Lamberto Andreotti of BMS, Ian Read of Pfizer, and Christopher Viehbacher of Sanofi are just some of the people who are all too familiar with the effects of patent cliffs on a drug company’s revenues and its share price. Last week Pfizer reported a drop in their first quarter sales and earnings mainly because of a $1bn drop in Lipitor sales from generic challenge. BMS and Sanofi are weeks away from seeing a massive drop in the sales of their blockbuster drug Plavix, which brought in $7bn in sales in 2011, as it loses its US patent.
But what is really worrying the pharma industry is that unlike their predecessors who faced patent cliffs of their own, pharma heads are now facing an unprecedented predicted financial loss as some of the world’s best selling drugs nearly simultaneously go off patent. In addition, generic manufacturers are becoming increasingly aggressive in challenging drug patents. The pharmaceutical industry therefore needs to adopt dramatic, effective strategies to help them through this crisis.
What the industry needs right now is enough free capital to allow them to focus on three core strategies - Increase Pipeline/Increase Offering/Increase Vigilance
Industries usually deal with patent expiries through continued innovation and/or psychological customer retention (take Google for example). But developing a new drug could take up to 10 years and several billion dollars in research spending and unfortunately for the pharmaceutical industry, time is not on their side. But by releasing enough capital, companies can speed up drug discovery by acquiring pipeline drugs from other companies, evade future generic competition by moving into relatively generic-free areas, and also be prepared to challenge generic entry through protecting their patents and/or adapting marketing strategies (Lipitor sounds familiar here).
Pfizer is amongst the pharmaceutical companies determined to focus on their core capabilities of drug discovery. Pfizer recently secured $12 free capital by selling its nutrition arm to Nestle (see the Pfizer-Nestle discussed previously in this blog) giving it muscle power in future acquisitions or its own R&D. Its pipeline efficiency is looking significantly improved compared to the previous year and it has 11 drugs currently in registration, including Eliquis which some analysts predicted to generate between $1-2bn annual sales. Other companies following this strategy include AstraZeneca (who recently purchased Ardea for $1.3bn for its gout remedy) and Eli Lilly. But unlike Pfizer, these companies don’t have deep pockets and many assets to sell, and if they can’t deliver, they could themselves end up as targets for acquisitions.
But even companies with a steady pipeline may not be rewarded by investors who are losing their patience and confidence in drug pipelines. In fact, critics have accused BMS of being overvalued as they believe the proprietary drugs in its pipeline could not effectively offset the losses incurred from patent expires. For this reason, not only are companies looking to expand their pipeline, they are looking to diversify their offerings. In essence, companies are trying to evade generic challenges by:
1. Making their own generics
2. Entering new markets that have high barriers against generic entry
3. Creating new markets through technology breakthroughs
Examples of the above include Novartis’s Sandoz acquiring Fougera for $1.3bn in an attempt to dominate the generic dermatology medicine market, the focus of nearly all major pharmaceutical companies on acquiring macromolecules and biosimilars, and Roche’s attempt to improve their targeted therapy and disease screening fields by bidding $7bn for Illumina.
Having enough capital also means that companies can afford to be more vigilant in their answers to generic challenges by both fighting the case in court as well as increasing marketing efforts through decreasing sale prices, improving customer retention, and increasing distribution channels. But such an approach also has its risks, including being perceived as aggressive marketing, or worse, being completely ineffective in delaying generic erosion of revenue. Previously companies have also tried to be more vigilant in renewing their patents, but with the recent tightening of FDA regulations the chances of successful patent renewals are diminishing.
In the mid to short term, most companies have chosen to focus mainly on one of these three core strategies but also adopting the other strategies when the opportunity arises. Looking outside the immediate challenges, the excess capital may be used to fuel moves into the world’s fastest growing economy, China. Up to know proprietary drugs have been struggling to survive in China. But as the regulations and market environment matures, this move will soon become inevitable. And there is an additional advantage of co-operating with Chinese drug makers; drugs made through active ingredients extracted from herbs are harder for generics to copy because of the complex extraction procedure.
As the clock ticks towards diffusing the patent-cliff bomb in the upcoming months, expect to see a greater flurry of M&A activity in the short term as well as increasing movement of pharma industries into China in the long term. But all this will only be possible if the company can secure enough capital.
