BUSINESSWEEK ONLINE : JUNE 12, 2000 ISSUE
COVER STORY

The Pharma Frenzy
In the race for gene-based therapies, big drugmakers join forces with upstarts

On the surface, it would seem that no force is changing the pharmaceutical landscape more than the megamerger. The pending marriages of Glaxo Wellcome (GLX) with SmithKline Beecham (SBH) and Pfizer (PFE) with Warner-Lambert (WLA) will create behemoths with annual research and development budgets approaching $5 billion. That's forcing competitors to reevaluate their own independence.

The merger frenzy, however, is merely a symptom of the real change sweeping Big Pharma: the revolution in genomics. This new era is likely to alter every facet of the pharmaceutical business. Research, focusing increasingly on the root causes of illness, will lead to more effective drugs and transform one-size-fits-all therapies into products tailored for an individual's genetic makeup. And it may strengthen the hand of upstart biotechnology companies. Genomics, says Pradip K. Banerjee, partner at Andersen Consulting, ''changes your entire business model.''

At the heart of this transformation is an unprecedented opportunity to find new ways to attack disease. Dr. Jurgen Drews, a consultant at research outfit OrbiMed Advisors LLC, says that drugs today work against just 500 different disease-related proteins in the body, or ''targets,'' as the industry calls them. Genomics may yield a quantum leap, revealing close to 10,000 new targets, Drews says.

Already, early work has offered some tantalizing possibilities. Merck & Co. (MRK) has identified a gene linked to a common form of blindness. Bristol-Myers Squibb Co.'s (BMY) genomics research has spawned compounds that may treat cardiovascular disease and rheumatoid arthritis. SmithKline (SBH), with help from the Rockville (Md.) biotech firm Human Genome Sciences (HGSI), has zeroed in on a possible new target for osteoporosis. And Glaxo Wellcome has found several potential targets, including a gene variation that makes people more prone to migraines.

NEW IDEAS. To speed commercialization of such discoveries, drugmakers have a key asset: their massive libraries of compounds. Bristol-Myers, for example, is testing many of the compounds in its library against fruit flies in which a certain disease-causing gene is turned on. If a compound counters a condition in the fruit fly, then Bristol knows it works against that gene--and they've taken the first step in turning the compound into a human drug.

Even as big drugmakers are overhauling their internal research to exploit genomics, the new technology makes it more critical than ever for them to reach outside. Small biotech companies and academic labs are likely to be more successful in using genomics to spot breakthrough disease targets, insists Orbimed's Drews. ''In early discovery and plowing the soil for the next generation of new ideas, the biotech industry is much more fertile ground,'' insists Drews.

That belief has led to a flurry of alliances between the giants and the upstarts. Bristol-Myers spends more than half of its genomics budget on outside collaborations. Pfizer Inc. has made deals with J. Craig Venter's Celera Genomics (CRA) and with Celera competitor Incyte Genomics (INCY) to gain access to those companies' gene libraries. ''To have done what Celera and Incyte have done would have distracted us from our core business,'' says Martin Mackay, Pfizer senior vice-president of worldwide discovery. ''Would we have done it as well? I doubt it.''

Not everyone, however, is convinced that paying big bucks for such databases is the way to win. Merck, for example, has its own database and technology deals with a number of companies, such as Affymetrix (AFFX), which provides chips to study genes. But it is also trying to uncover disease-causing genes with public data from the Human Genome Project and groups like it.

Genomics technology promises not only to cut the costs of discovery--it could make testing these new drugs a lot cheaper. Scientists will one day be able to genetically select people for clinical trials who are likely to respond to a drug and identify those patients who are likely to have adverse reactions--information that could help weed out potentially toxic drugs earlier in the process.

For the patient, genomics promises a revolution in how medicine is practiced. Doctors could use genetic tests to tailor drugs to individuals. It's already happening: Roche has done work on a heart drug that is most effective in patients with a particular gene mutation that the company found. And Glaxo Wellcome is collecting DNA samples from people taking the HIV drug Ziagen in an effort to identify a gene or genes that seem to make people likely to suffer an adverse reaction.

Such tests are merely the beginning. Eventually drugmakers will develop medicines tailored for smaller patient populations. Where there is a $1 billion hypertension drug today, down the road there might be five $200 million drugs, each designed to treat different groups with different genetic makeups. Genomics ''will change the way medicine is practiced,'' says Dr. Allen D. Roses, worldwide director of genetics at Glaxo.

A DRY PIPELINE. Some argue, however, that the genomics payoff could be a long time coming. The work needed to tease out what protein a gene encodes and how the protein contributes to disease is long and painstaking. Only then can drugmakers begin hunting for a safe, effective drug that blocks the action of the new target protein. ''We've known for fifty years the genetic mutation that causes sickle-cell anemia, and we still have no good therapy,'' says Merck Executive Vice-President Roger Perlmutter.

The problem for big pharmaceutical companies is the pressure they are under to increase their output of new drugs. According to Boston Consulting Group, investors expect each Big Pharma company to bring an average of three new drugs a year to the market. But Boston Consulting figures the drug companies are on track only to offer 1.6 new compounds per year. ''If this [genomics approach] takes longer than anybody envisaged,'' warns Dr. Joseph Zammit-Lucia, chief executive officer of Cambridge Pharma Consultancy, ''unless you've hedged with traditional drug research, you could end up with a dry pipeline.''

At the same time, the genomics boom could produce a host of new competitors for Big Pharma. Stephen S. Tang, national director of the health-care industry practice at A.T. Kearney Inc., believes that many of the early products that emerge from genomics research may be protein-based drugs, the specialty of biotech companies. If that's the case, the balance of power between biotech and traditional drugmakers could begin to shift--another seismic rumble that the dawn of genomics may bring.

By Amy Barrett in Philadelphia

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