Weathering the Storm

Nestled among the skyscrapers in midtown Manhattan is the headquarters of Bristol-Myers Squibb. If you enter at Lexington Avenue—away from the austere grand entrance—you'll meet Ralph, an elderly security guard who has stood watch there since Peter Dolan joined BMS in 1988.

"That Mr. Dolan, he's a nice man," says Ralph. "He always says 'good morning,' no matter what kind of rush he's in."

Steering Strategy (left) Elliott Sigal, MD, president of Bristol-Myers Squibb's Pharmaceutical Research Institute, and Andrew Bodnar, MD, senior vice president, strategy and medical and external affairs, have helped CEO Peter Dolan craft a winning strategy based on risk/benefit for the company and its brands.

The fact that Dolan has managed to smile and extend pleasantries, even in the midst of a media hailstorm, is a testament to his good nature—but probably even more so to his endurance. After all, just days before Dolan met with Pharm Exec for an interview, BMS struck an agreement with the US Department of Justice (DOJ) to settle criminal charges related to the allegation that, by giving wholesalers incentives to stockpile drugs, it had inflated revenues by billions of dollars. The DOJ agreed to defer prosecution. BMS agreed, among other things, to pay $300 million, bringing the total penalties associated with the incident to $839 million—and closing a nearly three-year investigation.

And that's just one of the headaches Dolan has faced since he became BMS' CEO and chairman in 2001. There was the much-hyped blood pressure drug Vanlev (omapatrilat) that never materialized. And the disappointing performance of Erbitux (cetuximab). Not to mention the wave after wave of patent expirations on key products, such as Taxol (paclitaxel) and Glucophage (metformin).

Top-Down Leadership

Dolan maintains his post as CEO, but he hasn't walked through these issues unscathed. As part of the agreement with federal prosecutors, Dolan has turned over his title of chairman to long-time board member James D. Robinson III. He also has what Deutsche Bank's pharmaceutical analyst Barbara Ryan calls "a full-time cadre of baby-sitters" to ensure the company stays on the straight and narrow.

But Dolan has managed to keep the enterprise running, and in the process, help harvest BMS' most productive run in R&D yet. The company received FDA approvals for four drugs in two and a half years and has two drugs currently awaiting FDA approval.

Philanthropy Flashpoint

"Until 2007, BMS will lose between $1 to $1.5 billion a year," says Dolan. "But 2007 to 2011 looks like a potentially attractive period for the company."

Despite the issues, there's a charisma to Dolan that's undeniable. It comes out in conversation, in the footage of Dolan cycling next to Lance Armstrong, and in the stories of his travels through Africa. There's good reason to expect that it will be visible in Dolan's role as the next chair of PhRMA. For BMS, it's also a good thing; a company facing a storm of patent and other legal challenges needs a charismatic leader. But there's more than personal magnetism to Dolan's survival strategy for BMS. The story of BMS today is one of a company remaking itself to focus on risk/benefit ratios at every level, from products to markets to organizational structure. As Dolan moves the company out of overcrowded primary care markets, as he reworks the organization so it can replace former blockbusters with new specialty drugs from its own pipeline, as he attempts to bring BMS out of the storm and into a new period of prosperity, he's also testing a set of ideas, already embraced by FDA, that promise to reshape the industry as a whole.

CEO Connection

De-Tox

Elliott Sigal, MD, joined BMS in November 1997 as vice president of the newly created department of applied genomics. He quickly rose through the ranks, his focus on genomics coloring the organization's broader goal of leveraging predictors of efficacy or safety early in the pipeline or in the clinic. When BMS' beloved research chief James Palmer passed away suddenly in October 2004, Sigal was appointed chief scientific officer and president of the Pharmaceutical Research Institute, the company's R&D organization.

Sigal never strayed very far from his roots. By the time Vioxx (rofecoxib) had other pharma companies scrambling to better understand the idea of a drug's benefit/risk profile, Sigal and the rest of BMS were reaping the rewards of having reorganized around the idea five years ago.

In the mid to late nineties, BMS launched an initiative to increase productivity in discovery. "By 2001, we almost tripled our productivity," says Sigal. "But we were not satisfied with the quality in the middle part of the pipeline. So we instituted procedures that would predict where we would run into problems downstream in terms of toxicology or safety or efficacy. And we put into place departments that dealt with the quality of our drug discovery candidates, so we would not run into problems in the clinic." Compounds that safely made it to humans rose from 50 to 80 percent.

