THE INSIDE STORY OF THE AIDS DRUG For the first time Burroughs Wellcome tells how it made crucial decisions on AZT that brought howls from Congress and gay groups. Some of its wounds were self-inflicted.
By Brian O'Reilly REPORTER ASSOCIATE Nora E. Field

(FORTUNE Magazine) – THEY EXPECTED to be heroes -- or at least to be appreciated. In the race to find a drug to fight AIDS, researchers at Burroughs Wellcome ran the pharmaceutical equivalent of an under-two-minute mile. In 1987, just three years after scientists learned what caused AIDS, the company won government approval for AZT -- the first and still the only drug authorized for use against the disease. Burroughs pushed AZT from test tube to market in a fraction of the usual time.

It wasn't just an accident or dumb luck that Burroughs got there first. The company specializes in obscure diseases and disdains common ones, emphasizing arcane research so strongly that employees proudly call it ''Wellcome University.'' That approach helped enormously in the search for AZT. But like the honor student who always does his homework but gets pushed all over the playground at recess, Burroughs found itself ill prepared for the explosive emotions and roughhouse politics surrounding AIDS. In the end, Burroughs managed to infuriate just about everybody. Once the drug was approved for sale, the company put a staggering price on it: A year's worth would cost users $10,000. That turned the only hope of AIDS victims into one of the most expensive drug treatments in history. In the near hysteria created by a fatal epidemic seeming to threaten millions, Burroughs never got off the defensive. For the first time, Burroughs executives agreed recently to explain to FORTUNE many of the controversial decisions they made before and after the full blast of public hostility hit them broadside. Much of the criticism Burroughs endured was inevitable: The public tends to invest human life with infinite value and has little sympathy for businesses that profit from sustaining it. That puts pharmaceutical companies in a particularly tough bind, but any company whose products affect the national well-being can benefit from Burroughs's experience. As Exxon learned in Prince William Sound, in a crisis senior management must be seen to care about the public interest or risk disgrace. ''People tend to compare Johnson & Johnson's success handling the Tylenol tampering problem to Burroughs's problems with AZT,'' says a senior executive at another major drug company. ''But what J&J had to do with Tylenol was a no-brainer: Pull the product, install safeguards, and express concern. Burroughs faced a much more difficult situation.'' Burroughs's decision to charge a stiff price for AZT was rational -- too rational, in fact. As pharmaceutical companies normally do, it wanted to cover the cost of developing the drug and recoup losses on other research that had failed to produce profitable products. But given the overheated emotions surrounding AIDS, Burroughs probably asked too much. Says Uwe E. Reinhardt, a Princeton economist specializing in health care: ''Clever drug companies stick their research overhead on a patient group that won't complain. You pluck the goose that squeals the least.'' Burroughs, he says, ''plucked the wrong goose.'' Within days of the price announcement, Congressmen summoned then-president Theodore Haigler and other executives from their offices in North Carolina's Research Triangle Park to answer charges of gouging. Angry anti-Burroughs demonstrations splashed over the evening news on TV. The company found itself accused of stealing credit for discovery of the drug, conducting unethical clinical trials, even letting children die of AIDS. Says Thomas Kennedy, a retired vice president for corporate affairs: ''If we had to do it all over again, I'm not sure we would.'' Burroughs executives insist that AZT, also called Retrovir, was hideously expensive to make and difficult to price. Says Sir Alfred Shepperd, recently retired chairman of London-based Wellcome PLC, Burroughs's British parent: ''If we wrapped the drug in a (pounds)10 note and gave it away, people would say it cost too much.'' THE HEAT Burroughs Wellcome endured seems more appropriate to a two-bit toxic waste hauler with a malodorous history than to one of the world's oldest, most respected drug companies. Of the eight Nobel Prizes for medicine that have gone to researchers in industry, its scientists have won four. Over the years, much of its research has been on marginally profitable drugs for such tropical diseases as malaria and toxoplasmosis. Not only that: The company pilloried for profiteering from a deadly plague is, in effect, the largest private charity in Britain. The Wellcome Trust, a charitable organization that funds medical libraries and research, holds 75% of Wellcome stock. In the 12 months that ended last March, Wellcome PLC earned $333 million on sales of $2.4 billion and distributed $55 million in dividends to the trust. More than 50 interviews with senior company officials, medical researchers, AIDS activists, drug industry executives, and others make it clear that the company made no colossal ethical misjudgments or business mistakes that might have justified the wrath it endured. Burroughs played by the rules of the drug industry. A more politically astute company would have recognized sooner that the rules for AIDS would be vastly different. Burroughs's involvement with AIDS began in the early 1980s, when the disease first surfaced in the U.S. Since AIDS destroys the body's ability to fight infection, its victims succumb to a wide variety of rare ailments. Because of its penchant for studying such oddball diseases, Burroughs often got called in to help. ''For most of the diseases they had, we were the only company with a treatment,'' says David Barry, vice president and head of the research, medical, and development divisions. In 1984, after researchers in France and the U.S. determined that an unusual virus caused AIDS, it started to become a major obsession for Burroughs. THE LATER controversy over how much Burroughs charged for the drug turned in part on exactly what original discoveries it made about AZT and how much government research help the company got. Some critics allege that Burroughs yanked a bunch of little-known chemicals off a shelf, sent them to federal scientists for testing against AIDS -- and then charged a fortune when one of its compounds hit the jackpot.

