Big Drug Makers See Sales Decline With Their Image By ALEX BERENSON New York Times November 14,

Fading Brands Meanwhile, insurers and some states are taking advantage of the backlash against the industry to try shifting patients to older, generic drugs, arguing that they work as well as newer and more expensive branded medicines. Overall, prescriptions continue to rise slightly, but an increasing share of prescriptions are going to generic drugs. Also, consumers seem to be less responsive to aggressive drug marketing.

Trust "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 and Company. "That trust has been lost." In the background, new competitors are forcing the old-line 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. Executives of the major drug companies say they expect public scrutiny in the wake of problems with Vioxx and other drugs. But they say they are concerned that consumer mistrust has led to unrealistic expectations about drug safety and risks, stunting the development of new medicines. "I think there is an overall unreasonable expectation right now that there is such a thing as a risk-free drug," said Sidney Taurel, chief executive of Eli Lilly & Company.

The Drug Industry The drug industry, dominated by US-based companies, is not in a full- blown crisis, and layoffs are occurring mainly on the margins of its work force. Pfizer 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 compared with the same period in Overall, the industry spends more than $30 billion annually on R&D. But for the companies, and for patients who are counting on industry research to produce new treatments for diseases like rheumatoid arthritis and diabetes, these are trying times. Shares of Pfizer are near their lowest levels since 1997, closing Friday at $22.43, and a broad index of drug stocks has fallen 25 percent in five years. In contrast, shares of biotechnology companies are soaring. Without new drugs to promote as patents expire, and with the bar set so high by the blockbusters of the last decade, the old-line companies have depended on stopgap measures to protect sales, like reformulating existing drugs so they can be taken once a week instead of once daily. At the same time, they have used consumer advertising to drive patient demand. But consumers have become more skeptical and insurers have rebelled against high prices for drugs that are not therapeutic breakthroughs.

Total Revenues Total Costs The Economics KEY: Big Fixed Costs R&D and advertising are fixed costs. WHY? They are not related to current production. Production costs are fairly low, generally, at the margin. $ Q MC AFC AC DMR Profits