Big Pharma’s Uphill 2013 Battle

By Maxx Chatsko

Big pharma knew it faced an uphill battle when 2012 began. Even drug pipelines stocked full of potential couldn’t completely mitigate the patent cliff as several blockbusters lost exclusivity. In fact, generics funneled an estimated $26 billion away from brand name drugs in 2012 alone. Now that the year is over and earnings are in, what can investors learn by taking a big picture view of the industry?

The following big pharma companies did quite well in softening their fall over the patent cliff.

Bristol Myers Squibb(NYSE:BMY  ) Johnson & Johnson(NYSE: JNJ  ) Merck(NYSE:MRK  ) Pfizer(NYSE:PFE  ) Novartis(NYSE:NVS  )
2011 EPS $2.16 $3.49 $2.02 $1.27 $5.57
2012 EPS $1.16 $3.86 $2.16 $1.94 $5.25
% Difference (46.3%) 10.6% 6.9% 52.8% (6.1%)
2011 Worldwide Pharma Sales $21.24 billion $24.37 billion $41.29 billion $14.14 billion $32.5 billion
2012 Worldwide Pharma Sales $17.62 billion $25.35 billion $40.60 billion $12.89 billion $32.2 billion
% Difference (17%) 4% (1.7%) (8.8%) (1%)

Sources: Company earnings releases (unaudited).

While Bristol and Pfizer saw the largest drops in revenue it is important to note that they lost exclusivity for two of the most successful drugs ever: Plavix (Bristol) and Lipitor (Pfizer). If you remove Plavix and Avapro/Avalide from the equation for Bristol, then 2012 pharma sales grew 9.4% over 2011. Similarly, Pfizer saw sales from its product lineup grow 1.4% without Lipitor. This growth may never replace the lost revenue from Plavix and Lipitor, but it is a crucial first step toward the future.

Combatting the patent cliff
The industry is looking to put the worst of the patent cliff behind it, but it will need to make it through 2013 first when an estimated $35 billion of brand name sales will be lost to generic competition. While this group lost exclusivity for some of the top branded pharmaceuticals in markets worldwide, the worst of the damage appears to have passed. First, let’s look at a list of brand names that slid in 2012 and are likely to slide further in 2013:

Company Drug 2011 Sales (millions) 2012 Sales (millions), % difference
Johnson & Johnson Doxil $402 $83 (79%)
Pfizer Lipitor $1,999 $584 (71%)
Bristol-Myers Squibb Plavix $7,087 $2,547 (64%)
Bristol Avapro/Avalide $952 $503 (47%)
Merck Singulair $5,479 $3,853 (30%)
Merck Cozaar/Hyzaar $1,663 $1,284 (23%)
Merck Remicade $2,667 $2,076 (22%)
Johnson & Johnson Procrit $1,623 $1,462 (10%)

Sources: Company earnings releases (unaudited).

Several of the blockbusters listed above still had noteworthy sales because they retained exclusivity in one or more key markets. That won’t last forever, which makes the next list even more important. Here is a table of key drugs with upward momentum:

Company Drug 2011 Sales (millions) 2012 Sales (millions), % difference
Johnson & Johnson Zytiga $301 $961; 219%
Novartis Gilenya $486 $1,200; 147%
Bristol-Myers Squibb Yervoy $360 $706; 96%
Novartis Afinitor $431 $797; 85%
Bristol-Myers Squibb Onglyza $473 $709; 50%
Johnson & Johnson Simponi $410 $607; 48%
Novartis Tasigna $694 $1,000; 44%
Novartis Galvus $636 $910; 43%
Johnson & Johnson Stelara $738 $1,025; 39%
Merck Gardasil $1,209 $1,631; 35%
Merck Januvia $3,324 $4,086; 23%
Novartis Lucentis $1,967 $2,499; 22%
Merck Janumet $1,363 $1,659; 22%
Pfizer Lyrica $998 $1,132; 13%
Johnson & Johnson Remicade $5,492 $6,139; 12%

Sources: Company earnings releases (unaudited).

You’ll notice that Johnson & Johnson, Novartis, and Merck appear multiple times on both lists, which can be attributed to early starts in combating the patent cliff. Regarding the above tables, key approvals in the last several years allowed J&J growth drugs to offset declining drugs with a net $1.31 billion in sales.

Merck had a more difficult time replacing Singulair revenue, but still has impressive growth to look forward to in several areas. Diabetes drugs Januvia and Janumet raked in $5.75 billion in 2012, while HPV vaccine Gardasil generated $1.63 billion.

Despite putting up impressive growth for several key drugs and gaining 17 major approvals, Novartis expects 2013 sales to be in line with 2012 totals. The company is preparing for up to $3.5 billion in generic competition this year — most of which will eat away at the dominance of blood-pressure blockbuster Diovan. If that doesn’t sum up the patent cliff struggles facing the industry, then I don’t know what does.

Emerging blockbusters?
We may have to lower the bar on blockbusters or even entertain the possibility that chasing home-run drugs is no longer the best strategy. Nevertheless, diabetes drugs remain big for big pharma. Although Merck’s Januvia and Janumet stole the show, Novartis’ Galvus climbed 43% to $910 million in sales while Bristol’s Onglyza notched a 50% increase. Onglyza in particular will have to grow quickly to make its mark before losing exclusivity in 2014.

Growth in the diabetes market is nothing compared to Bristol’s outlook for melanoma drug Yervoy, which some analysts expect to bring in over $2 billion in peak sales. That figure should only increase as trials for new applications progress, including a promisingcombination with Roche’s vemurafenib.

However, as the tables above illustrate, with every bright spot comes a headache. Bristol’s Abilify, which brought in $2.83 billion in sales last year, loses total exclusivity in the beginning of 2014.

Biologic moat remains strong
It may not be obvious from table above, but four of the ten drugs are biologics (Yervoy, Simponi, Stelara, Remicade) that work by stimulating a patient’s immune system. If you’ve had your coffee, then you’ll notice that Remicade was a big loser for Merck and a big winner for Johnson & Johnson. The difference lies in world market rights for each company. Still, you may be wondering how two companies can market the same drug to the tune of billions in annual sales.

Biological manufacturing is a very difficult and expensive part of drug development that is heavily scrutinized by the Food and Drug Administration. The high cost of manufacturing keeps the prices of generic biologics, or biosimilars, much higher than their small molecule counterparts. This allows non-exclusive biologics to maintain sizable market share even when competition arises.

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