What Burroughs should have charged for AZT remains a matter of debate. The company still refuses to say what the drug cost to develop, but it was clearly the product of an elaborate and risky effort by Burroughs and its British < parent. Says Haigler, president of the U.S. subsidiary from 1986 until he retired a year ago: ''For Merck, a project of this size might have absorbed 20% of its resources. For us, there were times when it seemed to demand 100% of our time.'' Ten years ago Burroughs was virtually alone among big drug companies in researching antiviral compounds. With good reason: Compared with zapping bacteria with antibiotics, treating viruses is a nightmare. Essentially, viruses are tiny particles carrying fragments of genetic information that can enter a cell and begin redirecting its normal functions. Killing a virus without killing the patient is tricky because, unlike a bacterium, a virus shares many processes with the cell. Interrupt the reproduction of the virus and you may kill the cell as well. The AIDS virus, also called HIV (for human immunodeficiency virus), is even more insidious than most. It is a retrovirus, which can become an extra link in the genetic code, or DNA, of a cell. Once it is part of the gene, it becomes still harder to attack safely than other viruses, and it can sit dormant for years before it begins to reproduce rapidly. Worse, the host that HIV chooses to inhabit and eventually destroy is the T-4 cell, a key part of the immune system that attacks foreign germs. Without T-4 cells people succumb to all manner of yeast, fungus, and viral infections. Burroughs had started tinkering with retroviruses at least five years before the discovery of HIV. Says Dr. Dani Bolognesi, head of a major viral research program at nearby Duke University, whose scientists gave retrovirus and target cells to Burroughs in 1982: ''It wasn't a big project. But when they started, it wasn't clear that human diseases were caused by retroviruses. They deserve a lot of credit.'' Eventually, in the way that often happens to people who do their homework, Burroughs got lucky. In the early 1980s Janet Rideout, an organic chemist at Burroughs, was studying a compound originally synthesized by a Michigan Cancer Foundation researcher in 1964 and then abandoned. It was azidothymidine -- AZT for short. She had learned that the compound was extremely effective against some common bacteria. By 1984 she knew a lot about the structure and toxicity of AZT. In the summer of that year, after the cause of AIDS was identified, Burroughs started searching for a treatment. ''We looked at all our known antivirals on the off chance that one would work against retroviruses,'' says $ Phillip Furman, head of virus research. Hundreds of compounds were tried, but most killed too many cells or not enough viruses. Finally, Rideout suggested her antibacterial, AZT. SHE WASN'T CRAZY. Four years later, in 1988, two Burroughs scientists would win a Nobel Prize for a dramatically different, ''rational'' approach to drugmaking. In the 1950s the scientists, Dr. George Hitchings and Dr. Gertrude Elion, abandoned the trial-and-error method of discovering drugs. Instead they studied the chemistry of disease-causing agents like viruses to identify chemicals that a virus uses to survive or reproduce. Then they devised a dummy chemical -- an ''analogue'' -- so similar to the first that the virus would try to replicate itself with it. The analogue thwarts the entire process. It's a bit like driving bakers out of business by slipping them yeast that won't leaven dough. Using that ''rational'' approach, Rideout made a breakthrough: She saw that AZT was similar in structure to a chemical that retroviruses need to reproduce. Her hunch turned out to be correct. In late 1984 Burroughs determined that AZT worked well against some mouse and cat retroviruses. To test whether it would actually be effective against AIDS, Burroughs turned to the government and universities. Critics later contended that the company was too frightened to work with the HIV virus and wanted federal researchers to take the risk instead. Burroughs replies that in 1984 it did not have the special containment facilities required to work with concentrated samples of the AIDS virus. No other company was known to be working with live HIV either. Burroughs didn't have to look far to find someone who was. Cajoling and exhorting every drug company at the time was Sam Broder, then senior researcher at the National Cancer Institute (NCI) and now its head. Intense and brilliant, Broder takes credit for galvanizing reluctant drug companies, including Burroughs, into studying AIDS, by traveling around the country urging them to send him promising drugs for testing. His involvement would become a source of enormous controversy. In late 1984 and early 1985, Burroughs sent about 50 compounds to Broder, each identified only by a one- or two-letter code. ''We had the highest hopes for compound 'S,' '' says Furman. In February 1985, Broder's staff reported back that 'S' -- AZT -- was by far the most effective. Furman did not dance around the room with