The Wall Street Journal (editorial): January 28, 2009, pA14

Emergency is too strong a word for Pfizer's $68 billion agreement to buy Wyeth, but not by much. The deal shows the afflictions that beset the larger American pharmaceutical industry, which ought to concern anyone who cares about U.S. medical innovation.

After weathering a period of listless growth for some top drugs and a dearth of promising new ones, the pharma game these days is "diversification." That seems to be the strategy behind the Pfizer-Wyeth merger. Pfizer says the new business model will combine the resources of a global corporation with the agility of a small biotech firm, and it expects no drug in the combined portfolio to count for more than 10% of revenue within four years.

The immediate danger facing Pfizer is the 2011 expiration of the patent rights for the cholesterol medicine Lipitor, which accounted for a quarter of the company's 2007 revenues of $48 billion and remains the world's best-selling drug. Generic drug companies will stage a run on at least 14 Pfizer patents -- and 70% of its sales -- over the next five years; Merck, Eli Lilly and Bristol Myers Squibb are staring down the barrel of similar expirations.

New innovation is funded by previous innovation, but the money sunk over the last decade into the search for the next big lifestyle blockbuster a la Lipitor also doesn't have much to show for it. The industry is thus turning away from such "small molecule" drugs and toward advanced biotechnology. Biomedicines are made by splicing genetic material into living cell cultures, and they often target rare diseases and unmet needs like cancer and Alzheimer's.

A decade ago Wyeth was in disarray after a series of business blunders and the fen-phen diet drug bomb, but it has since reinvented itself as an industry leader in vaccines and biologics. Pfizer figures this slate of investigational drugs can help refill its pipeline, especially the promising Prevnar-13, an advanced vaccine for pneumococcal meningitis.

For years, analysts have been predicting major industry consolidations like Pfizer-Wyeth because of the patent cliff, but the risk is that the cost savings and bureaucratic mayhem from combining labs and streamlining R&D end up stifling research productivity. Pfizer CEO Jeffrey Kindler is a lawyer who came to the drug giant from McDonald's in 2006 and has been laying off scientific staff all over the place.

Just as the industry is pinning its hopes on bioresearch, political developments have made it harder to win approval for new medicines. Once admired as an engine of American innovation, drug companies are now treated like Big Tobacco on Capitol Hill. The phantom drug safety crisis conjured by the Vioxx and antidepressant controversies has made the industry a pinata for Democrats like Henry Waxman and Bart Stupak.

The Food and Drug Administration is deeply influenced by this political criticism and has tilted its approval process toward reducing risks rather than speeding the benefits of new drugs to market. On average, a drug stands only an 11% chance of making it through FDA clinical trials and reaching patients, by that point usually costing $1 billion or more. The FDA also forces advanced biologics to conform to conventional testing standards, and any chances for a Congressional fix are nil. Meanwhile, Democrats are planning an FDA pathway for generic imitations of biotech medicines, despite scientific uncertainty and, ironically, safety risks.

The stated political goal is to reduce the cost of health care so the government can afford to pay for benefits for more people, which inevitably means controlling access to new drugs. Blueprints are being drawn up for Medicare to "negotiate" drug prices by leveraging its quasi-monopolistic power or simply by fixing the prices through reimbursement. The influence of such policies will only be magnified if Democrats create a Medicare-like program open to the under-65 set.

This political ferment can't help but distort the investment decisions of companies like Pfizer, which need to balance projected profits against the cost of clinical development. Biotech medicines hold the promise of significant health benefits but come at a price, reflecting the difficulty of developing them. But if starved of R&D money -- whether through politics or industry gambles that don't pay off -- innovation will wither.

Maybe these circles can be squared through more mega-mergers like Pfizer-Wyeth. But they're symptoms of business weakness, and one more sign of Washington's growing dominance in the U.S. economy.