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Utility patents do not last forever. In fact, they last exactly twenty years, with few exceptions under the Hatch-Waxman Act. Pharmaceutical companies which enjoy monopoly pricing from patented drugs will one day face generic competition and lower profit margins. In 2012 alone, drugs which account for $63 billion in revenues are expected to lose patent protection, of which $33 billion in sales is forecast to be lost to generic competition and lower prices, according to EvaluatePharma.com. Which pharmaceutical companies will be hit the hardest? Will any firms see their prescription revenues grow between now and 2016?

Pfizer, Inc. (NYSE:PFE) lost patent protection on Lipitor and Protonix in 2011 and is expected to lose its patent on Geodon in 2012. A whopping 68% of Pfizer's 2010 pharmaceutical sales will be exposed to patent expiry risk by 2013. In 2010, PFE had the world's highest prescription drug revenue in 2010 and is forecast to be number one in 2016. However, note that even such forecasts with happy endings are predicting a bumpy ride for Pfizer.

Eli Lilly and Company (NYSE:LLY) is expected to fare worse than Pfizer in the long term. It lost patent protection for Zyprexa in 2011. Eli Lilly is expected to find 66% of its 2010 pharmaceutical sales exposed to patent expiry risk by 2013. Eli Lilly is forecast to lose revenues in the coming years: its 2010 $20.8 billion sales number will decline to $16.8 billion by 2016.

Merck & Company (NYSE:MRK) is expected to lose patent protection on Singulair. Merck is expected to find 43% of its 2010 pharmaceutical sales exposed to patent expiry risk by 2013. Merck will endure these setbacks and increase prescription sales to $42.6 billion in 2016, up from $40.4 billion in 2010.

Sanofi (NYSE:SNY) is expected to lose patent protection on Plavix. Sanofi is expected to find 40% of its 2010 pharmaceutical sales exposed to patent expiry risk by 2013. Despite these hardships, Sanofi is forecast to do very well over the next few years. Its prescription drug sales are expected to rise to $50.2 billion for 2016, which is much higher than its 2012 $36.6 billion in pharmaceutical sales.

To what extent are these forecasts present in current valuations for these firms? Consider the following current valuations:

Ticker

Company

P/E

P/S

P/B

Prescription Sales Growth

SNY

Sanofi

15.72

2.17

1.43

5%

MRK

Merck & Co. Inc.

26.55

2.47

2.15

1%

PFE

Pfizer Inc.

17.09

2.45

1.85

-1%

LLY

Eli Lilly & Co.

9.4

1.87

3.03

-4%

It appears that Sanofi is underpriced considering its forecasted prescriptions sales growth. Sanofi is an interesting growth investment candidate. Investors should keep an eye on this stock if trouble in the eurozone depresses its prices to more attractive valuations.

Merck and Pfizer are pricey considering stagnant prescription sales forecasts for these companies. Investors should wait for more attractive prices before buying either stock.

Eli Lilly is priced as a value company, but might not be a savvy buy at this time. Investors eyeing Eli Lilly should wait for management to announce any initiatives to spur growth in the company. The ultimate risk of buying Eli Lilly now would be enduring a price drop should Eli Lilly announce the acquisition of another pharmaceutical company for its drug pipeline. It is smarter to wait for a post-announcement drop than it is to pay a higher price for a company that is evaluating takeover targets.

Whether growth-oriented or value-oriented, investors who are interested in pharmaceuticals companies should make sure they are aware of patent cliffs that these firms are facing. They should start by investigating the extreme scenarios outlined for LLY and SNY and kicking the tires of these forecasts for themselves.

Source: 4 Pharmaceutical Companies Facing Huge Patent Cliff Hurdles