joy. His restraint made sense, since 80% of compounds tested in people never become useful drugs. Bolognesi of Duke, who worked with Burroughs and the NCI on early AIDS tests, says AZT could not have been developed without Broder. Critics would later argue that his contribution made the NCI a virtual co-inventor of AZT, and that his research saved Burroughs so much time and money that the high price of the drug was unwarranted. Clearly Broder cut months or years off the time needed to develop the drug. But Burroughs would have conducted similar tests eventually, and most of its costs for developing AZT came after the compound was found effective in test tubes. NCI RESEARCHERS injected AZT into a human for the first time in July 1985, six months after the favorable test-tube report. As part of a test to see how the drug behaves in the body, 19 people dying of AIDS were given AZT. Two dropped out, but after several months, 15 showed improvement in their immune systems, and almost all had gained weight. When the results of the test were published in March 1986, gay people were electrified. ''It was the first good news we'd had,'' says an HIV-infected gay activist. Burroughs's misadventures with the politics of AIDS were about to begin. The next step was to test the drug in hundreds of patients. But how? Dying AIDS victims began clamoring desperately for AZT, confronting Burroughs with a horrendous ethical dilemma. Because no other AIDS treatment was available for comparison, the fastest and most effective way to test such a drug was a placebo trial, in which half the patients get a useless pill. But then if AZT really was effective, scores of people getting the placebo would die who might not otherwise. A prominent cancer researcher, Dr. Mathilde Krim, complained that placebo trials were immoral. She argued for ''historical'' trials: Give AZT to every participant in the test and see how their health changes compared with untreated patients in previous years. Barry was responsible for the design of all Burroughs's clinical tests. He ordered placebo trials. ''It was one of the most difficult decisions I ever made,'' he says. To many scientists like Barry, historical trials were anathema, and his decision to go with placebo trials seems sound. For a little-understood epidemic like AIDS, comparing death rates in 1986 with rates from 1985 could have been misleading. Improved treatments for the infections that attacked AIDS patients could distort comparisons, he says. Historical trials were often used in the 1960s and 1970s, Barry observes, sometimes with tragic results. One showed a drug for herpes encephalitis to be effective, he says: ''Later, with proper controls, the drug turned out to increase the death rate.'' AIDS activists, who frequently accused drug companies of moving too slowly, saw Burroughs then as callous and greedy, rushing to get its drug to market ahead of any competition. They complained that the company was using a placebo trial because it showed results faster, not because it was more reliable. Now that passions have cooled, some critics understand Barry's position. Says Peter Staley, an activist and AZT user who once barricaded himself inside Burroughs's headquarters: ''I was upset about placebo testing at first, but it was probably the best way in the end.'' THE POWER of gay activist groups came as a shock to Burroughs Wellcome, whose marketing strategy had kept it removed from patient groups of any ilk. For years Burroughs relied on doctors, not advertising, to push even its most popular over-the-counter drug, the cold remedy Sudafed. ''We were very careful not to interfere in the doctor-patient relationship,'' explains Peter Reckert, vice president for marketing and sales. ''You didn't want the patient to start second-guessing the doctor.'' Burroughs was slow to recognize that gays were deeply suspicious that government and corporations didn't care enough about AIDS. Gay doctors, scientists, journalists, and congressional aides mobilized into a knowledgeable and influential bloc. ''I never saw anything like it,'' says Kennedy, the former head of corporate affairs. ''Their ability to be heard was unbelievable.'' Even if it had wanted to, Burroughs could not readily have given AZT to all the people in the trial. To conduct the test, with only half getting the drug, the company would need about 50 pounds of azidothymidine, the active ingredient. In early 1986, as the tests were starting in various hospitals, the world's supply of the key raw material, thymidine, came to only some 25 pounds. It took months -- and more than 20 chemical processes -- to make the finished product. Eventually David Yeowell, head of technical development, found a tiny German subsidiary of Pfizer that had made some 130 pounds of thymidine in the 1960s and persuaded it to start turning the stuff out by the ton. As the summer progressed some of the 282 patients in the clinical trial were flourishing; some were dying. Burroughs was collecting medical data on all of them, but, following standard testing practice, the company didn't know which were getting AZT. That information was