If you want to get an idea of the biggest challenge facing Big Pharma, just take a look at Pfizer Inc., the world's biggest drug maker, and Lipitor, the world's best-selling drug, which contributed $11-billion (U.S.) of the company's $52-billion in sales last year.
Any day now, Judge Joseph Farnan of the U.S. District Court of Delaware will rule on a case brought by India's generic giant Ranbaxy Laboratories Ltd. to invalidate the patents on Lipitor, which is prescribed to lower cholesterol levels in the blood. If Pfizer prevails, as it did in a British court recently, its patents would stand until 2011. But the prevailing view on Wall Street is that anything is possible because of differences in British and U.S. patent law.
A loss would be seismic for Pfizer. In 2001, for example, when Eli Lilly & Co. lost patent protection for its antidepressant Prozac several years ahead of schedule, the drug lost 73 per cent of its share of new prescriptions to lower-priced generic copies within two weeks.
The attack of the generics represents a watershed for one of the most powerful industries on the planet. It will force an unprecedented explosion of research and development spending as business development teams search to buy drugs coming out of other companies' labs.
At the same time, hundreds of millions of dollars will be spent in court fights to protect patents from generic competition. Patents are the industry's lifeblood: They legitimize raising millions of dollars on the stock market. When the value of patents are attacked, investor panic can bring companies to their knees.
For all the worrying going on at Big Pharma, there is a different kind of excitement for its competitors.
Jack Kay, for one, can't wait to get his hands on Biovail Corp.'s new once-daily Ultram ER pain reliever when it goes on sale in the United States early in the new year.
“As soon as we get a sample of the drug, it goes to the lab and we start our development work,” said the president of Canada's biggest generic drug maker, Apotex Inc., which already sells the active ingredient in Ultram ER as a generic drug known as tramadol that now must be taken up to six times a day.
He says Apotex can complete development and clinical tests of a generic drug in 18 months at a cost of $500,000 to $3-million (Canadian).
In lining up Johnson & Johnson to distribute Ultram ER, Biovail strengthened its patent portfolio for once-daily tramadol in a side deal with another drug company, potentially delaying generic competition in the U.S. until 2014. Its patent claims likely will be challenged in the courts well before then, analysts say.
Although Ultram ER won't be available in Canada for a couple of years, dozens of generic drug makers across North America are keen to get a piece of what could be a blockbuster pain medication, with annual sales that some analysts predict could top $1-billion (U.S.) in three or four years.
The tramadol wars highlight the dilemma now facing Big Pharma as it braces to lose patent protection on an estimated $80-billion of annual prescription medicines by the end of the decade, or 15 per cent of global sales now.
In 2006, for example, analysts estimate that patents will expire on more than $15-billion worth of medications, including such well-known brand names as Pfizer's antidepressant Zoloft, Sanofi-Aventis SA's insomnia pill Ambien, GlaxoSmithKline PLC's chemotherapy drug Zofran, and two cholesterol-lowering drugs: Zocor from Merck & Co. and Pravachol from Bristol-Myers Squibb Co.
UBS Securities analyst Carl Seiden, in a recent study, figures that 21 per cent of Big Pharma's 2004 revenue will be exposed to generics through 2008 and 12 per cent in the following two years. “Assuming 80 per cent of those revenues will be lost through 2010, the average annual drag [from generics] is roughly 4 per cent,” he said.
Generic competition is already chipping away at Pfizer. Sales of its epilepsy and pain drug Neurontin, a $2.7-billion product in 2004, fell 80 per cent to $155-million in the third quarter this year. And at least one U.S. pharmacy benefits manager has opted to exclude Lipitor from its preferred list of drugs next year to maximize utilization of generic versions of Merck's Zocor.
“It's going to be very difficult for Big Pharma to find new blockbusters to replace what patent expirations will take away,” Ranbaxy chief executive officer and managing partner Brian Tempest said in a recent interview when he launched his Canadian subsidiary. “There isn't a lot in the pipeline.”
Even though Pfizer is completing a program of registering 20 new medicines, analysts say its own R&D has been unable to restock its drug portfolio fast enough to replace patent losses.
