Sunday, February 04, 2001

P&G bets on pharmaceuticals

Company making small gains despite wary investors, drug giants

By Cliff Peale
The Cincinnati Enquirer

        MASON — Only 20 miles from Procter & Gamble Co.'s world headquarters, the company's future depends on scientists in laboratories overlooking a Warren County cornfield. There, 1,100 employees of P&G Pharmaceuticals are waging a battle to compete in a $220 billion industry with a relatively tiny $850 million company.

P&G has high hopes for the osteoporosis drug Actonel.
(P&G photo)
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        Their mission is to move Cincinnati-based P&G past its traditional stable of soap, detergent and diapers into the corporate fast lane of high-stakes research and high-profit prescription drugs.

        The workers in Warren County are an anomaly within the often rigid P&G culture. When built in 1995, the Health Care Research Center was the only facility in the company to combine marketers, lawyers, finance officers, regulatory executives and researchers from one division, the company said.

        They are making considerable progress. Sometime during the next year, P&G Pharmaceuticals will turn the corner into profitability after almost two decades of siphoning off research funds, said Mark Collar, president of P&G Pharmaceuticals.

        Fueled by their new Actonel osteoporosis drug, featured in national television ads for the first time last week, executives at the drug division are setting their sights high: sales of up to $2 billion by 2005, and close to $4 billion by 2010.

        “We don't have the pedigree with the company of Tide,” Mr. Collar said. “We have to create our legacy here on the fly.”

        It's been a year since investors punished P&G for exploring a $140 billion

        merger that would have made it an instant drug-industry giant. But the legacy that Mr. Collar considers still is very much in doubt.

        The stakes for P&G are huge: Success would mean growing into an explosive new field, but failure could sentence the company to hanging its 21st-century future on 20th-century powerhouses like Tide detergent, Pampers diapers and Ivory soap.

        The stark dilemma became obvious in late January 2000, when Procter's stock price dropped about 20 percent in a week after it started talks with American Home Products Corp. and Warner-Lambert Co. about a $140 billion merger.

        P&G dropped out when the talks leaked into the media. Its stock has yet to recover, and lagging growth in core brands such as Tide, Pampers and Ivory has Wall Street almost ignoring the drug business.

        Pharmaceuticals “is not what they are,” Prudential Securities analyst Constance Maneaty said, echoing a theme by other Wall Street observers. “They're a consumer products company. By definition, they're not a pharmaceutical house.”

A new image

        In Mason, a few miles north of the bustling Fields-Ertel Road interchange off Interstate 71, P&G Pharmaceuticals is fighting that perception.

        The sprawling complex, opened in mid-1995, is an all-purpose facility geared to innovation, collaboration and profits.

        Researchers can visit “Inspiration Point,'' an outdoor area with walking paths and benches. They can eat in the cafeteria, get shoes repaired, clothes dry-cleaned or packages mailed — all in the building.

        Only lawyers and finance executives have private offices, while other workers — including Mr. Collar — work out of cubicles and reserve “huddle rooms” for meetings.

        By combining marketing, a core function for P&G, with research, the company hopes to speed as many as two dozen new products through the pipeline.

        The current standard-bearer is Actonel, which was approved for U.S. marketing in April to treat osteoporosis. First-year sales should total about $100 million, Mr. Collar said, despite an entrenched competitor in Merck & Co.'s Fosamax.

        Others in the P&G pipeline include Stedicor, an anti-arrhythmia drug, and Intrinsa, a female testosterone patch that Mr. Collar said executives think one day could be a “two-billion-dollar blockbuster.''

In a new league

        Pharmaceuticals have produced a business growing at about 15 percent a year, very healthy compared to P&G's more established units.

        But a year after P&G failed in its bold attempt to become an instant drug-making giant, the question remains: Is “healthy” good enough?

        Giants such as Pfizer Inc. and Merck & Co. spend billions of dol lars every year on research, send thousands of salespeople into the field to persuade doctors and exert huge political influence on regulators.

        Procter isn't nearly that big in the business. Even for Actonel, it has joined with drug-industry mainstay Aventis Pharmaceuticals to sell doctors on the merits of the drug.

        The company's top executives are determined to stay focused in the prescription drug business, spending big development dollars only on those products where they can use research from other P&G divisions and attack markets where they know there's a payoff.

        While many analysts say, “Get bigger or get out,” P&G seems determined to make its mark in the business at its own pace.

        Late last year, it squelched talk that it would swap the pharmaceutical business for Clairol's hair-care products.

        P&G badly needs the new sales that Actonel and other in-the-pipeline drugs can produce. That money could increase profits, free research funds for other products and increase the stock price.

        But the company still is trying to convince Wall Street analysts and doctors that it's a real player in the pharmaceutical game.

        “They're a relatively small pharmaceutical unit, so I think they're a little like the new kid on the block,” said Dr. James Liu, head of the reproductive endocrinology unit at the University of Cincinnati.

Marketing efforts

        Some doctors said P&G's legendary connections with consumers and marketing acumen haven't taken hold in the drug industry.

        It's different than selling to major retailers. Drug companies often fly groups of medical “thought leaders” away for the weekend for full-court presses on the advantages of the latest pharmaceutical wonder.

        The combined marketing force of P&G and Aventis has more than 3,000 salespeople in the field calling on individual doctors as many as 20 times, Mr. Collar said.

        It also has data on every one of the prescriptions written for osteoporosis treatment, and Actonel's share of new prescriptions has increased to about 7 percent, Mr. Collar said.

        But Dr. Edward Silberstein, an internist at the University of Cincinnati Medical Center, said he was puzzled why he hadn't received the full marketing blitz for Actonel.

        “Procter is so good, I would assume they'd develop a superb campaign,” he said. “I'm waiting to see Procter be as aggressive (as Merck). At least for us, we haven't seen it.”
        P&G lumps financial results for P&G Pharmaceuticals in its health-care unit, but top executives have given the division the research money — up to $450 million a year — to make it on its own.

        Those days, however, are clearly about to end. Any future growth in drug research will depend on increasing sales, Mr. Collar said.

        “Actonel by itself can't carry this division on its back,” he said. “The company has seen us beat objectives so much in the past few years, they've come to expect that. So yes, they're asking us for more.”

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