Our Top Ten Items from a Year Most Want to Forget

From the bear market, to the growing management credibility gap, to GPO whistleblowers, 2002 was a year most of us are glad to have behind us. But within the gloom, some glimmers of hope: most important among them is a sense of directionality at athe FDA following the appointment of a new commissioner.

1) The Ugly Market. Without question, issue number one for 2002. Stock funds fled health care, the pervasive bleakness dulling, not highlighting, the few bright spots. Both Big Pharma and biotech badly underperformed the Dow, dropping 21% and 34%, respectively. Medical devices did relatively well—a mere 15% decline. But even there, consolidation skews the numbers—a few winners, like Stryker Corp. and Boston Scientific Corp. , dramatically helped the index. In no segment could a small public company without great news buy an investor. IPOs were virtually nonexistent. The depression in the public market translated directly to a depression on the private side: valuations of follow-on financings, when they could be found, plummeted. Layoffs—both in anticipation of a financing squeeze and because of them—were common as even well-funded businesses tightened their belts in anticipation of a long financial drought: discovery scientists were hardest hit.

2) The Management Credibility Gap. One key reason for the market problems: distrust of management. Corporate malfeasance turned personal in 2002. Tyco International Ltd. 's accounting problems fell off the news pages at the revelations that former CEO Dennis Kozlowski had raided the Tyco treasury for paintings, condos, parties, and extravagant knickknacks. ImClone Systems Inc. 's clinical problems with Erbitux gave way to CEO Sam Waksal's insider trading charges and ultimate plea bargain. Schering-Plough Corp. president and CEO Richard Kogan was accused of leaking bad earnings news only to Putnam investors. Following other key strategic missteps, the breach of investor rules proved fatal: Kogan decided to resign. Meanwhile, accounting scandals continued to plague the industry. Swiss cardiovascular device star Jomed NV apparently inflated earnings by 40% (its CEO just resigned). Bristol-Myers Squibb Co. —under fire since 2001—finally admitted in the fall of 2002 that it needed to re-state at least two years' worth of earnings, a task made more difficult following a Wall Street Journal report that the company had—under previous and current management—repeatedly misrepresented its accounts to meet earnings goals, with top executives profiting enormously. Thus when the board of the underperforming GlaxoSmithKline PLC , as part of a broader top-management plan, floated the idea of a hefty increase in CEO JP Garnier's compensation with a package keyed to only modest growth, British investors revolted, suggesting a pay cut instead. The increase was tabled for a corporate re-think.

3) GPOs in Wonderland. Group purchasing organizations came under unprecedented scrutiny of industry policies and practices, first in the form of Senate hearings held last spring and second, in a blistering series of articles in The New York Times. GPOs, in particular Premier Inc. and Novation LLC , were charged with colluding with big companies and with practices designed to line their own pockets. Many of the accusations came from small suppliers tired of being excluded from group contracts. But the charges, particularly the notion that GPOs could dictate buying behavior by their members, had an Alice in Wonderland quality for GPO executives. Still, when the federal government says "Clean up your act or we'll clean it for you," the GPOs have no choice but to start looking at ways to change how they do business.

4) Pfizer Buys Another Partner. Establishing a pattern of buying its most important partners, and with its own near-term pipeline of at best equivocal value, Pfizer Inc. paid $60 billion in stock for Pharmacia Corp. [See Deal]. Can it continue to buy growth? Probably not—too many antitrust concerns. Can it sign co-promotions with big companies? Again, probably not those with an independent streak. Pfizer now will have to see its R&D organization produce (which it hasn't of late) and/or opt to be biotech partner of choice (which it clearly is trying to do, beating out the aggressive GlaxoSmithKline in December for rights to Neurocrine Biosciences Inc. 's indiplon [See Deal]), and/or find a way to make niche markets pay (presumably the rationale behind its enormously expensive deals for Serono SA 's Rebif [See Deal] and Eyetech Pharmaceuticals Inc. 's Macugen [See Deal]).

