The once-mighty pharmaceutical industry, for years the nation s most profitable, has begun to show some cracks, as lucrative drug pipelines dry up and employers and government balk at paying its patent-protected prices.


But no major U.S. drug maker seems to be facing more problems than Bristol-Myers Squibb.


With $20 billion in sales last year and 46,000 employees, the company had long been a solid performer with a strong franchise in the highly profitable cancer market. Now it is wrapped up in the ImClone Systems debacle, has lost patent-protection on key drugs, including cancer-drug Taxol, and is the focus of an SEC investigation into its accounting for inventory.


Shares in Bristol-Myers Squibb have lost half their value since March and many industry analysts view the company as a likely takeover target.  The thing that was distinctive about the company was that its pipeline was due to go dry sooner than some of the other companies, so in order to keep up with the bunch  at least one interpretation is   it relied on other things to boost revenues, says Mark Pauly, Wharton professor of health care systems.


 Bristol-Myers is suffering from many of the same problems that other firms in the industry are suffering from, only in a more extreme and concentrated form, adds Patricia Danzon, professor of health care systems. These problems, she says, include major patent expirations, lack of success in its own internal pipeline and suits filed by attorneys general alleging Bristol-Myers and other manufacturers unfairly blocked introduction of generic competition.


According to Danzon, a major issue for all drug companies is the possibility that Congress will add a drug benefit to Medicare, which could help companies by driving up sales volume but could also cut into profits if it comes along with price controls.  That, plus the accounting issues at Bristol-Myers, all mount up to an unfortunate specific case of general industry woes.


New technology led to a burst of drug patents in the early 1990s, but most of those easy targets have been hit, says Robert Field, adjunct professor of health care systems. The industry s next wave of innovation is expected to come through advances in genetic technology. That payoff, however, is still years away and perhaps will come too late for Bristol-Myers.  I think part of their problem is endemic to structural economic and technological trends that all the companies are subject to, Field notes.


Michael Krensavage, pharmaceutical analyst at Raymond James, dates the beginning of Bristol-Myers current woes to the failure of its highly touted hypertension drug, Vanlev, to win regulatory approval. In 2000 the company withdrew its application for approval of Vanlev after regulators raised concerns about side effects.


Then in March 2002, the company announced that additional tests indicated Vanlev is no more effective than other treatments already on the market.  The drug could have carried them through the patent expirations, but without it they faltered. The ImClone problem reflected their degree of desperation, says Krensavage.


In September 2001, Bristol-Myers Squibb agreed to pay ImClone $2 billion to co-develop a new cancer drug, Erbitux. Under terms of the deal, Bristol-Myers paid $1 billion to buy a 20% stake in ImClone at $70 share. The rest was to be paid following certain milestones in development of the drug.


But in December, the Food and Drug Administration rejected ImClone s application for Erbitux s market approval. ImClone s stock is now trading under $10 a share and its former chief executive, Samuel Waksal, was arrested in June on charges of conspiracy, perjury and insider trading. Authorities are investigating whether Waksal tipped off his friend, Martha Stewart, also an investor in the company, to sell shares just prior to the FDA s December ruling.


Bristol-Myers has since amended its agreement and put one of its own executives in place to monitor subsequent regulatory hearings for Erbitux, but the company already recorded an $875 million loss on the deal.


Sean Nicholson, Wharton health care systems professor, says Bristol-Myers has been the most active drug firm in developing drugs that initially were discovered by other firms. The practice, known as in-licensing, is a popular strategy for drug companies trying to cope with weak pipelines.


According to Nicholson, data on FDA drug approvals between 1966 and 1999 show that of the 43 Bristol-Myers drugs approved, 53% were developed by other firms and licensed to Bristol-Myers. The second-highest company was Aventis with 34%.  The ImClone situation presumably would be more likely to occur at a Bristol-Myers given the quantity of in-licensing deals they are doing, says Nicholson.  Bristol-Myers had been doing these deals earlier and more intensely than others.


The decision to buy ImClone was the first big move by Peter Dolan, chief executive of Bristol-Myers Squibb who succeeded Charles A. Heimbold, Jr., as board chairman in September. Heimbold is now U.S. ambassador to Sweden.


