Avoiding a prescription conniption.

• Position: North Carolina's pharmaceutical industry - Industry Overview

Reformers and rivals both want to tear into the profits of the pharmaceutical industry.

It might turn out to be the nonstory of 1994. Last year, many observers predicted certain death for pharmaceutical companies at the hands of health-care reform. "People envisioned ominous and egregious threats of drug-review boards and price controls," recalls Larry Wheeler, vice president of corporate affairs at Burroughs Wellcome in Research Triangle Park.

"While the noise of health-care reform was going on - what the threats might be, what the targets should be - it was actually happening in the market," Wheeler says.

"As consumers began sharpening their pencils, pharmaceuticals became more of a price-sensitive business," notes Bob May, a partner and portfolio manager at Greensboro-based Trent Capital Management. "Managed-care companies and pharmaceutical benefits managers have been doing a good job of keeping drug prices down."

For nine years in the '80s, drug makers increased consumer prices more than 9% a year. In 1993, however, prices rose 3.3%, just slightly higher than the 2.7% increase in the Consumer Price Index. Wheeler and May agree that price controls are no longer the threat they once were. "A Republican-led Congress will probably let market demands determine the path of reform," Wheeler says.

Lower prices mean shrinking profit margins, so drug makers must find other ways to recoup the costs of discovering "breakthrough" compounds. These "homerun compounds," as RTP-based Glaxo Inc. Chairman Charles Sanders calls them, are behind big-name drugs such as Glaxo's ulcer medicine Zantac and Wellcome's AIDS drug AZT. The average cost for researching and developing such drugs was a whopping $359 million in 1993. One result: restructuring. During 1993 and 1994, mergers and acquisitions were rampant in the pharmaceuticals industry.

Another option is strategic partnering. Glaxo and Burroughs Wellcome almost got something going last year when they discussed pooling resources to fight AIDS. Glaxo holds the rights to 3TC, a new AIDS drug, and Burroughs Wellcome had hoped to be a partner in developing and marketing the drug. AZT generated sales of $268.3 million for Burroughs Wellcome in the 10-month period ended in June. Negotiations fell through in November, though the companies continue to discuss options.

To keep costs in check, most drug makers are holding R&D budgets firm. Some are actually slashing funding - a mistake, May says. "There's no...