"Unlike most industries where engineers design the product, in pharma, you are always learning about a drug's efficacy, utility, and safety," says Sigal. "You unmask characteristics, not design them. The more you design and predict upfront, the more efficient you can be—and that is what we've been doing.

"Investigational toxicology is a lot of old-fashioned biochemistry and the use of various chemical probes and biology applied to studying something not everybody has spent a lot of time studying. We use gene expression arrays from genomic technology to look for molecular signatures that might predict a response. In doing so, we can either redesign a compound or move forward with the knowledge that whatever the issue, it is not relevant to humans."

BMS' use of investigational and predictive toxicology puts the company in good stead with FDA which, under its Critical Path initiative, is pushing for toxicology packages that show a better understanding of a drug's risk profile. Sigal says BMS used this approach when developing Baraclude (entecavir) for chronic hepatitis B. The drug was the first new molecular entity to come before an advisory committee since Vioxx, and, says Sigal, "I wasn't sure which way it would go." But Baraclude received a unanimous 18–0 vote from the committee and subsequently received FDA approval in March 2005.

BMS also applied that science in developing Pargluva (muraglitazar). The product has the potential to be a super drug: It controls both blood glucose and lipids—part of the constellation of symptoms that characterize a patient with metabolic syndrome. By some estimates, that population will reach 86 million US patients by 2025.

Several companies have already tried and failed to develop such a drug, or one like it. Industry observers are split over whether FDA will approve Pargluva, whose application is currently being reviewed.

"We think muraglitazar will get turned down at FDA and will be delayed as FDA seeks more studies of the drug, being that it doesn't have a lot of benefit relative to TZDs [thiazolidinediones] like Actos [pioglitazone], and has some potential worrisome liabilities on the cardiovascular side," says Deutsche's Ryan.

Others expect an approval—after all, BMS took prudent steps to ensure the drug's safety. Not only did the company apply investigative toxicology in developing Pargluva, it also employed another safety net by partnering with Merck, which had gained significant experience with PPARs while bringing its compound MK-767 to Phase III—at which point it was discovered that the compound had toxicity issues.

Focus: The Order of the Day

In 2002, BMS was facing an inflection point. Dolan had been CEO for about a year, but he and the company had experienced a run of bad luck. Within a matter of months of taking office, Dolan had spent $2 billion to purchase Erbitux (cetuximab). But by December 2001, FDA shot down ImClone Systems' application for the cancer drug. BMS' shares started to tumble. Then in March 2002, tests indicated that the much-touted Vanlev (omapatrilat) was no more effective than currently marketed treatments for congestive heart failure, followed by an advisory committee's recommendation against approval for hypertension. Vanlev and Erbitux added salt to investors' wounds—but what really stung was that FDA had not approved a BMS product in three years.

Topping the list, in July 2002, the SEC began its investigation of "channel stuffing" after Bristol disclosed it had artificially boosted sales by persuading wholesalers to buy more of its drugs than they could quickly sell, leading the company to restate $900 million in profits and $2.5 billion in revenue reported from 1999 through the first half of 2002. One thing was certain: The company needed to change—but how?

A new model Within its six therapeutic categories, BMS was studying up to 45 disease states. Going forward, the company decided to focus on just 10 specialty disease areas that

• represent a significant unmet medical need—either no available treatments or room for significant improvement

• are core competencies

• have a science base that suggests clinical advancement is not only possible, but probable

• are treated by specialists and a relatively small number of generalists. (See "Areas of Focus.")

"Focus provides a benefit in trying to build a leadership position in our 10 disease areas, as opposed to being much broader and more opportunistic," says Dolan.

In part, says Ryan, the specialty model is a concession to the fact that BMS is unable to invest at an appropriate level for some of the larger markets or compete against heavyweights like Pfizer for the most promising and lucrative in-licensed products. That may be true, but the strategy puts the company on the right side of the changing healthcare landscape. The specialty focus steers the company toward developing differentiated products, for which it can charge a premium and which will be more likely reimbursed by public or private payers because the drugs are truly innovative.