restricted to a panel of outside doctors set up to monitor results of the test. In mid-September, says Barry, ''They told us we had it.'' Of the 137 patients in the trial who got placebos, 19 had died. Of the 145 on AZT, all but one were still alive. The success of the test seems to have caught Burroughs's top executives by surprise. Says Haigler, astonishment still in his voice: ''The result was so significant that all of us realized, for the first time, all of a sudden, that we've got a significant product we will have to manage.'' One of the thorniest management questions, of course, was how much to charge for it. Without being specific, Burroughs maintains that the risks and the costs of AZT were high, so a high price was in order. Picking a price, says Shepperd, the retired chairman, was a ''finger in the wind'' decision: ''We didn't know the demand, how to produce it in large quantities, or what competing drugs would come on the market. There was no way we could stop to find out.'' The early market for AZT was small. Burroughs did not know how big it might become, so if the company were to make any money on AZT a few would have to pay a lot. When the FDA approved the drug for sale in March 1987, it did so only for use in fewer than 50,000 seriously ill patients. Approval for people infected but without symptoms -- an estimated one million -- did not come until March 1990. It was perfectly reasonable for Burroughs executives to imagine that a better drug would turn up any day. AZT can have severe side effects. It doesn't rid a patient of the virus but only slows its reproduction: Before AZT, a person with AIDS-related pneumonia had about 12 months to live; now, by one estimate, he lives 21 months. Half a dozen other drugs were in trials. No one knew when they might be approved. Putting a price on AZT was further complicated by uncertainties about how much it would cost to make. Since most drugs take a decade from test tube to approval, pharmaceutical companies normally have years to get costs down. Yeowell, the vice president devising new manufacturing processes, had less than six months to learn how to run the raw materials through 20-foot-high vats, two-story centrifuges, and rotating dryers the size of a small car. Twirl the particles too fast or too slow and they come out the wrong size, affecting reactions and yields in the next step. During one stage of the process, the raw materials in AZT turn into sodium azide, a chemical that can be explosive if it contacts lead or copper. The matter was not academic. Yeowell points grimly to a 50-foot-high wall that blew out in the 1970s when another drug ran amok. THOSE EARLY COSTS and anxieties were only part of the company's decision to charge a high price for AZT. The drug probably cost less than $50 million for direct development before it was approved, says Samuel Isaly, a former security analyst at S.G. Warburg who is now co-owner of a New York City investment firm specializing in drug companies. But Burroughs says that after approval it was committed to spend tens of millions on raw materials, plant, and equipment. The company clearly wanted both a reasonable return on previous years of research on it and other compounds, and money to fund future R&D. In the five years preceding approval of AZT, Burroughs and its parent spent $726 million on R&D involving dozens of drugs without producing any other whoppers. Explains Philip Tracy, the new president of Burroughs: ''You don't price on a drug-by-drug basis. Our business is R&D. You have to look at your income from all your products.'' He says Burroughs, which ranks 20th in U.S. drug sales, isn't like Merck, an industry leader: ''We don't have eight or ten $100- million-a-year products.'' None of that sounded reasonable to AIDS sufferers or their Congressmen. Since private insurance reimburses Americans on average for only 14% of what they spend on prescription drugs, gays complained that AZT would ruin them financially. Congressmen, under pressure to have the government pay the costs of the AIDS epidemic, turned the heat back on Burroughs. Nowadays Haigler and others insist that they tried to prepare Congress for a high AZT pricetag. But under grilling from Representative Ron Wyden, Haigler appeared clumsy and ill prepared. ''I guess we assumed that the drug . . . would be paid for in some manner by the patient himself out of his own pocket or by third-party payers,'' Haigler said. ''We really didn't get into a lot of calculations along those lines.'' Haigler and Barry repeatedly dodged congressional questions about how much AZT cost to develop. Haigler now says that executives often debated whether to open the company's books to help explain the costs but decided that doing so would probably backfire. Critics would have attacked the pay of top executives or complained that the company was spending too much on R&D in other areas, explains another official. Besides, Haigler says, revealing costs might have created a precedent, forcing drug companies to justify their prices forever. ''We operate in a free enterprise system,'' he argues. ''We're not required to tell