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Patent Wave Hits

Pharma’s third-quarter earnings reflect the onslaught of generics competition on key products

by Lisa M. Jarvis
November 15, 2010 | A version of this story appeared in Volume 88, Issue 46

A year ago, nearly every speech by a pharmaceutical executive included a reference to the rapidly approaching patent wave, a swell of patent protection losses on some of the industry’s top-selling products. Weak financial performance for several companies is a clear sign that the wave has arrived onshore. And with more generics competition yet to come, companies are scrambling to expand their portfolios through acquisitions.

Kindler
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Credit: Pfizer
Credit: Pfizer
Lechleiter
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Credit: Eli Lilly & Co.
Credit: Eli Lilly & Co.

Third-quarter results show that the drug industry is now mired in a phase of intense generics competition for key products: At six of the 10 big pharma firms tracked by C&EN, sales were flat or down. And although most companies still saw some earnings growth, much of the improvement was based on cost cutting rather than new product launches.

Two of the biggest drug companies, Pfizer and GlaxoSmithKline, are having the toughest time sustaining growth.

At first blush, Pfizer’s third-quarter results look pretty healthy: Sales were up 39.2% to $16.2 billion, and earnings increased 26.3% to $4.4 billion. But last year’s quarter did not include sales from Wyeth. Without that big 2009 acquisition, Pfizer says, sales would have been down 4%.

In fact, not one of Pfizer’s 15 best-selling legacy products had double-digit sales growth in the quarter. Worse, sales shrank for nine of those products. The cholesterol drug Lipitor, Pfizer’s biggest moneymaker, posted $2.5 billion in third-quarter sales, an 11% drop. The drug already faces generic competition in Canada and Spain and will lose patent protection in the U.S. in November 2011.

With the sales potential of its own portfolio clearly limited, Pfizer has been hastily buying new sources of growth, focusing on emerging markets; biosimilars, which are generic versions of biologics; and its new drug pipeline. Since the end of the third quarter, it has agreed to pay $3.6 billion for King Pharmaceuticals, which brings a portfolio of pain medications; put up $240 million for a 40% stake in the Brazilian generics firm Laboratório Teuto Brasileiro; agreed to pay $200 million for a generic insulin portfolio developed by India’s Biocon; and closed on a deal for FoldRx, a Cambridge, Mass.-based biotech firm that bolsters Pfizer’s work in rare diseases.

Each of these deals “significantly advances” Pfizer’s diversification strategy and “helps us further balance our portfolio, businesses, and products,” the company’s chief executive officer, Jeffrey B. Kindler, told stock analysts in a conference call.

GSK is also hoping that diversification will revitalize its business. Although GSK has been hit by generics competition, it is having a tougher time grappling with setbacks for Avandia. Sales of the blockbuster diabetes drug, which in its heyday brought in $3 billion annually, have in recent years been pulled down by concerns that it increases the risk of heart attacks. At the end of the third quarter, the Food & Drug Administration said that use of Avandia should be severely restricted. European regulatory authorities decided to withdraw the drug altogether.

On top of plummeting Avandia sales, generics competition is cannibalizing sales of GSK’s herpes treatment Valtrex, which were down 75% in the third quarter to $150 million. Meanwhile, sales of the pandemic flu drug Relenza, which soared during last year’s H1N1 scare, dropped 91% to $28 million.

Overall, GSK’s third-quarter profits were down 2.0% to $2.1 billion based on a 0.8% rise in sales to $10.8 billion.

As part of its diversification strategy, GSK is ramping up efforts to establish a presence in the rare diseases market. The unit added a gene therapy drug candidate to its roster through a pact with Italian charity Fondazione Telethon and research organization Fondazione San Raffaele. More recently, GSK took a 19.9% stake in Amicus Therapeutics as part of a licensing deal for Amigal, the biotech firm’s developmental Fabry disease treatment.

Sanofi-Aventis is also gunning for a position in the rare diseases market as a means of boosting a flagging drug portfolio. Since July, the French firm has been trying to convince the management of leading rare diseases firm Genzyme to consider its $18.5 billion takeover offer. Sanofi recently went hostile in its attempt to acquire the biotech company.

