Wyeth's comeback kid: Robert Essner guides the pharma giant back from the fen-phen brink.

Robert Essner, chief executive officer of drug company Wyeth, doesn't want to talk about the F-word.

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That's F as in fen-phen, the diet drug combination that caused severe and sometimes fatal heart and lung malfunctions in tens of thousands of people in the 1990s. Wyeth marketed the dangerous "fen" half of it--the drugs fenfluramine and dexfenfluramine, sold under the brand names Pondimin and Redux. To date, Wyeth has set aside more than $21 billion to pay the claims from some 100,000 lawsuits, a sizable bite for a company with a market capitalization of less than $60 billion, yet still not enough to cover the liability, according to most experts. To put that in perspective, Merck, with a slightly larger market cap, faces a potential liability of $18 billion to $30 billion from lawsuits over its painkiller Vioxx, the biggest pharmaceutical recall since fen-phen.

And fen-phen isn't Wyeth's only problem. Scientists have also challenged the safety of two other flagship products--its Premarin line of hormone therapy for postmenopausal women and the antidepressant drug, Effexor. Moreover, as a small player in an industry of behemoths, Wyeth is vastly outgunned in marketing and research firepower.

What Essner does want to talk about is how surviving these woes has strengthened his company. He insists that Wyeth has largely pushed its fen-phen and hormone therapy troubles into boxes that it can measure, wrap up and put aside. As for Effexor, Essner claims it's been more of a success than a problem. "We are a little battle-hardened," the CEO says. "These are likely to be very tumultuous times [for the entire industry]. We are better able to cope than companies that may have had easier paths than we've had."

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Given the trouble plaguing many large pharmaceutical companies these days, including Merck, it would be easy to discount Essner's confidence as hopeful speculation, but outsiders, too, are cautiously optimistic about Wyeth. That is largely a tribute to Essner, an unlikely CEO who originally set out in the early 1970s to become a history professor. But while he pursued a Ph.D. in history, specializing in the classics, Essner soon realized there were no attractive academic positions available, and with career redirection as his goal, he landed in the market research department at drug company Sandoz, which was known for seeking out people with nontraditional backgrounds.

Over the next 13 years Essner's unrelated academic resume and uncanny research skills filled the company's prescription for success, and he rose through the corporate ranks to become COO. In 1989, Essner joined Wyeth-Ayerst Laboratories (a division of what was then American Home Products) as senior vice president, sales and marketing, and climbed through the C-suite, eventually being elected CEO in May 2001 and chairman in January 2003.

Before the Storm

Wyeth's story began nearly 150 years ago, in 1860, when two brothers, John and Frank Wyeth, opened a retail drug store in Philadelphia. Two years later they branched out into manufacturing medicines, and that original Wyeth company was acquired by American Home Products in 1931. AHP continued along the acquisition trail over the years, including one deal that brought in the obesity drug Pondimin.

In the mid-1980s, Pondimin was a minor product because most people felt that the severe fatigue it caused wasn't worth the few pounds they shed. But in 1983, a University of Rochester researcher, Dr. Michael Weintraub, discovered that if patients combined Pondimin with another obesity drug, phentermine, they could lose many more pounds without the fatigue because phentermine's tendency to be a stimulant countered the side effects of Pondimin. The combination, dubbed "fen-phen," swept a diet-crazed nation. Often prescribed after scant medical exams at diet centers, each drug had already been approved individually by the Food & Drug Administration, so no further regulatory approval was needed. Some 6 million Americans ultimately took the combo between 1992 and 1997. At the height of the craze in 1996, AHP was raking in sales of over $300 million a year. With its patent on Pondimin about to run out, the Wyeth-Ayerst Laboratories division of AHP came up with a revised version named Redux to extend its monopoly.

At that point, Wyeth officials insist, they had no reason to think there were serious safety issues with either drug. Critics, however, note that published studies linked the drugs to a rare, incurable heart condition called primary pulmonary hypertension (PPH) that interferes with blood flow to the lungs. "Wyeth had reports coming in, yet they continued to sell the drug month after month to make the money," charges George Fleming, a Houston attorney who is pursuing more than 8,600 fen-phen lawsuits.