The new model also allows BMS to obtain substantial savings by redeploying reps out of overcrowded general practitioners' offices. For example, Andrew Bodnar, MD, senior vice president, strategy and medical and external affairs, says BMS is launching Baraclude with about 34 reps. Compare that with the average size of a primary care sales force of 600, and given that most companies have several primary care sales forces, the savings realized with this reduced infrastructure are apparent.

Further focus Part of BMS' shift in strategy includes focusing on diseases states instead of therapeutic franchises. "Diabetes and atherosclerosis are two of our disease areas," says Bodnar. "In previous times, that might have been metabolism and cardiovascular disease, which almost forced us to pursue in parallel to diabetes and atherosclerosis a whole set of other diseases. We now recognize that focus is the order of the day."

The specialty strategy brings further streamlining of non-pharma businesses. BMS owns the Mead Johnson, ConvaTec, and Medical Imaging businesses, but it recently sold its North American over-the-counter business to Novartis. Given Bristol-Myers' and Dolan's roots in consumer products—he spent his first 10 years with BMS in the OTC division—it must have been a difficult move. But there are only so many chips to hedge BMS' bets, and Dolan has placed them with pharmaceuticals.

"The other businesses [outside pharma] represent about 20 percent of the company's revenue, and what surprises most people, about 25 percent of the company's profitability," says Dolan. "They are attractive, high-margin, good growth businesses that aren't subject in most cases to the same cyclical nature of losing exclusivity. The OTC business in North America is a very small piece of that total. If we had sufficient critical mass, then we would be interested in maintaining that capability. But to be successful in terms of getting distribution in retail and having sufficient sales force capability, etcetera, you need enough clout to compete with the largest OTC companies."

The move to the streamlined specialty model makes sense—but it's not without issues. First, there's concern, in focusing on drugs that treat diseases with smaller populations, that the company will miss out on the next billion-dollar windfall.

Second, the move puts the company in more direct competition with specialty companies, such as Genentech, already firmly entrenched in specialists' offices.

Lastly, given its size, BMS will have more difficulty in achieving growth by selling smaller specialty products. To replace lost revenue, BMS must launch more drugs—and be sleek and efficient in supporting them.

"BMS is trying to morph into a leaner, more growth-oriented company over the long haul, transitioning from a large company that's burdened with substantial infrastructure and that's losing significant revenue to generic competition," says Ryan. "That's where they are, and we know where they are going. The question then is execution—and a lot of that relies on how successful their new drugs are."

In-House Investment

When you can't grow products in your pipeline, you have to buy them. In the past, BMS used that strategy to survive. Today, many of the company's leading products are licensed or acquired—including its top-seller Plavix (clopidogrel), an anti-platelet agent, which brought in $3.3 billion dollars in 2004, and Avapro/Avalide (irbesartan), an anti-hypertensive, with sales of $930 million in 2004, both gained from Sanofi-Aventis.

BMS' business development index, a metric created by Wood Mackenzie to measure the amount of companies' sales that are derived from in-licensed or acquired products, is 74.8 percent for 2004. "There's no other Big Pharma company with that kind of metric," says Stephan Gauldie, senior analyst of life sciences at Wood Mackenzie. "They're all around 15 or 20 percent."

But Dolan feels that dependence on licensing is not a good long-term strategy. That's why, despite holding down costs, BMS is investing in internal R&D. In 2004, BMS increased its research spend by 12 percent to a record $2.5 billion. Dolan says he expects the investment in R&D to continue to grow in 2005 in the low double-digit range.

"Clearly, you have to risk-adjust for what you have in your own pipeline," says Dolan. "But imagine trying to forecast five and 10 years out. If you were largely dependent on licensing, you don't know what will be available from other companies."

Besides, there are other benefits to developing drugs in-house: "You understand that drug better than anybody else does in terms of its risks, and where you can take it clinically and develop it further for additional indications when it's a drug your own scientists have created," says Bodnar.

R&D investment will be directed toward increasing support for the company's late-stage development pipeline, which will begin to tilt the revenue toward products developed in-house. Wood Mackenzie forecasts BMS' business development index in 2009 to decrease to 71.5 percent.

"But we are still highly dependent and very interested in the in-licensing strategy because of attrition," says Sigal. "Attrition is the Achilles heel of the pharmaceutical industry. And it only makes sense that you keep a balanced portfolio of in-house and out-of-house discoveries in your pipeline."