Genzyme, meanwhile, is doing its best to convince shareholders that the offer is too low. Sanofi made the bid at a time when manufacturing issues had forced Genzyme to limit supplies of two enzyme-replacement therapies, Cerezyme and Fabrazyme, leading to months of sales and profit declines.

Genzyme argues that any takeover offer should reflect its speedy recovery. Although the company is still under a consent decree, a legal action taken by FDA to force it to bring manufacturing up to snuff, production is starting to ramp back up. Cerezyme supplies should be back to normal in the fourth quarter, and Fabrazyme shipments are increasing, the company said in its earnings report.

As a result, Genzyme’s third-quarter earnings jumped by 43.6% to nearly $112 million based on an 8.4% rise in sales to $1.0 billion. The firm also strengthened its cash position in the quarter by agreeing to sell its genetics division to Laboratory Corp. of America for $925 million. Furthermore, it recently released impressive Phase II clinical-trial data for Campath, a monoclonal antibody for the treatment of multiple sclerosis. If approved, Campath is expected to bring in multi-billion-dollar sales.

Despite Genzyme’s claims of a rosy outlook, Sanofi has yet to up its offer. Most analysts expect the price tag to eventually increase because the acquisition would bring the French firm a new revenue stream to offset looming patent expirations for several of its top-selling drugs.

Sales of Sanofi’s anticoagulant Lovenox, which began to face generics competition in the U.S. in July, were already down 26% in the third quarter to $801 million. Plavix, also a blood thinner, brought in $2.4 billion, a 5.5% decline that was largely because of generics competition in Europe. The drug is expected to lose patent protection in the U.S., where it sells twice as much as in Europe, in 2012.

Although sales of some of its top-selling medicines are waning, Sanofi’s third-quarter results were helped by robust growth in emerging markets. Sales increased 5.7% to $10.6 billion, and earnings improved 8.9% to $3.4 billion.

Eli Lilly & Co. is facing its own patent woes and may also need to pursue acquisitions. Its cancer drug Gemzar goes off patent this month, and its schizophrenia treatment Zyprexa loses protection late next year. The antidepressant Cymbalta is expected to face generics competition in 2012. Given the back-to-back losses, the company has said it will not see growth in profits before 2014.

“It should be safe to say that Lilly has among the highest generic exposure because of its particular schedule of patent expiries of high-margin pharmaceutical products,” Bernstein Research stock analyst Tim Anderson wrote in a note to investors.

Zyprexa and Cymbalta are Lilly’s top-selling drugs, bringing in $1.2 billion and $825 million, respectively, in the third quarter alone. Sales of Gemzar were already down 2% in the third quarter to $325 million. The one bright spot in the company’s portfolio was the lung cancer drug Alimta, which experienced a 21% surge in sales to $560 million.

Overall, the firm’s third-quarter profits rose 2.2% to $1.3 billion based on a 1.7% increase in sales to $5.7 billion.

A series of setbacks to Lilly’s developmental pipeline has added to the pressure on CEO John C. Lechleiter to find new sources of growth. In the third quarter, Lilly discontinued development of its Alzheimer’s treatment semagacestat after data from a Phase III trial suggested the γ-secretase inhibitor worsened, rather than improved, cognition in people with the disease.

Last month, FDA refused to approve Bydureon, a long-acting form of the diabetes treatment Byetta, until Lilly and its partner Amylin Pharmaceuticals provide more data on the QT interval, a measure of heart rhythm. The companies said they can’t come up with the data needed to fulfill the agency’s requests until late 2011, meaning the drug could launch in mid-2012 at the earliest.

With the combination of patent losses and late-stage failures, many think Lilly, like so many of its big pharma competitors, will have no choice but to purchase growth. In public statements, Lechleiter has been adamant that the company will not pursue major acquisitions. Analysts, however, feel a shake-up is necessary. As Deutsche Bank analyst Barbara Ryan said succinctly in a note to investors, “Management should reconsider its strategy.”

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