It was in the summer of 1997 that scientists from the prestigious Mayo Clinic warned that they were seeing an unusually high rate of two serious conditions among fen-phen patients--not just PPH, but even more instances of abnormalities in the heart valves that require extensive surgery. Soon more cases flooded in to the FDA. With mounting proof of safety problems, Pondimin and Redux were pulled in September 1997.

Of the tens of thousands of lawsuits that inevitably followed, only two dozen or so have made it to trial; the verdicts so far have been mixed. About 40,000 relatively minor cases have been pulled together into one class-action settlement, and around the same number of individual suits still remain.

Wyeth has been adding to its settlement pool, upping it again last fall to S21.1 billion, and almost no one except Wyeth expects the increases to stop there. Shaojing Tong, a senior analyst at Mehta Partners, a Manhattan-based money management boutique specializing in pharma and biotech, says the company might need $2 billion more; attorney Fleming predicts an extra $15 billion.

To cope with the debacle, Essner says, "We made rigorous walls around the diet issue." A discrete group of lawyers and scientists was assigned to fen-phen, allowing the rest of the staff to focus on their own work, and Essner says the company never borrowed money from the funds to grow the company, instead opting to use proceeds from divestitures of some consumer product lines for that purpose. (The company will not reveal how much money that came to.) Fen-phen "is fading as an issue that is distracting the company," the CEO argues.

Dealing With Double Trouble

Even as Wyeth was still contending with the fen-phen disaster, it was hit by a second, unexpected punch: For 60 years, Wyeth had dominated the burgeoning field of postmenopausal hormone therapy with its estrogen-based Premarin and Prempro blockbusters. Many doctors and patients considered these virtually miracle drugs. Not only did they ease the discomforts of menopause, like hot flashes, but they were also believed to help treat or reduce the risk of heart attacks, strokes, dementia, memory loss and urinary incontinence. But in 2002, a major national study called the Women's Health Initiative revealed that the hormone therapy did not provide most of the assumed side benefits and, in fact, increased the risk of heart attacks and strokes. Other reports showed problems with breast cancer, urinary incontinence and Alzheimer's disease. Sales of the hormone line plunged from $2.1 billion in 2001 to $880 million last year.

Robert R. Ruffolo Jr., the senior vice president who heads Wyeth's pharmaceutical research, says Essner's leadership prevented morale from collapsing. "Bob never lost his cool. He kept the whole thing together," Ruffolo recalls. Within a few days after news broke about the hormone study, Essner convened a one-hour town-hall meeting for Wyeth staff at what was then the R & D headquarters in a Philadelphia suburb, simulcast to the other offices. His message: There was more in the pipeline to withstand these blows.

Among the "more" waiting in the pipeline at that point were two lower-dose versions of the existing hormone therapies, which appeared on the pharmacy shelves a year after the women's health study. The lower dose seems to have reassured doctors and patients, at least for temporary relief of immediate menopausal discomfort. "The CEO may have made the right call to leave the drugs on the market with a narrowed market and shorter-term use," Tong of Mehta Partners says. He compares that favorably with Merck's decision to yank Vioxx, rather than trying to salvage it for short-term use.

Wyeth's third blow came last winter amid growing evidence that teenagers on certain antidepressants, including Wyeth's Effexor, had a tendency to commit suicide. But the facts remain murky because very few scientific trials have been conducted, and many psychiatrists argue that the medications actually prevent suicide. Wyeth probably emerged from this brouhaha looking better than its rivals because it had warned doctors and broached the possibility to the FDA months before public pressure built up. (Essner says when Wyeth informed the FDA of its concerns, the regulators told the company not to change its label until the whole category was studied.)

One element of Essner's response to these multiple crises was to sharpen the identity of his company. Few outsiders understood what the entity American Home Products really was. "It had very nice businesses, but it was by no means a leader," he says of the old conglomerate. So Essner brought back the original Wyeth corporate name.

What's In a Name?

Essner's management style--he almost always appears publicly in shirtsleeves and is widely praised for his openness--also was a welcome change and quickly helped to boost company morale. But to complete the corporate makeover, Essner radically revamped the company's focus on R & D to reshape it into "a leading research-based pharmaceutical company," he says.

The reshaping came about through a marketplace approach. "What Bob has brought is a very clear vision of what R & D is made to do," explains Bernard Poussot, president of Wyeth's pharmaceutical arm. "Bob said [to the scientists], 'You are the strategic planners of the organization.'"