all.'' WAS THAT a bad decision? Probably not. It's hard to imagine how Burroughs could have mollified gays or Congressmen at the time. Nine months after the hearings, in December 1987, Burroughs cut the price 20%, explaining that manufacturing costs had dropped. There was scant applause; pressure for deeper cuts continued. Burroughs executives managed to make other enemies. To emphasize their efforts to rush AZT to patients and to help justify the high price, they gave little credit to government and university researchers who worked with them. Barry says he was trying to defend the company against accusations that it didn't deserve much credit for AZT, but at the NCI Broder was livid. Over the years Broder and other prominent government officials have repeatedly criticized Burroughs. The attack Barry resents most bitterly came from Broder, who claimed Burroughs had not applied for approval to market AZT to children with AIDS. ''That simply wasn't true,'' says Barry. ''We were doing everything we could.'' For all its good science, Burroughs had too few antennae in place to spot trouble before it got out of control. Until December 1988 the company had no representative in Washington. Whenever a problem arose, even with federal regulators, someone had to fly up from North Carolina. That problem has been solved: Burroughs hired Richard Teske, a former deputy assistant secretary at the U.S. Department of Health and Human Services. He was surprised to find that the only document being used to address the AIDS issue with Congress was a 30-page position paper: ''Congressmen don't read 30-page reports.'' Nor did the company ever reach out effectively to AIDS groups. The job fell to a woman originally employed to answer phone calls from AIDS patients wondering where to get AZT. The company never hired any openly gay people to explain why the price of the drug was high or how it was being tested. As soon as AZT was approved, Burroughs had a program to provide it free to patients who couldn't afford it and were ineligible for other forms of assistance. But to avoid being inundated with requests, the company didn't advertise it. Several drug industry officials put much of the blame for Burroughs's image problems on the top brass. Shepperd, chairman of the British parent, made AZT a special ''chairman's project,'' with all important decisions taken by the London board. Says an ex-senior executive: ''That created a much greater barrier to handling local problems like public relations.'' Several critics say Burroughs suffered most from not having a ''face,'' a highly visible figure who could demonstrate that the company cared about the suffering and the financial consequences of AIDS. Haigler, then president, failed to take on that role; the former executive calls him ''the invisible man.'' Haigler replies, ''Maybe we should have been faster in our public responses. But I don't know that my being out there would have changed things.'' For all the headaches, AZT has turned out to be no bonanza: With a return on equity under 25%, Wellcome is at the low end for drug companies, well behind Merck, which has a 40% ROE, and American Home Products, maker of Anacin, with 60%. AZT sales are nowhere near the giddy numbers projected only recently. When the drug was shown last year to benefit HIV-infected patients without AIDS symptoms, several analysts predicted that revenues from it would exceed $1 billion this year. But researchers had also determined that the drug was just as effective at half the original dose. The company cut the price 20% a second time in September 1989. Between the price cuts and lower dosages, a year of AIDS treatment now costs about $3,000. Jo Walton, a Lehman Brothers drug industry analyst in London, says worldwide AZT sales this fiscal year will reach $290 million. With competing drugs expected by 1991, she adds, AZT sales will peak in three years at $460 million. HAS BURROUGHS changed? Not much. The company still pursues useful but arcane drugs, to the annoyance of Wall Street. Says Stewart Adkins, another Lehman analyst: ''They're still rather fuddy-duddy. The pipeline of new drugs they have under development is disappointing, frankly. They're still more interested in making intellectually satisfying drugs than in developing a lot of $100-million-a-year products.'' Of course, that's what got Burroughs Wellcome into the flap over AZT in the first place. If anything like it happens again, the company should remember its lesson from the last round: . Good science and good intentions aren't good enough. You have to learn how to fight those schoolyard bullies.

CHART: NOT AVAILABLE CREDIT: *Lehman Brothers estimates CAPTION: THE KICK AZT GAVE WELLCOME PLC In just three years AZT sales zoomed more than tenfold -- and company profits rose a rousing 141%.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: STRONG MEDICINE FOR THE STOCK PRICE Wellcome shares shot up in 1987 anticipating approval of AZT, and again last year when tests showed it could help millions carrying the AIDS virus. When predicted AZT sales of $1 billion a year failed to materialize, the stock sank.