How Big Pharma blew it: bad choices and PR gaffes have finally caught up with the drug industry

Chief Executive, The, Dec, 2004 by Fran Hawthorne

For years now, Big Oil, tobacco and HMOs have pretty much held a monopoly in consumer loathing. But no longer: According to a recent Harris Poll, pharmaceutical companies have tied the big bad three as the industry that consumers love to hate the most.

In fact, opposition is coming from all sides. Politicians from both major parties regularly denounce the drug makers for their prices, their marketing and for blocking Grandma from buying inexpensive medication from Canada. New York State Attorney General Eliot Spitzer this summer charged GlaxoSmithKline, the second-largest drug company in the world, with fraud for not revealing the negative results of clinical trials that tested antidepressants on children.

Dozens of states have sued or investigated drug companies over their pricing tactics. In the space of just a year and a half, at least six books critical of the industry have been published, with titles like The Truth About the Drug Companies and The Big Fix. "You take Pfizer, you take Merck, you take Bristol-Myers, you take Glaxo-Smith," says Larry Bossidy, former CEO of Honeywell and author of the new book Confronting Reality. "All of them face the same challenges. They're all looking down the same gun barrel."

From Indiana to New Jersey to Basel, Switzerland, CEOs of Big Pharma scratch their heads at the outpouring of anger. How did an industry that makes Gleevec as a treatment for cancer, Fosamax for osteoporosis and Lipitor for cholesterol--an industry whose products save people's lives--come to be so reviled? And what, if anything, can they do now to change that negative image? The giant drug makers and small biotechs, as well as consultants, economists and consumer advocates, point to causes that range from lousy PR to nasty battles with manufacturers of low-cost generic drugs to the flawed basic structure of health care in the United States. The biggest single point of protest is prescription drug prices, which have been soaring at far faster rates than the general cost of living. To some degree, the industry's dilemma is the inevitable side effect of being a big, profitable business. But to a larger degree, the wounds are self-inflicted. "What the public is telling us is, 'We love the innovation that you come up with, but we can't afford it,'" says Sidney Taurel, chairman, president and CEO of Eli Lilly.

From the other side of the divide, Dee Mahan, senior policy analyst at the Washington-based consumer group Families USA, puts it this way: "It's not like buying a Lexus--it's not something where you have a choice. People get angry because this is something that is critical that they need, and companies are raising the prices so much."

Most people date the current problems to the early 1990s, when President Bill Clinton's health care reform plan rode a tide of public concern about rising costs. At first, HMOs bore the brunt, but after they loosened their coverage rules, the angry eye turned to drug companies.

Some of that is convenience. These companies were obvious targets because they were big, they comprised one of the nation's most profitable industries, and they were powerful players in Washington. And just around that time, a flurry of breakthrough drugs came to market, like Mevacor for elevated cholesterol and Prozac for depression, and new drugs are always pricier than older ones with generic competition. "It's politically easier to point a finger at the small number of big pharmaceutical companies than at hospitals and doctors," complains Ben Hohn, a New York-based consultant at The Monitor Group, who specializes in biopharmaceuticals. "People have a personal relationship with the doctor, and they tend to associate the doctor with the hospital."

Daniel Vasella, CEO of the Swiss drug giant Novartis, notes that "it became pretty obvious in the late '90s that the industry had a problem." A decade earlier, he recalls, people reacted with sympathy when he told them he worked for a drug company. "Today, the reaction is generally cold." Vasella and other industry defenders say a knowledge gap among consumers is partially to blame for their troubles. The economics of drug pricing and the relative benefits, they say, are intrinsically difficult to explain to the general public.

"People don't realize the tremendous risks," says Kenneth I. Moch, president and CEO of Alteon, a New Jersey biotech company that specializes in cardiovascular disease, diabetes and aging. "The only way to attract investors and capital is to have high rewards." Based largely on controversial studies by Tufts University's Center for the Study of Drug Development, the industry claims it costs over $800 million and takes at least 12 years, on average, to come up with a new drug.

Shot in the Foot

Still, the pharmaceutical makers can hardly claim to be innocent victims. Even some industry stalwarts cringe at the record:

* They filed multiple lawsuits, sought questionable patent extensions and made outright payoffs to generic companies in order to maintain their monopolies on expensive blockbuster drugs like Astra-Zeneca's Prilosec for heartburn and Bristol-Myers Squibb's Glucophage for diabetes.