Dolan has had a somewhat rocky tenure. In April he announced that in the past year the company had provided incentives to wholesalers that drove up short-term sales but would lead to a sharp revenue fall-off this year. Industry analysts estimate wholesalers bought an excess of $1 billion in inventory.


Bristol-Myers contends the practice, known as  channel stuffing, does not violate accounting rules. Nonetheless, the head of the company s pharmaceutical operations and its chief financial officer left the company. Dolan predicted profits could fall up to 47% next year, including provisions for an inventory reduction program.


Pauly says that what Bristol-Myers did is similar to automakers offering zero-percent financing as an incentive to book sales, but notes that the tactic seems more jarring when it occurs in the health-care sector.  In health care people are more trusting. Everybody is skeptical when buying a car, but not when buying a drug, or a drug stock, because there is an aura of being regulated. Investors, he adds, may also be less distrustful of health-care companies out of reverence to science and the research tradition.


In addition to those Wall Street concerns, Bristol-Myers is facing internal problems with several top-sellers coming off patent. When a drug loses patent protection and faces generic competition, sales typically drop by as much as 80%.


Bristol-Myers has not introduced a so-called blockbuster, a drug with annual sales of more than $1 billion, in a decade. Its cancer drug Taxol, anxiety drug BuSpar and diabetes drug Glucophage have all recently lost patent protection. Next year, Plavix, a stroke treatment with $1.3 billion in sales last year, will be open to a patent challenge.


In addition to the suits filed by 29 attorneys general against the company and other drug makers for allegedly blocking generic competition, the U.S. Federal Trade Commission is also investigating alleged anticompetitive schemes in the industry.


Bristol-Myers Squibb reportedly is exploring strategies that might include selling the company, merging with an equal, or acquiring a smaller more promising company to bolster its weak drug pipeline. Krensavage suggests it is unlikely that Bristol-Myers will be an acquirer:  They can t manage what they have now. I think they will have to merge to survive its problems & Desperation drives mergers in the drug industry and there is a lot of desperation now. Meanwhile, one potential buyer, Pfizer, has announced its plans to merge with Pharmacia in a $60 billion deal.


The recent decline in all drug stocks will make it harder for a merger to occur because potential acquirers have less equity to use as merger currency, Nicholson says, adding that it is not clear mergers are the right prescription for troubled drug makers.  I don t think the anecdotal or sparse statistical analyses on the effects of mergers have shown them to be phenomenally productive. For some reason Wall Street thinks you can t cut costs unless there is a merger, but it seems that many of the same kinds of things a merger would allow can be done without merging.


Even in the wake of Pfizer s merger agreement with Pharmacia, Danzon suggests that mergers are no longer viewed as a guaranteed solution for companies in the industry, which remains highly fragmented.  The hey-day of mergers seems to be over. What people have found is that mergers essentially only buy you a couple of years of improvement in the bottom line.


Mergers benefit from a few years of cost-cutting by eliminating duplicate personnel, but it is only a short-term improvement, Danzon adds.  Then you are left with the complication of managing those incredibly large unwieldy companies. In Bristol-Myers case, the various liabilities overhanging it make merger even more doubtful.  It s hard to see it as an attractive merger partner.


The lack of an obvious merger partner may buy the company some time.  They could say,  Let s just hold on for six months or a year and this anxiety will blow over,  says Nicholson who points out that some analysts suggest Bristol-Myers long-range pipeline is relatively strong.  It s not as if their cupboard is completely bare.


According to Pauly, there is little chance of a bankruptcy:  Pieces of the company still have considerable value. Their long-term future may be as part of something else.


Meanwhile, the problems at Bristol-Myers and throughout health care are discouraging not only for investors, but for the broader society, says Field.  Up until six months or one year ago, people in health care could point to pharmaceuticals as one sector that was still doing well. If the pharmaceuticals are going to hit economic hard times, then no one in health care is doing well. That means there is less investment in health care and fewer resources for research. There are major implications for our health-care system, and ultimately our health.