An End to Drug Patent Woes? - Analyst Blog

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The US Supreme Court will soon hear a case which will determine whether "pay-for-delay" agreements between drug manufacturers violate anti-trust legislations. These "reverse payment" agreements enable patent holders to pay generic drug manufacturers to delay the launch of generic versions of their drugs. This runs contrary to normal practice, where patent holders sue violators and then seek damages, in some cases through an out of court settlement.

The companies standing to benefit in this case were Watson Pharmaceuticals, Inc. ( WPI ), Paddock Pharmaceuticals - now owned by Perrigo Co. ( PRGO ) - and Par Pharmaceuticals, Inc. - which was acquired this year by private equity firm TPG Capital. Solvay Pharmaceuticals Inc, now owned by Abbot Laboratories ( ABT ), was paying them to delay launch of a competing drug.

These companies received annual payments of between $31 million to $42 million in order to delay launching generic versions of AndroGel until 2015, when Solvay's patent on the drug would expire. Such an agreement would have helped Solvay maintain annual profits to the tune of $125 million.

The Federal Trade Commission, which is the appellant in the case, has said that 28 such deals concluded last year have cost consumers and taxpayers a minimum of $3.5 billion in synthetically inflated prices.

That pharma giants are resorting to such measures comes as no surprise when one considers the fact that 2012 has seen an industry-wide decline in drug sales. According to Ernst and Young, combined sales of the leading global thirteen drug firms will decline by nearly 4% from around $557 billion in 2011.

Expirations of drug patents are a major factor. A "patent cliff" is characterized by a steep fall in revenues when one or more of the firm's best-selling products lose their patent protection. The most grievously affected firm in terms of patent expiration has been Pfizer Inc ( PFE ), whose patent on blockbuster drug Lipitor expired in 2011. Subsequently, sales of the drug declined 42% during the 2012's first quarter compared with the same period a year ago.

Eli Lilly and Company ( LLY ) and AstraZeneca PLC ( AZN ) are among other firms to be affected by this phenomenon. Sales have dropped by 56% and 25% for their drugs Zyprexa and Seroquel IR during the first quarter of this year following the expiry of their patents. The march of generics continued through the first nine months of the year. As a result, the industry as a whole finished with lower sales for the year compared to 2011.

The good news is that the end of 2012 will also mean an end to the current patent cliff, which has lasted for nearly eighteen months. By next year, the worst will be over.

Meanwhile, despite such conditions, share prices of industry bellwethers like Merck & Co. Inc. ( MRK ) and Pfizer have risen 25% this year -- nearly twice as much as the increase in the S&P 500. Drug-makers have delivered steady earnings and large dividends, even while taking a hit from patent expirations.

This is because they have spent these trying times reorienting their focus. Historically good at marketing and distribution, pharma companies have spent more time on cost reduction initiatives and have invested in research in a big way. The emphasis on research has resulted in large investments in biotechnology.

According to CLSA, a unit of French bank Credit Agricole, by 2012, six of the top twenty drugs will be biologics. This will probably change the game in favor of patent holders, since it is much tougher to produce "biosimilars," the generic versions of biologics.

Though generic manufacturers will lose many opportunities as a result, some of them are already readying strategies to cope. Teva Pharmaceutical Industries ( TEVA ) and Watson Pharmaceuticals have resorted to inorganic growth. Teva acquired Israel-based Cephalon for $6.5 billion last year, while Watson purchased Actavis for $5.6 billion in October this year.  

In summary, the loss of patent protection has been a major factor which has propelled changes in the way the industry operates. Companies have radically changed their business models and reoriented their focus in response to the current situation. And by now, the worst is most likely over.



ABBOTT LABS (ABT): Free Stock Analysis Report

ASTRAZENECA PLC (AZN): Free Stock Analysis Report

LILLY ELI & CO (LLY): Free Stock Analysis Report

MERCK & CO INC (MRK): Free Stock Analysis Report

PFIZER INC (PFE): Free Stock Analysis Report

PERRIGO COMPANY (PRGO): Free Stock Analysis Report

TEVA PHARM ADR (TEVA): Free Stock Analysis Report

WATSON PHARMA (WPI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: ABT , AZN , LLY , MRK , PFE

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