Growth Drivers

BMS is a company in transition. Although new products fit in with the specialty strategy, it will be a few years before it completely sheds its old skin.

"In April of 2006, we lose exclusivity on Pravachol [pravastatin] in the United States, but that's the last major product up through 2012 that we're offsetting major exclusivity losses in any given year," says Dolan, "By contrast, 70 key US products that accounted for more than $70 billion in sales in 2004 are going off patent across the industry in the next five years."

BMS expects its 10 target disease areas to account for about half of all the company's pharma sales by the end of 2005, partially spearheaded by new products.

Abilify Abilify (aripiprazole), an anti-schizophrenic co-developed and co-marketed with Otsuka Pharmacuetical, was introduced in the United States in November 2002. From 2003 to 2004, its sales grew 110 percent to $593 million, the best start of any new drug in the company's history. In 2004, BMS launched Abilify in Europe, and FDA approved it for treatment of acute bipolar mania, as well as a new formulation.

Baraclude More than one million US patients have chronic hepatitis B infection. Datamonitor estimates that, globally, two billion people have been exposed to the hepatitis B virus and almost 400 million are chronically infected. Baraclude sales are expected to peak between $300 and $500 million in 2009.

Reyataz BMS launched HIV treatment Reyataz (atazanavir) in June 2003. In 2004, the company began marketing the drug in Europe. Total sales for the brand in 2004 were more than $400 million, and in the first quarter of 2005, nearly $150 million. Reyataz now has a 30 percent share of the weekly new US prescriptions in the protease inhibitor class, and has already exceeded that threshold in certain European countries.

Erbitux In 2000, Dolan charged a group to develop a biologics strategy. But it wasn't until February 2004 that BMS, along with partner ImClone Systems, received FDA approval for its first biologic Erbitux, indicated for the treatment of advanced refractory colorectal cancer. Sales since launch through the first quarter of 2005 were nearly $350 million.

In addition, the company has also submitted the following compounds for regulatory approval:

Pargluva BMS and partner Merck are awaiting word from FDA on the compounds' status. Sigal says it "lowers blood sugar better than most, if not all, compounds that we have tested against." But Pargluva needs to obtain the dual indication to treat diabetes and heart disease if BMS is to maintain its legacy in the cardiovascular disease and metabolics area.

Abatacept This compound—also known as CTLA4Ig—is BMS' first internally discovered biologic, and would be the first in a new class of agents called selective T-cell co-stimulation modulators for the treatment of rheumatoid arthritis. The company completed the rolling Biologics License Application in March, and expects to hear from FDA later this year.

Challenges Ahead

In the company's office in Princeton, New Jersey, there is a gallery dedicated to the history of BMS. Along the walls hang the brands and boxes of Sal Hepatica laxative and Ipana toothpaste—reminders of the "Bristol-Myers" part of the organization—and graying photos of Edward Robinson Squibb in front of his pharmaceutical plant in Brooklyn, New York.

Both Bristol-Myers and E.R. Squibb & Co. started as family-owned businesses. When the entities merged to form Bristol-Myers Squibb in 1989, it created what was then considered the second-largest pharma company.

Today, BMS is ninth biggest, but industry onlookers don't expect another merger, at least not in the short-term, because there is too much undefined litigation. First off, there are current challenges to the Plavix patent, although it isn't set to expire until 2011. The court is expected to rule on that case sometime between November 2005 and early 2006. If BMS loses the Plavix case, the company will have trouble filling the $2.5 billion revenue hole it will create. However, sources close to the case feel that BMS and partner Sanofi-Aventis stand better than a 50/50 chance.

The second area of undefined litigation surrounds the continual unfolding of the allegations related to the counts of channel stuffing and securities fraud. Frederick Schiff, the former CFO, and Richard Lane, former executive vice president and president of the company's worldwide medicines group, were indicted by federal prosecutors, and a trial date will be set in September. Certainly, whatever type of dirty laundry is aired in court could have ramifications on the company.

In the meantime, Dolan is focused on internal growth—and reclaiming the company's leadership in the industry. "There's much discussion, not inappropriately, about challenges that the company's had from the past. Since we put a strategy in place and said, 'Here's how we're going forward,' we've executed against the strategy, we've delivered against expectations, we've got people in the company aligned behind where we're going, and how we're going to get there. There clearly is a sense of positive movement and momentum."