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Pushing drug research to the fore

Pfizer hopes to repeat the success of drugs such as Viagra.
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(CNN) -- Two mega-mergers in just four years have made Pfizer the biggest pharmaceutical company in the world with a research and development budget of seven-and-a-half billion dollars.

In 2000 the New London, Connecticut, manufacturer -- which started producing painkillers during the U.S. Civil War -- bought rival Warner-Lambert in a stock market deal worth $114.7 billion. Two years later it repeated the trick, buying up Pharmacia Corp. for stock valued at $60 billion.

It is an acquisition strategy that has pushed Pfizer to the forefront of its field, along with its British-based rival GlaxoSmithKline.

Yet the emergence of the drugs giants has raised new issues about their ability to maintain a place at the forefront of drugs research.

A Financial Times study of the pharmaceuticals industry concluded that mergers and acquisitions were causing huge uncertainty and damaging productivity.

Despite Pfizer's market dominance, the company has failed to match previous blockbuster successes such as Viagra in 1998 and Lipitor, the cholesterol-reducing pill that has become the world's top-selling drug.

One area that would also appear to pose a potential threat to their position is the growth of the biotechnology industry. While its profitability is still untested, the innovative nature of the research emerging from small biotech labs is without question.

Financial Times pharmaceuticals expert David Fern believes surrendering that innovative edge is the price large companies like Pfizer must pay for their wealth and size.

"It seems to come down to the very soft people issues, about allowing a very small number of brilliant scientists and science managers to spot what they think are promising drugs and to pilot them through the bureaucracy, which in a company like Pfizer or GSK is considerable," says Fern.

But John LaMattina, Pfizer's head of global research and development, believes expansion has helped the work of the company's 15,000 scientists.

"I'm a big believer in size," says LaMattina. "When you're a smaller company, as we were 27 years ago when I started, you don't necessarily have the resources to invest in things outside your immediate expertise. But as we've gotten bigger and become more resource-rich we've been able to expand."

Pfizer's strategy for fostering the spirit of innovation has mirrored the decentralizing approach taken by GSK, which split its drug research division into six independent units, in a process described by research and development head Tachi Yamada as "de-bureaucratization."

"Pfizer's size has allowed us to access a much broader base of scientists," says Mark Bambridge of Pfizer's Groton Laboratories, who works on compounds to fight heart disease.

"We have groups here in Connecticut and also in St. Louis and Michigan, and these people have a lot of different expertise. It also gives us many more resources to really advance and do the riskier experiments as far as asking whether these drugs will actually work in humans."

It's at the developmental end, however, where the drugs giants' financial muscle really comes into play. Pfizer's latest clinical trial into a new heart disease compound is estimated to cost $800 million.

And even with hundreds of millions going into trials with actual patients, there are still risks, and questions as to whether enough is being spent before putting drugs to market.

In September Merck withdrew its arthritis drug Vioxx, used by millions of Americans, after a study showed it doubled heart attack and stroke risk. Two of Pfizer's best-selling compounds belong to the same class of drug as Vioxx and are also under scrutiny.

It's a level of impact that only the bigger companies are able to absorb.

"Strong companies are going to survive in this sector, and they're going to look more like Pfizer than not," Deutsche Bank analyst Barbara Ryan told Fortune magazine.

"We're of a size and can do enough different things that we're not putting all our bets on one specific area," agrees LaMattina.

"We're minimizing that risk and as a result we have the potential to grow 10 percent a year and to have continued prosperity for ourselves, our patients and our shareholders."

-- CNN's Diana Magnay contributed to this report.

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