5) The Demise of the Neuer Markt. If US biotech stocks performed disastrously, German and indeed European companies did even worse. Investors simply vanished—and finally so did the Continent's most important new-company exchange, the Neuer Markt (the Swiss New Market folded as well). The German firms on the Neuer Markt were moved over to the main exchange in Frankfurt, where they'll compete for what little investor attention remains with much bigger and more established companies. And should Europe's private companies ever want to go public, they'll face—it's feared—substantial restrictions. Nonetheless, the demise of the Neuer Markt isn't all bad: some biotechs and bankers hope that the lingering taint of bubble-economy businesses will now disappear along with the market.

6) Spin-offs. As investors became increasingly disillusioned with start-ups, and especially start-up discovery companies, spin-offs and LBOs became the hot financial strategy. Big Pharmas and others unloaded medical businesses no longer considered core: Allergan Inc. spun off Advanced Medical Optics Inc. [See Deal] and Degussa AG sold Viatris GMBH in an LBO [See Deal]; Merck & Co. Inc. tried and failed to spin off Merck-Medco Managed Care LLC [See Deal]; VCs took out chunks of Johnson & Johnson (via new dermatology company Barrier Therapeutics Inc. [See Deal]) and Aventis SA (via ProSkelia Pharmaceuticals , courtesy of financing from Warburg Pincus [See Deal]). Roche offloaded costs and some clinical-stage programs with the BioXell SPA spin-off to, among other investors, MPM Capital [See Deal](which will devote, it says, 20% of its new $900 million fund to spin-offs). The attraction of these pharma deals: broad-based research programs with advanced products at cheap prices—and the ability to take on big chunks of capital from capital-stuffed venture funds.

7) The Novel Target Problem. The ImClone shenanigans masked a bigger issue for an industry which for a decade had sought to solve its productivity (and pricing) problems by developing drugs against novel targets: the enormously increased R&D risk of doing so. The failure of ImClone's EGFR antagonist looked like a one-time corporate event until AstraZeneca PLC revealed that its own EGFR inhibitor, Iressa, worked a bit in late-stage cancer but not in cancer patients with less advanced disease, just the opposite of expectations. (See "Testing Drugs against New Targets: Like Playing Blind Man's Bluff?" IN VIVO, October 2002 (Also see "Testing Drugs Against New Targets: Like Playing Blind Man's Bluff?" - In Vivo, 1 Oct, 2002.).) Suddenly everyone was talking about the risk of new mechanisms that have not been validated by linking them empirically to the initiation or maintenance of a disease state. What once looked like the answer to the R&D productivity challenge now looked like just another problem.

8) Finally, Some Welcome Changes at FDA. Amidst the gloom, a glimmer of hope. The headless FDA finally got a commissioner (Mark McClellan, MD, PhD), who, it's hoped, will bring a sense of leadership to an agency that—two years without a boss—seemed adrift, with back-and-forth decisions on basic policies and statistical measures (the agency's flip-flopping on criteria for antibiotic approvals being one example). As important to the biotech industry: the agency is merging the Center for Biologics Evaluation and Research (CBER) with the Center for Drug Evaluation and Research (CDER), with luck bringing a new uniformity to the approval process of large molecules (CBER's approvals have taken on average three months more than CDER's). Until the reorganization is in place, however, no one's betting on the outcome.

9) Orthopedics Goes Soft. Not the market itself, which had another robust year in pricing and profitability, but the approval this past summer of Medtronic Inc. division Medtronic Sofamor Danek 's Infuse, the bone morphogenic protein. To the long-asked question: Will biologics reshape therapeutic choices in a discipline where hardware has long been the surgeon's preferred option, the market—at least the spine market—enthusiastically responded "Yes." Infuse's promise heralds larger changes for an orthopedics industry flush with success, much as drug-eluting stents have done for cardiovascular devices.

10) Vulnerable Plaque Moves Center Stage. In any other year, the fact that drug-eluting stents were approved for sale would have been the big news in cardiovascular devices. But many companies are already looking at the next big thing: devices to diagnose and treat vulnerable plaque, which, like the stents, bring biologics to bear on traditional devices. And vulnerable plaque challenges device companies, well-equipped to deal with mechanical problems but maybe overmatched when it comes to solving biological problems, particularly if vulnerable plaque proves to be a systemic condition.