Now, the company's researchers have their bonuses tied to the ability to meet a strict set of four goals: Each year they must start work on 12 new compounds, submit eight applications to the FDA for clinical trials, put three or four drugs into late-stage trials, and submit two new drug applications for FDA approval. Moreover, those applications are supposed to be brand-new drugs that have never before been sold in the United States, not merely new uses for existing drugs. Ruffolo says the change cost the company about 6 percent of its R & D staff of 6,000, including "a few" who were fired because they "didn't like the system." To further invigorate the pipeline, Essner began pumping money into R & D; he directed over $2.7 billion there this year, representing an increase of about $400 million over 2004.

Since the industry asserts that it takes about 12 years to take a drug all the way from initial development to FDA approval, and Wyeth's new system was established just four years ago, company officials say it's too soon to hold them to all their R & D yardsticks. But they claim to be well on track. "I think that the current management is making an effort to get the company headed in the right direction," says Ira Loss, executive vice president of the research firm Washington Analysis.

This year, Wyeth expects to meet the first three goals and come close on the fourth, submitting one drug to the FDA by early next year. "In the next 12 to 18 months we will have six major new drug applications," Ruffolo adds. Indeed, the load is so huge that the company plans to make a couple of hundred new hires to cope with the related clinical, regulatory and paperwork issues. Altogether, Wyeth says it has 33 potential drugs in mid- and late-stage trials or already filed with the FDA (including new indications for existing drugs). That's better than most of its rivals, which tend to have around two dozen, but nowhere near the 52 claimed by Novartis.

Among the most promising of Wyeth's collection are Tygacil, a novel type of antibiotic that was approved by the FDA in June; two hormone therapies, DVS and bazedoxifine, which the company claims will avoid some of the problems of the existing therapies while providing benefits for depression and osteoporosis; the schizophrenia treatment bifeprunox, a joint venture with Solvay Pharmaceuticals; and the oral contraceptive Levo. Wyeth can also boast some important products already on pharmacy shelves. Probably the most exciting is the complex vaccine Prevnar, for meningitis, and six other invasive pneumococcal diseases.

Most manufacturers dropped out of the vaccine arena long ago, including Wyeth, which stopped making its diphtheria/tetanus/pertussis vaccine shortly before Essner took charge. But at $65 a dose for a four-dose regimen, Prevnar "redefined how the world thinks about vaccines," Essner says. Analyst Loss agrees, seeing Prevnar as the forerunner of a category of "designer vaccines" for conditions like AIDS. Other key Wyeth drugs include Enbrel for rheumatoid arthritis, Protonix for heartburn, and Rapamune for transplant patients.

For all that, Wyeth remains a small fry--ninth or tenth in most size rankings--in an industry increasingly dominated by mega-mergers. The company failed spectacularly in its last attempt to bulk up, in 2000, when Pfizer stole Warner-Lambert right out from the then-American Home Products. Now, it's probably too small for a major acquisition and too tainted by fen-phen to be an attractive prey itself. Essner says he's neither looking to buy nor worried about being bought.

Thanks to the fen-phen withdrawal, the hormone therapy debacle, some manufacturing problems with Prevnar and some slowdowns in divestitures, earnings growth has been erratic over the past several years. After profits soared to $4.4 billion in 2002, they fell to only $1.2 billion last year, though the company recently raised_its earnings-per-share guidance for this year. But maybe the true measure of a company's strength isn't size. If Essner is right and strength really comes from surviving crises, Wyeth has some muscle to play with.

Fran Hawthorne is the author of Inside the FDA: The Business and Politics Behind the Drugs We Take and the Food We Eat (John Wiley & Sons, 2005).

RELATED ARTICLE: Wyeth's Uphill Climb

Wyeth's net revenue has been alternately battered and buoyed by a number of factors over the past decade, including gains from its divestiture of assorted consumer products, the recall of the diet drugs Redux and Pondimin in 1997, a national study critical of hormone products in 2002, and the success of its meningitis vaccine Prevnar.

Drugs in Decline

Net revenue from hormone therapy products

      billion

2001  $2.1
2002  $1.9
2003  $1.3
2004  $0.880

Note: Table made from line graph.

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Source: Company reports