The pharmaceutical industry is in a weak state, with an impending "patent cliff" that is forcing Big Pharma to reorganize and refocus. In 2011, roughly $20 billion in branded US sales dollars are "at risk" to patent expiry and generic competition. The pinnacle will be reached in 2013 and will subside after 2015.
|Fiscal Year||Estimated Branded Sales "At Risk"|
Big Pharma's Response to Patent Problems: Premium-Priced Acquisitions
From 2008 to 2011, Big Pharma has been on a rampage of merger and acquisitions, including; Merck (MRK) with Schering Plough; Pfizer (PFE) with Wyeth; Abbott (ABT) with Solvay; Johnsons & Johnson (JNJ) with Synthes; Sanofi (SNY) with Genzyme; Valeant (VRX) with Biovail; and Endo (ENDP) with American Medical Systems. The average multiple for these transactions was four times annual sales. This lofty multple was reaffirmed with Takeda's (TKPHF.PK) recent purchase of Nycomed, at a multiple of 3.5 times annual sales. This premium only begins to exemplify the drastic state of Big Pharma.
Big Pharma's Response: Reorganizations and Divestitures
More recently, several pharmaceutical companies have announced plans to examine their strategic options with regards to divesture and reorganization. For example, during Pfizer's fourth quarter conference call, CEO Ian Read stated that he is exploring all options, hinting at the possibility of spin-offs, break-ups, or outright sales of non-strategic divisions (back story here).
This was in line with comments made in early March by Pfizer's research chief Mikael Dolsten, who said that the company was considering cuts in Research and Development ("R&D") as well as spin-offs. No surprise, in early May Pfizer announced it would restructure R&D. Just yesterday, the company outlined its planned cuts and intent to outsource some R&D work to Paraxel (PRXL), a contract research organization ("CRO").
Big Pharma: When You Can't Innovate, Imitate
Also recent and relevant, Johnson & Johnson laid out its R&D strategy, outlining plans to gain approval for 11 new medications by 2015. More interesting to note was that the pharmaceutical giant plans on creating 30 product-line extensions. This is not exactly a new strategy; for years, Big Pharma has focused on product-line extension for continued growth; surprisingly, these "me-too" products have performed especially well for Big Pharma. Drugs like Nexium, Lyrica, Pristiq, Effexor XR, and Seroquel XR are all product-line extensions. Despite generic and branded competition in their respective markets, they have achieved significant annual sales.
Given these successes, it makes perfect sense why Johnson & Johnson is focusing its R&D on a whopping 30 product-line extenders. Similarly, Pfizer has focused on product-line extention. In 2010, Pfizer received approval on six product-line extenders. In its 2010 annual summary, Pfizer emphasized creation of product-line extensions as a strategy to bolster future pharmaceutical sales.
Big Pharma's State of Weakness
|Big Pharma's State of Weakness|
|Impending Patent Cliff represents a large % of sales|
|Inefficient Research and Development|
|Lackluster Drug Discovery|
|Reliance on M&A to bolster sales|
|Reliance on Product-Line Extension to bolster sales|
|Forced Reorganization and Divestitures|
Big Pharma's outlook is gloomy. Despite behemoth acquisitions at luxurious premiums, Big Pharma is still vulnerable: To the huge impending decrease in branded sales due to generic competition; to their own inefficient R&D; and to lackluster drug discovery. These vulnerabilities are now forcing some fledgling pharma conglomerates to consider divestiture, with Pfizer leading the way and possibly Merck and Abbott to follow, according to Goldman Sachs (GS). Make no mistake; all of Big Pharma is in a state of weakness.
Big Pharma's Woes Are Blessings for Platform and Specialty Pharma
This weakness becomes an opportunity for specialty pharmaceutical companies and platform technology pharmaceutical companies that are in a position to strengthen against their Big Pharma counterparts.
Late-stage and commerical-stage specialty pharmaceutical companies with compelling pipelines or modestly reasonable sales should enjoy a valuation adjustment in line with the healthy multiple currently being offered by the M&A market. Likewise, platform technology companies can also enjoy that premium. Employing a versatile platform technology is in line with Big Pharma's strategy of product-line extension and allows for the quick deployment of differentitated reformulations. The average drug delivery solution takes about five years to bring to market, versus 8-10 years for an NCE, making it an attractive option for Big Pharma.
The pharmaceutical industry is in bad shape, with its rising R&D costs and stagnant new drug output, in the face of an impending patent cliff. For these reasons, I think investors should pay particular attention to compelling platform and specialty pharmacuetical companies that can address and capitalize upon the weakness of Big Pharma.
Platform Technology Companies: Depomed (DEPO), Durect (DRRX), Alkermes (ALKS).
My previous articles, here
Takeda buyout of Nycomed, here
Pfizer's R&D restructuring, here
Pfizer's partnership with "CRO," here
Pfizer's Annual Review, here
Matthew Herper's article on Pfizer restructuring, here
Patent Cliff information, here
J&J R&D strategy PR, here
Journal of Managed Care article on product-line extension, here
Elan publication on Drug Technology, here