja vu surrounding Vioxx. “This keeps happening,” says Mark Harvey, partner with Cardiff solicitor Hugh James citing the drug scandal surrounding Eli Lily in 1987. “The industry talks about risk versus benefit but it is perceived at putting profit before safety and is facing a loss of confidence unless it improves clarity and transparency,” he says.

Harvey has had around 100 phone calls since the Vioxx verdict and expects it to double his caseload. “Ninety per cent of them have suffered strokes and heart attacks,” says Harvey who may take on one case from a man who took Vioxx and Betra. Harvey is also leading a 2,000-strong class action against GlaxoSmithKline’s Seroxat. Proceedings will start later this year.

Goldman Sachs’s Tracey said: “Post marketing surveillance has got to be sharpened, something the FDA is already talking about.” The FDA is also making sure the industry puts clear new warnings on its medicines.

Whistleblower Graham stated that the FDA’s inability to protect Americans from another case similar to the Vioxx case was clear evidence that massive changes need to be implemented for the future protection of the public. One of the regulatory changes he proposed was granting the Office of Drug Safety status as an independent regulatory authority.

According to the Journal of the American Medical Association: “Adverse drug reactions are the fourth leading cause of death in America. Reactions to prescription and over-the-counter medications kill far more people annually than all illegal drug use combined.”

The pharmaceutical industry is on the cusp of change, a process that is likely to be accelerated by the recent adverse publicity. Early this month Wood Mackenzie produced a report called “It Ain’t Your Parents’ Pharma Industry Anymore”. It says the future of new Big Pharma business models will be focused on innovation and customer-focused approaches, as they move away from relying heavily on blockbuster products.

The number of blockbusters and the percentage blockbusters contribute to sales have decreased since the rapid growth of mega- selling drugs in the late 1990s.

Blockbusters can be the key to a company sustaining competitive advantage for a while, but without a diversified portfolio to protect itself, the company could find itself in financial difficulty when patents expire. Wood Mackenzie has identified three distinct business models the pharmaceutical industry may pursue: focus on key specialty audiences in marketing, a limited number of therapy areas in R&D, and a much more customer-centric selling model.

“For the past 20 years, the leading pharmaceutical companies have all looked very similar,” said Dr Keith Redpath, head of life sciences Research for Wood Mackenzie. “They all had in-house R&D across many therapeutic areas, were vertically integrated, and their growth was driven by the blockbuster model – with one product accounting often for 30% or more of their sales. Now, these evolving models mean drug companies are beginning to look different.”