The pharmaceutical industry is facing one of the biggest patent
) multi-billion-dollar blockbuster drug Lipitor losing patent
protection in the US in late November 2011. Besides Lipitor, other
major branded drugs that lost patent protection in the past few
) Lexapro and
) Zyprexa. These products alone represented branded sales worth
more than $15 billion.
The effect of the genericization of these products will be felt
mostly in 2012, which will be a challenging year for several
companies. Two major products slated to lose patent protection in
) Singulair and
While generics will eat into sales, new products are not expected
to generate the same level of sales as products losing patent
protection. The next few years are expected to reflect a
significant imbalance between new product introductions and patent
Generic competition and insufficient new product sales will not be
the only factors impacting performance in 2012. Other headwinds
include EU and Japan pricing pressure.
Meanwhile, the US government is exploring options which will help
increase the availability of generics. Recently, the Obama
administration announced that it is looking to implement a proposal
under which the exclusivity period for biologics will be cut down
by 5 years, thereby allowing generics to enter the market sooner.
The government is looking to bring this proposal into effect from
It is also seeking to increase the availability of generics by
preventing companies from entering into anti-competitive or "pay
for delay" agreements which push out the availability of generics.
These initiatives, if implemented, would result in additional
pricing competition and genericization in the pharma industry.
Moreover, the FDA is working on establishing a biosimilar pathway
so that cheaper versions of biologics will be available.
With revenue growth stalling or slowing down, pharma companies have
been resorting to cost-cutting and share buybacks to drive
bottom-line growth. 2011 was a year characterized by the loss of
patent protection for blockbuster drugs, merger & acquisitions
(M&As), licensing deals, restructuring, share buybacks and
monetization of non-core assets.
The M&A activity witnessed in the pharma sector in the last
couple of years will continue in 2012. With most of the big pharma
companies already facing or likely to face patent challenges for
their blockbuster products, the companies have been looking toward
M&A and in-licensing activities to make up for the loss of
revenues that will arise with key products losing patent
Major deals include
Johnson & Johnson's
) upcoming acquisition of Synthes, which should help strengthen its
medical device portfolio.
Pharma giant Pfizer acquired King Pharmaceuticals to strengthen its
presence in the pain management market. Pfizer has been adding to
its portfolio with other acquisitions as well, including that of
Icagen and Excaliard. Merck expanded its ophthalmology product
portfolio through its acquisition of Inspire Pharmaceuticals, Inc.
Another pharma major, Bristol-Myers Squibb, is not far behind in
acquisitions activity. The company has been looking to expand via
acquisitions and partnerships to counter the loss of revenues that
will arise following the genericization of its key drugs, including
the blockbuster blood thinner Plavix.
Bristol-Myers was in the news recently, with rumors doing the
rounds about the company's intention to acquire
) has been pursuing
), albeit without much success so far. Glaxo also did not meet with
success in its attempt to acquire
Human Genome Sciences, Inc.
Oncology also remains a much sought-after therapeutic area, with
companies like Sanofi and
) strengthening their presence in this market through acquisitions.
Meanwhile, generic players are not far behind in the acquisition
) acquired Cephalon, Inc.,
) acquired generic company Specifar Pharmaceuticals to expand and
strengthen its presence in Europe. Watson recently announced its
intention to acquire generic player, Actavis.
Elsewhere, companies have been looking toward biotech firms to
build their product portfolios. A prime example is French pharma
giant Sanofi's acquisition of biotech company Genzyme Corp. The
Genzyme acquisition has boosted Sanofi's revenues as well as its
) will be acquiring biotech company
). Another acquisition deal announced in April 2012 is
) upcoming acquisition of biopharma company
Going forward, we expect the M&A trend to continue. We also
expect a significant pickup in in-licensing activities and
collaborations for the development of pipeline candidates. Instead
of developing a product from scratch, which involves a lot of funds
and time, pharma companies are shopping for mid-to-late stage
pipeline candidates that look promising.
Small biotech companies are also game for in-licensing activities
and collaborations. Most of these companies find it challenging to
raise cash, thereby making it difficult for them to survive and
continue with the development of promising pipeline candidates.
Therefore, it makes sense for them to seek deals with pharma
companies that are sitting on huge piles of cash.
We would recommend investors to put their money in biotech stocks
that have attractive pipeline candidates or technology that can be
used for the development of novel therapeutics. Therapeutic areas
which could see a lot of in-licensing activity include oncology,
central nervous system disorders, diabetes and
immunology/inflammation. The hepatitis C virus (HCV) market is also
attracting a lot of attention.
Another trend that we are seeing in recent months is the divestment
of non-core business segments. Pfizer sold its Capsugel unit in
August 2011 and signed a deal for the divestment of its Nutrition
business in April 2012. The company is currently exploring
strategic alternatives for its Animal Health business.