And its acquisition of Pharmacia Corp. two years ago for nearly $60-billion is crumbling. In the deal, Pfizer gained control of highly touted Cox-2 pain killers Celebrex and Bextra. But the entire Cox-2 category is now suspect because of cardiovascular safety concerns in the wake of Merck's withdrawal of Vioxx. Pfizer stopped selling Bextra in April, and Celebrex sales plummeted 44 per cent to $446-million in the third quarter.
Not surprisingly, investors have deserted Pfizer, sending its stock price to an eight-year low of $20.71 last month in the wake of a 52-per-cent drop in third-quarter profit and the company's decision to withdraw its financial outlook through 2007. The stock closed at $22.43 on the New York Stock Exchange yesterday, less than half its value five years ago.
So how does Big Pharma fight back?
Having billions of dollars at the ready is a huge advantage to fight patent challenges in the courts and rev up mergers and acquisitions to fill product pipelines.
Although business models in the brand-name and generic sectors differ markedly, at least one drug company is crossing the barrier.
In a surprise move this year, European giant Novartis AG paid $8.3-billion to acquire two generic companies, turning its sleepy Sandoz unit into the world's No. 2 generic drug maker.
Novartis was driven largely by double-digit growth prospects in the generic sector, even though competition is fierce and margins are being squeezed. Novartis predicts the generic sales will reach $100-billion by 2010, when it wants a 10-per-cent market share. Total sales of generic drugs are expected to hit $45-billion this year.
Big mergers and acquisitions have always been a favourite route for drug companies to fill holes in their portfolios. And now the industry has pots of cash to do it. Under a new U.S. tax bill, companies with substantial foreign cash holdings have until the end of 2005 to bring them home at an effective tax rate of 5.25 per cent, rather than the standard corporate tax rate of 35 per cent.
Pfizer has the potential to repatriate $37-billion, Johnson & Johnson $11-billion, with nearly similar amounts available to Schering-Plough Corp. and Eli Lilly.
There are endless permutations and combinations but analysts often cite possible marriages between AstraZeneca PLC and Glaxo, since both are suffering from regulatory setbacks and generic exposure, and Bristol-Myers and Wyeth, since both companies have solid pipelines of products.
On the other hand, companies such as Pfizer, Merck and Glaxo are always on the hunt for smaller companies with successful drugs that will strengthen their position in a specific disease category.
Wayne Schnarr, a life sciences specialist at Equicom Group Inc., an investor relations firm, contends blockbuster deals aren't necessary. “Drug companies have to get a pipeline somehow, which could mean buying a bunch of biotech companies or licensing anything they can get their hands on.” He points to Eli Lilly, which has a franchise in diabetes care, and is “adding products to protect that franchise.”
Even the generic sector faces potential consolidation as analysts say there are too many companies vying for the same slice of pie. This year, Israel's Teva Pharmaceutical Industries Ltd., the world's No. 1 generic drug maker, has swallowed Ivax Corp. for $7.4-billion.
“It's not just about economies of scale,” said HSBC Securities analyst David Lickrish. “It's about vertical integration and securing sources of supply of active pharmaceutical ingredients.”
On the drug development front, Mr. Lickrish said “product life-cycle extension” strategies — where improved formulations replace existing franchise drugs — are one of the more “popular defence mechanisms Big Pharma can utilize to mitigate the potential impact of a generic launch.”
Glaxo, for example, launched Biovail's once-daily antidepressant Wellbutrin XL in the United States in the fall of 2003, before generic competition began eroding sales of its twice-daily Wellbutrin SR drug in 2004. In the interim, Glaxo's sales and marketing team was able to convert the lion's share of SR prescriptions written by doctors to the new XL drug.
The same could hold true for Pfizer. It has another cholesterol-lowering drug in development that could be combined with Lipitor and launched before the arrival of generic Lipitor at the end of decade, analysts say, assuming a favourable court ruling this year.
In order to salvage some of the revenue lost to generic competition, big drug companies also have opted for what's known as “authorized generics” when one of their drugs goes off-patent. An authorized generic, which is made by a drug company but relabelled and licensed for distribution to a generic partner, can often outsell other generic competitors because it retains brand-name recognition.
© The Globe and Mail
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