By Michael Applebaum

It's not quite a spoonful of castor oil, but the prescription drug industry has had to open wide to swallow some very bitter medicine of late. Growth for 2007 has been anemic (U.S. sales up a mere 3.8%), due largely to stiff competition from generics and a dearth of new blockbuster treatments. Fastening a splint to their earnings, players like Pfizer and Merck have cut their sales forces, even as they continue to give cash infusions to their ad efforts. Direct-to-consumer spending industrywide climbed 4% last year, to $4.9 billion.

Admittedly, drug firms have been pumping additional funds into R&D, but thus far there's been no surge of FDA approvals or new-product launches. That reality is a function of a risk-averse regulatory culture in the post-Vioxx era. What's more, new classes of drugs that once looked promising have not lived up to their hype. Prescription weight-loss pills, for example, have turned out to be either ineffective or caused such unpleasant side effects as to render them unusable.

Plavix Goes with the Flow
Let's hear a collective "welcome back" for Plavix, the juggernaut anti-clotting drug from Bristol-Meyers Squibb that leapt back into the top 10 in 2007 (at No. 4, with sales of $3.9 billion) after a year's absence. Unfortunately, the story behind its comeback is indicative of what's largely driving the industry these days. (Hint: It's not innovation.) The key development was a permanent legal injunction won by the company back in 2006 against Canadian drug manufacturer Apotex to cease sales of its generic version of Plavix. (Apotex is currently appealing the decision that it had infringed the company's patent.) But the damage had been done. Even though the generic drug was only allowed to remain on the market for a few weeks—and despite the name brand's $150 million in spending that year—the development managed to sink Plavix's sales to $2.7 billion in 2006 from $3.2 billion the previous year. This cautionary tale remains a scary signal to drug manufacturers regarding the threat from generic drugs—cheaper alternatives already favored by many health-insurance plans. Meanwhile, Plavix has another obstacle: A study of 3,000 Plavix takers published this year in The Journal of the American Medical Association found that the risk of heart attacks may "rebound" when patients stop taking the drug.

Specialty Maladies
Going forward, Big Pharma may have no choice but to dispense with its old blockbuster model and settle for tapping new niches for incremental growth. Analysts point to specialty product categories such as biotech, oncology and vaccines as among the most promising areas for new product development. Indeed, Merck's HPV vaccine Gardasil (introduced in 2006) has been one of the industry's few recent success stories, racking up an impressive $1.5 billion in sales last year. Merck is projecting sales of $2 billion for the vaccine in 2008.

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