Posted At International Herald Tribune

BY : Alex Berenson

The image problems of the U.S. drug industry are beginning to hurt pharmaceutical companies where it matters most - at the bottom line.

A year after Merck's withdrawal of its arthritis medicine Vioxx led to an industrywide credibility crisis, the U.S. Food and Drug Administration is blocking new medicines that might previously have passed muster. Doctors are writing fewer prescriptions for antidepressants and other drugs whose safety has been challenged, like hormone replacement therapies for women in menopause.

Meanwhile, insurers and some states are taking advantage of the backlashagainst the industry to try shifting patients to older generic drugs. Over all, the number of prescriptions continues to rise slightly, but an increasing share is going to generic drugs. Also, consumers seem to be less responsive to aggressive marketing of drugs.

"A lot of the demand that the industry has created over the years has been through promotion, and for that promotion to be effective, there has to be trust," said Richard Evans, an analyst covering drug stocks at Sanford C. Bernstein. "That trust has been lost."

In the background, new competitors are forcing the old drug giants to struggle to keep pace. Biotechnology companies like Genentech are taking the lead in finding new treatments for cancer, a promising and lucrative field.

The major drug companies remain highly profitable. But at some, including Pfizer and Merck, sales are stagnant and profit is falling, leading to layoffs and - for the first time in many years - cuts in research budgets. Third-quarter U.S. sales of prescription drugs fell 3 percent at Bristol-Myers Squibb, 4.5 percent at Johnson & Johnson and 15 percent at Pfizer. Merck did not separate domestic and international sales but said overall sales fell 2 percent despite favorable foreign exchange trends.

The companies are reticentcompanies like Genentech are taking the lead in finding new treatments for cancer, a promising and lucrative field.

The major drug companies remain highly profitable. But at some, including Pfizer and Merck, sales are stagnant and profit is falling, leading to layoffs and - for the first time in many years - cuts in research budgets. Third-quarter U.S. sales of prescription drugs fell 3 percent at Bristol-Myers Squibb, 4.5 percent at Johnson & Johnson and 15 percent at Pfizer. Merck did not separate domestic and international sales but said overall sales fell 2 percent despite favorable foreign exchange trends.

The companies are reticent concerning details of layoffs, but both Pfizer and Merck have said they are cutting workers. Even Eli Lilly, where U.S. sales rose about 5 percent in the third quarter, said it had cut about 1,600 employees - almost 4 percent of its work force - so far this year.

No one expects a quick end to the crunch because several top-selling drugs will lose American patent protection by early 2007. They include Norvasc, a blood pressure medicine from Pfizer, and Zocor and Pravachol, cholesterol drugs from Merck and Bristol-Myers Squibb. Together, those three drugs have almost $10 billion in U.S. sales.

The U.S. drug industry is hardly in a full-blown crisis, however, and layoffs are occurring mainly on the margins.

Pfizer alone will make about $8 billion in profit this year, on sales of about $51 billion, and invest more than $7 billion in research and development - although the company's research spending fell 6 percent in the third quarter of 2005 from a year earlier. Over all, the industry spends more than $30 billion annually on research and development.

But without new drugs to promote as patents expire, line companies have depended on stopgap measures like reformulating existing drugs so they can be taken once a week instead of daily.

At the same time, they have use concerning details of layoffs, but both
Pfizer and Merck have said they are cutting workers. Even Eli Lilly,
where U.S. sales rose about 5 percent in the third quarter, said it had
cut about 1,600 employees - almost 4 percent of its work force - so farNo one expects a quick end to the crunch because several top-selling
drugs will lose American patent protection by early 2007. They include
Norvasc, a blood pressure medicine from Pfizer, and Zocor and
Pravachol, cholesterol drugs from Merck and Bristol-Myers Squibb.
Together, those three drugs have almost $10 billion in U.S. sales.
The U.S. drug industry is hardly in a full-blown crisis, however, and layoffs are occurring mainly on the margins

Pfizer alone will make about $8 billion in profit this year, on sales
of about $51 billion, and invest more than $7 billion in research and
development - although the company's research spending fell 6 percent
in the third quarter of 2005 from a year earlier. Over all, the
industry spends more than $30 billion annually on research and
development.But without new drugs to promote as patents expire, line companies have
depended on stopgap measures like reformulating existing drugs so they
can be taken once a week instead of daily.