Azimilide

NEW YORK -- Procter & Gamble is so obsessed with outdoing the competition that its executives have been known to peek into friends' closets to make sure they are not stocking rival brands of soap, dishwashing liquid and shampoo.

Now, though, P&G is no longer satisfied simply controlling what goes into kitchen cabinets and shower stalls. It also wants more space in consumers' medicine chests, and not just for toothpaste.

The $35 billion company is on an ambitious mission to double its size in 10 years, and not all of that growth can come from its mature Tide detergent, Pampers diapers and Crest toothpaste brands. So P&G is aggressively trying to move into the prescription pharmaceuticals business, where profit margins for successful drugs can be more than double those for products in its four core categories: hair care, diapers, feminine hygiene and laundry. "Beyond the year 2000, we want to make sure we are bringing along other categories that can provide the same sort of dynamic growth we've gotten from these four," said Bruce Byrnes, president of the company's health care business. For example, the company expects to more than double sales from its health care unit, to $6.4 billion, with much of the growth coming from pharmaceutical sales, which now account for $500 million to $600 million. Yet while P&G may have a huge presence on supermarket shelves, it is barely known in doctors' offices and health insurance companies, where the powerhouses of the $300 billion pharmaceutical industry play an equally tough game. The question, rarely faced by P&G, is whether it can successfully operate as an unwelcome guest in someone else's backyard. Wall Street is skeptical. "They know how to market to consumers," said Michael Grant, an analyst who follows consumer products companies for J.P. Morgan. "But that doesn't mean they know how to market to doctors and HMO's and others that are involved in this side of the business." What is more, though P&G's products may be the first consumers grab to get a stain out of a shirt, the company lacks the track record and product range to command that kind of credibility in the prescription drug business. And while P&G is committing a sizable chunk of its research dollars to develop drugs -- about $150 million a year -- that is a small fraction of what the large drug companies spend. Johnson & Johnson spends $1.9 billion on research and development while Merck's budget is about $1.5 billion, eclipsing the $1.3 billion that P&G spends on all of its product lines. Despite all that, P&G executives see opportunities in developing drugs for an aging population with an increasing need for better and cheaper medicine. They reason that the company can hold its own by narrowing its focus to a few, high-growth areas of the industry, like heart, ulcer and bone medications, drugs that treat the types of problems that are becoming increasingly prevalent among aging baby boomers. "The world is getting grayer and with that comes a lot of medical issues, so we think this is a category that will be large and growing for a while," Byrnes said. "We are in an investment mode in pharmaceuticals right now. We want to become recognized as an emerging, innovative force." On paper, the goal certainly makes sense. Gross margins for household products like fabric softeners and cleansers are about 40 percent, compared with 90 percent for popular drugs. And the company already has some promising drugs in its system, including Azimilide, which is being tested now to treat irregular heartbeats. Helidac, an ulcer medication introduced a year ago, has already become a big seller because it does not have the side effects of some competing drugs. And Risedronate, a medication being developed to treat bone disease, was shown during an 18-month study to increase bone density in women with osteoporosis. P&G estimates that the drug has the potential to grow into a $1-billion-a-year product. But Risedronate, which is undergoing further clinical testing and has not yet been presented to the Food and Drug Administration for approval, is not expected to hit the market until at least 2001. And then it will face stiff competition from drugs made by two pharmaceutical heavyweights, Merck and American Home Products. Those established players are not exactly looking over their shoulders at their latest competitor. "That is the nature of the business," said Doug Petkus, a spokesman for American Home Products' Wyeth-Ayerst Laboratories, whose osteoporosis medication, Premarin, is already a billion-dollar drug. The challenge in staying ahead of the innovation curve underscores the difficulty P&G will have reaping the kind of returns it is counting on from its drug division. And it is why the investment in the unit, which previously focused largely on remedies for coughs and sniffles, has been met with mixed reactions. "It is a bit of a neutral right now," said Grant of J.P.Morgan. "The question really becomes one of critical mass for P&G. If their business is currently $500 million, which is roughly where it is, how can they compete against a Merck at $20 billion? And the answer is that obviously it's very difficult." In fact, P&G's entire health care business, which includes oral care products and nonprescription medications like Pepto-Bismol and Vicks, has struggled a bit lately. Crest's share of the market tumbled after the company was slow to pick up on consumer demand for baking soda and peroxide toothpaste formulas. And after introducing the nonprescription pain medicine Aleve three years ago, P&G dumped its 50 percent stake in the product last year. At the same time, some of its nonprescription drugs have been squeezed by former prescription medications that are now sold over-the-counter. But P&G has already begun to address many of those problems and is putting up the cash to increase the prescription side of the business. It opened a $280 million pharmaceutical research center near its headquarters in Cincinnati two years ago and is beefing up its 350-member drug sales team. It has also been increasing the amount it spends to develop drugs. Though it still spends far less than the industry giants, it now allocates more than half of its $300 million health-care research budget to pharmaceuticals. "A disproportionately high percent of our net sales is going into our research and development effort in pharmaceuticals right now," Byrnes said. "Our board has said that is just fine; a company this size ought to be able to pick some areas we want to be in." P&G has so far stayed away from building the business through acquisition, mainly because many suitable targets have already been snapped up or are too pricey, analysts said. Instead, it has been teaming up with other manufacturers to develop and market some drugs jointly. The idea, Grant said, "is to partner with major pharmaceutical players to try to leverage off of their distribution." In one arrangement announced not long ago, P&G said it would share the cost of promoting Astra-Merck's Prilosec, which is used to treat heartburn and ulcers, in exchange for an undisclosed percentage of sales. P&G is also collaborating with Regeneron Pharmaceuticals on a number of projects, including the development of Axokine, a compound that may be effective in treating obesity associated with diabetes. In addition, P&G will market Risodronate with Hoechst Marion Roussel, a unit of Hoechst AG. By maximizing its resources through these partnerships, and by focusing on only a few drug categories, P&G should be able to produce a decent return on its investment, some analysts say. "As long as they maintain some discipline, then it doesn't seem like a bad idea," said Constance Maneaty, who follows the company for Bear, Stearns. "If they get a drug that generates $500 million in sales, which is very small by current standards, they've doubled their sales." Glaxo Wellcome, after all, was a relatively small player until its Zantac ulcer medicine took off. The drug generated $3 billion in worldwide sales last year alone, or 24 percent of Glaxo's revenues. P&G believes it has the products in its pipeline to duplicate that success. If not, the company, which is rarely on the losing end of any market share battle, will get a taste of its own medicine.

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