) is divesting non-core brands from its Consumer Healthcare
segment. In August 2011, AstraZeneca sold its Astra Tech business
). The monetization of non-core assets will allow the
pharma/biotech companies to focus on their areas of expertise. 2012
will see Abbott Labs splitting into two separate publicly traded
companies. While one company will deal in diversified medical
products, the other (AbbVie) will focus on research-based
Another recent trend seen in the pharmaceutical sector is a focus
on emerging markets. Companies like
), Pfizer, Merck, Eli Lilly, Glaxo and Sanofi are all looking to
expand their presence in India, China, Brazil and other emerging
markets. Until recently, most of the commercialization efforts were
focused on the US market -- the largest pharmaceutical market --
along with Europe and Japan.
Emerging markets are slowly and steadily gaining more importance
and several companies are now shifting their focus to these areas.
According to the IMS Institute, spending on medicines in
"pharmerging" markets will double to $285-$315 billion in the next
five years from $151 billion in 2010. This will catapult
pharmerging markets to the second position where spending on
medicines is concerned.
However, while higher demand for medicines, government initiatives
for healthcare, new patient population, and increasing use of
generics should help drive demand, we point out that emerging
markets are also not immune from genericization.
Branded Drugs Market Share to Decline
According to the IMS Institute, market share for branded drugs will
continue declining in the next five years. Branded drugs' market
share, which declined from 70% in 2005 to 64% in 2010, is expected
to decline to 53% by 2015. The decline will be driven by patent
expiries, with generics accounting for a significant part of pharma
spending. Spending on branded medicines in 2015 is expected to
remain at the same level as in 2010.
While the US will witness a major increase in generic spending,
generic spending in Japan will continue to be low, even though
significant efforts are being made to increase the use of generics
there. Overall spending in generics is expected to increase from
20% in 2005 to 39% in 2015.
Global spending for medicines is expected to reach almost $1.1
trillion by 2015, according to the IMS Institute. However, the
five-year compound annual growth rate of 3-6% represents a
significant slowdown from the 6.2% annual growth seen in the last
Moreover, the US' share of global spending is expected to decline
from 41% in 2005 to 31% in 2015. The share of spending from the top
5 European countries is also expected to decline (from 20% in 2005
to 13% in 2015) with spending by pharmerging markets expected to
increase from 12% in 2005 to 28% by 2015.
(Source of growth forecasts: IMS.)
We continue to have a Neutral outlook on large-cap pharma stocks.
While the companies will continue to face challenges like pricing
pressure and genericization, growth in emerging markets and product
approvals could help reduce the impact.
A few years down the line, the pharma industry should show some
signs of recovery. The industry should be out of the major patent
cliff period, and new products should be contributing significantly
to results. Increased pipeline visibility and appropriate
utilization of cash should increase confidence in the sector.
About 35 new molecular entities were approved by the FDA up to
mid-November 2011. Important product approvals include Johnson
& Johnson's prostate cancer therapy Zytiga, Merck's hepatitis C
virus (HCV) treatment Victrelis, Bristol-Myers' melanoma treatment
Yervoy, AstraZeneca's Brilinta,
) HCV treatment Incivek, Pfizer's lung cancer treatment Xalkori,
and Glaxo/Human Genome's lupus drug Benlysta, among others.
Potential blockbusters include Benlysta, Yervoy, Zytiga, Incivek
In the biotech space, we are positive on
). We are optimistic on BG-12, the company's oral multiple
In spite of a Neutral recommendation on Bristol-Myers, we are
positive on the stock. Although Bristol-Myers is facing a major
patent cliff with Plavix losing exclusivity later this year, the
company's pipeline represents a lot of potential. 2011 has been a
fruitful year for Bristol-Myers, with many key drugs getting
We are positive on specialty biopharma company,
), which carries a Zacks #2 Rank. The company's fourth quarter
results exceeded expectations, and we believe Xyrem has impressive
We recommend avoiding names that offer little growth or opportunity
for a take-out. These include companies which are developing drugs
that are likely to face regulatory hurdles. The FDA has been
exercising more caution in granting approval to new products and
several candidates are facing delays in receiving final approval.
We would also avoid companies like
), which are facing patent expirations on key products and whose
new products may not be enough to make up for the loss of revenues
that will take place once generics enter the market. 2012 will be a
challenging year for Eli Lilly, with the company losing patent
exclusivity on Zyprexa in October 2011. Zyprexa sales should erode
rapidly with the entry of generics. Moreover, we expect continued
erosion of Gemzar sales due to genericization. Another company that
is highly exposed to a patent cliff is
Another company facing generic competition is
). Estimates are down significantly as the company's lead product,
Vancocin, began facing generic competition recently. The entry of
generic versions will lead to a rapid decline in branded Vancocin
sales. We expect ViroPharma to remain under pressure as generic
players launch their versions of the drug.
We currently have a Zacks #4 Rank on
). We expect 2012 to be a challenging year for the company given
manufacturing issues, pricing headwinds, generic competition and
unfavorable currency movement. The company's first quarter 2012
results were below expectations.
) also carries a Zacks #4 Rank. We are not too bullish on the
company's chances of gaining US approval for oral treprostinil,
given the mixed data on the candidate. Moreover, the company's weak
late-stage pipeline concerns us.
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