Business Notes: Drug Companies’ Hard Times, Lilly, Zyprexa, etc.

Indianapolis Business Journal on Lilly's Declining Revenue

Note: I worked in the Medical Device field for 7 years before I became involved in the Energy sector.

Losing patent protection of one drug that treats bipolar and schizophrenia affects the salaries of 38, 000 employees at one of the biggest drug companies in the world.  Many drug and medical device companies are hooked up into a pipeline of cash from the government and insurance companies.  The increasing pressure from the government and insurance companies to cut medical costs of a mass produced product seriously affects the bottom line of large companies.  Lilly, being in the Pharmaceuticals, is just one of many companies in the same situation.  I can probably think of other Medical Device companies suffering a similar fate.

An article last year from Daily Finance here explains,

Once drugs lose patent protection, lower-price generics quickly siphon off as much as 90% of their sales. For consumers, the savings from generics can be substantial, as this price table of the top 25 brand-name drugs with available generic counterparts highlights. According to pharmaceutical analyst Sophia Snyder at research firm IBISWorld, generics now average about 30% of the price of the brand-name originals.

Daily Finance includes a table:

Patent Expiring in 2011	Condition	Company	2010 U.S. Sales
Lipitor	cholesterol	Pfizer	$5,329,000,000
Zyprexa	antipsychotic	Eli Lily	$2,496,000,000
Levaquin	antibiotics	Johnson & Johnson	$1,312,000,000
Concerta	ADHD/ADD	Johnson & Johnson	$929,000,000
Protonix	antacid	Pfizer	$690,000,000

See full article from DailyFinance:http://srph.it/eNsmU9

Look at the sales figure for Lilly’s Zyprexa.  It is about 2.5 billion dollars.  This is serious cash.  This kind of cash disappearing by even 50% will not go unnoticed in the local economy in which the business participates.  There are 38, 000 employees.  Also think of the supply chain of the company, and this figure could have an affected population of perhaps 5 times to 10 times the Lilly number. 

The article continues,

Zyprexa's patent is set to expire in October, and according to Snyder, Lilly is one of the worst positioned companies to compete after the patent cliff.

So, the patent already expired this past October (2011).

The pressure to increase revenue or cut costs also seems to push these companies toward actions that are allegedly in violation of FDA regulations.  One must remember that there is not “freedom of speech” in the marketing of medical devices or pharmaceuticals.  This may shock some Americans.  Yes, you read that right; I will repeat, there is no “freedom of speech” in the marketing of medical devices or pharmaceuticals.  You cannot promote your product if it is not approved by the FDA for that particular use of the product.  If you do, the FDA can pretty much arrest you.  However such large companies with diverse populations may have a few people here and there who may not be aware of the regulations, or may even not care, and thus, we may expect cases where people are tempted to bend the rules to “make the numbers” for the quarterly earnings statement.  Read on.

Back in 2009, Lilly’s newsroom here, explains,

The misdemeanor plea is for the off-label promotion of Zyprexa between September of 1999 and March of 2001. Specifically, the plea states that Lilly promoted Zyprexa in elderly populations as treatment for dementia, including Alzheimer's dementia, although Zyprexa is not approved for such uses. As part of this agreement regarding the criminal investigation, Lilly has agreed to pay $615 million.

Under terms for the resolution of the civil investigations, Lilly has agreed to make payments totaling nearly $800 million. Approximately $438 million will be paid to the federal government and approximately $362 million will be made available for payment to settling states. As previously reported, Lilly took a charge of $1.415 billion, or $1.29 per share, in the third quarter of 2008 in connection with this investigation. The 2008 charge will be sufficient to cover the payments announced today. The company is now finalizing the tax treatment of these payments, and will communicate this impact when the company announces fourth quarter 2008 financial results on January 29, 2009.

So, we have large corporations with hordes of employees and families (38, 000 at Lilly) depending upon them.  We also have a pipeline of revenue from the government and insurance companies supplying the cash to these large companies.  Thus, we have all these wonder drugs as a consequence of all this revenue and the hard work of employees who have to navigate the heavy regulations and internal bureaucracy necessary to support the functioning of any pharmaceutical or medical device company.  These employees are no slackers, and they are usually smart and highly skilled.

However, with the explosion of the elderly population with the retiring of the Baby Boomer generation, and with the medical needs of the elderly, what will we do?  Can we afford this coming explosion of medical spending?  How will the families of these companies cope when the revenues are no longer predictable for the company and the managers begin firing people?  How will the local economies react to large numbers of people looking for jobs? 

Are we reaching the end of an era of wonder drugs, to be followed by an era of just manufacturing and distribution of drugs without much research and development?  This sounds plausible with our economic realities.  If the insurance companies keep on cutting costs to survive, the government trims spending on health care, and then drug and medical device companies have to cut spending as a result, I am afraid there will not be much infrastructure left to support research and development to the level we have become accustomed to in the last 50 years or so.