Shares digital

Acting against a looming product protection crunch could mean kill or cure for the world’s pharmaceutical giants

by Susanna Twidale

The pharmaceutical industry is facing a major crunch that could turn the sector’s current headache into a painful, and potentially long-lasting, migraine. Uniting the global pharmaceutical industry, the world’s biggest drug firms are facing a patent expiry time bomb over multi-billion dollar products. This year alone drug sales worth a staggering $20 billion or more face losing the protection of patents. According to estimates by IMS Health, the pharmaceutical intelligence group, more than two-thirds of all prescriptions written in the key US market this year will be for generically-produced drugs. The pharmaceutical industry may not be quite fighting for its life, but it is definitely feeling poorly.

Among the companies immediately facing the patent crunch is the UK’s industry leader, GlaxoSmithKline. Glaxo’s bi-polar and epilepsy product Lamictal generated sales of £1.1 billion in 2007 but is due to come off patent later this year. The situation is equally critical at US giant, Merck & Co. In February Merck lost patent protection for its popular treatment for osteoporosis, Fosamax, a development that could blow a huge hole in the group’s revenue stream. Fosamax generated worldwide sales of $3 billion last year but Merck believes that income is likely to plummet to around $1.1 billion to $1.4 billion in 2008.

Patents pending

Extending the patent of an existing product by finding a new use or changing the formula is a common way for pharmas to try to get the most mileage out of their drugs. Shares in AstraZeneca were given a huge boost recently when it reached a settlement with India’s Ranbaxy Laboratories over the patent for its top selling drug Nexium.

The agreement means its sales are protected until 2014, a crucial factor considering that analysts believe the drug is worth as much as 600p per share to the company’s overall market value, over 28% of its current £20.98 share price. ‘For the medium term, the deal with Ranbaxy over Nexium has lowered the risk profile, although the parallel situation with Seroquel is as yet unresolved,’ says Evolution’s Peter Cartwright.

Pipeline problems

Astrazeneca has been criticised for having a seemingly weaker product pipeline than its peers. Such claims appear to have been handed credibility by the company’s acquisition of Cambridge Antibody Technology – the one-time UK stock market darling – in 2006, but only after coughing up a seemingly generous £700 million-odd, a 66% premium to the firm’s prevailing market value.

More recently, investors have started to take note of the firm’s greater success in extending the life of existing products, even to the point of Astra prospering from this tactic to a greater degree than many competitors.

Similarly, New York-based Pfizer, the world’s biggest pharmaceutical group, is currently trying to get US regulators to extend its patent on top selling Lipitor until 2011, but concedes this process could take a couple of years. It is currently set to expire in 2010 but as the world’s biggest selling drug, generating revenues of $12.7 billion in 2007 the extra year would be a huge bonus.

Pfizer recently reported an 18% drop in Q1 ‘08 profits blaming tougher generic competition and its not alone. Glaxo’s recent Q1 results revealed a 4% drop in its pharmaceutical sales to £4.8 billion with chief executive Jean-Pierre Garnier citing generic competition as one of the key causes for the slip.

In the past shares in the big pharma firms have been seen as solidly defensive investment options during market turmoil, thanks in part to a bulging global population that is living increasingly long lives. For example, global prescriptions rose 6.4% last year to a mind boggling $712 billion, according to IMS research. Yet sector share prices have failed to respond. Between them, the UK's biggest three drug firms – Glaxo, Astra and Shire – have lost, on average, almost 10% of their market value since the start of the year, compared with the 5.7% fall experienced by the FTSE 100.

Attempts to arrest this decline have sparked company research teams into action and the industry as a whole has upped its effort to boost product pipelines, yet this may not be enough. Even once a potential new drug is identified through pre-clinical studies it can still take around eight more years to get it through all of the regulatory hoops, and any slip-ups en route can see years of research and millions in investment flushed down the drain.