Patent Cliff Offers Entry Dips

by: Jessica King Holden

Improved science of the 1990s offered a bounty of novel therapies in the arenas of SSRI's, statins and diabetic drugs. This past generation of blockbuster drugs are retiring into generics. Towers Watson predicts $73 billion in name brand drugs will go generic by 2015. If history repeats, when this generation of generics hit the market, sales may only be a tenth of the former patented status revenue. Like Y2K, Large Pharma has been planning for this event for years. And like good investors, the best of the big pharmaceuticals have been diversifying their portfolios of pipelines, acquisitions and marketing strategies.

Pfizer (NYSE:PFE) Has Tested the Waters

Pfizer has been one of the first and arguably biggest companies to jump the cliff when it lost Lipitor in late 2011. The $106 billion prescription giant brought in over 20% of Pfizer's revenue. Foreseeing potential doom, the stock dipped in November.

So what has Pfizer done about this loss? The company has looked to Pharmacy Benefit Managers like Catalyst Rx (NASDAQ:CHSI) and Medco Health Solutions (NYSE:MHS) to market Lipitor more affordably and conveniently. Watson Pharmaceuticals (WPI) is one company manufacturing generic Lipitor and will profit share with Pfizer. The company has set its sights on biosimilars, which are more difficult to recreate.

How has the bottom line fared so far? PFE reported a surprise EPS gain in the most recent quarter. Analysts expect a single-digit decline in revenue instead of double-digit doom in 2012. Offset by Pfizer's planning, the stock has since rebounded and is near its 52-week high some 4 months after. This dividend stock has taken some bumps from Lipitor's fall off the cliff, but those that saw PFE's dip as an entry point are benefiting today.

Forest Labs (NYSE:FRX) saw Lexapro® expire this past week. The generic has been licensed in the U.S. to Teva Pharmaceuticals (NYSE:TEVA), did not much affect FRX stock in the short term, but more loss is on the way. FRX will lose Alzheimer's drug Nemenda® this month as well. Between these two drugs, Forest is losing nearly 50% of its revenue off the cliff. Its generics line offers some financially stability, but being a tenth of Pfizer's market cap makes taking a position in FRX a bit cloudier. Forest is finding success in its phase III antidepressant levomilnacipran drug, which would offer a potential new blockbuster in a market it has already successfully navigated.

What company is next?

March - AstraZeneca (NYSE:AZN) will lose patent for Seroquel, its blockbuster schizophrenia drug on March 26. This larger-cap dividend play offers stability. The company has been attempting approved drug line extensions for a host of its currently marketed drugs. It has 10 drugs in Phase III trials. AZN has also been partnering with smaller labs and focusing on inflammatory and respiratory diseases.

April - TEVA offers some interest in that it is both a winner and loser in this arena. It loses its patent for anti-sleep medication ProVigil® and its billions in sales in April. The company still retains sales of its next generation wakefulness drug, NuVigil®, to pad its bottom line. But, if you can't beat 'em, join 'em and Teva is now one of the leaders in generics. TEVA looks to benefit directly from other's patent losses. The company is picking up the Glaxo Smith Klein (NYSE:GSK) drug Naramig ® for migraine headaches and others along the way in its generics division.

May - Sanofi Aventis (NYSE:SNY) and Bristol-Myers Squibb (NYSE:BMY) will lose Plavix ®. The drug results in nearly $9 billion in sales a year. Sanofi is poised to continue success with its diverse approach to its own generics line. Further, SNY incorporates global, synergistic marketing strategies to its products making it a favorite in Europe and emerging markets.

What to look for?

For those interested in investing in Big Pharma, 2012 patent losses can provide good entry points in the near term. Take the lesson from Pfizer and consider a near-term position. Pick a dividend stock and look for a dip leading up to a patent loss. SNY is a solid pick with a diverse array of products. TEVA is attractive in playing both sides of the coin with its own blockbuster history and generic success. Regardless, expiring patents may bring more of an opportunity than a downfall in the sector. The patent cliff may well be just an entry dip to capitalize upon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here