The effect of the genericization of these products will be felt mostly in 2012, which will be a challenging year for several companies. Two major products slated to lose patent protection in 2012 include Merck's Singulair and Bristol-Myers Squibb/Sanofi's Plavix.
While generics will eat into sales, new products are not expected to generate the same level of sales as products losing patent protection. The next few years are expected to reflect a significant imbalance between new product introductions and patent losses.
Generic competition and insufficient new product sales will not be the only factors impacting performance in 2012. Other headwinds include EU and Japan pricing pressure.
Meanwhile, the US government is exploring options which will help increase the availability of generics. Recently, the Obama administration announced that it is looking to implement a proposal under which the exclusivity period for biologics will be cut down by 5 years, thereby allowing generics to enter the market sooner. The government is looking to bring this proposal into effect from 2012.
It is also seeking to increase the availability of generics by preventing companies from entering into anti-competitive or "pay for delay" agreements which push out the availability of generics. These initiatives, if implemented, would result in additional pricing competition and genericization in the pharma industry. Moreover, the FDA is working on establishing a biosimilar pathway so that cheaper versions of biologics will be available.
With revenue growth stalling or slowing down, pharma companies have been resorting to cost-cutting and share buybacks to drive bottom-line growth. 2011 was a year characterized by the loss of patent protection for blockbuster drugs, merger & acquisitions (M&As), licensing deals, restructuring, share buybacks and monetization of non-core assets.
The M&A activity witnessed in the pharma sector in the last couple of years will continue in 2012. With most of the big pharma companies already facing or likely to face patent challenges for their blockbuster products, the companies have been looking toward M&A and in-licensing activities to make up for the loss of revenues that will arise with key products losing patent exclusivity.
Major deals include Johnson & Johnson's upcoming acquisition of Synthes, which should help strengthen its medical device portfolio.
Pharma giant Pfizer acquired King Pharmaceuticals to strengthen its presence in the pain management market. Pfizer has been adding to its portfolio with other acquisitions as well, including that of Icagen and Excaliard. Merck expanded its ophthalmology product portfolio through its acquisition of Inspire Pharmaceuticals, Inc.
Another pharma major, Bristol-Myers Squibb, is not far behind in acquisitions activity. The company has been looking to expand via acquisitions and partnerships to counter the loss of revenues that will arise following the genericization of its key drugs, including the blockbuster blood thinner Plavix.
Bristol-Myers was in the news recently, with rumors doing the rounds about the company's intention to acquire Amylin Pharmaceuticals. Meanwhile, Roche has been pursuing Illumina, albeit without much success so far. Glaxo also did not meet with success in its attempt to acquire Human Genome Sciences, Inc.
Oncology also remains a much sought-after therapeutic area, with companies like Sanofi and Celgene strengthening their presence in this market through acquisitions. Meanwhile, generic players are not far behind in the acquisition game. While Teva acquired Cephalon, Inc., Watson Pharmaceuticals acquired generic company Specifar Pharmaceuticals to expand and strengthen its presence in Europe. Watson recently announced its intention to acquire generic player, Actavis.
Elsewhere, companies have been looking toward biotech firms to build their product portfolios. A prime example is French pharma giant Sanofi's acquisition of biotech company Genzyme Corp. The Genzyme acquisition has boosted Sanofi's revenues as well as its pipeline. Meanwhile, AstraZeneca will be acquiring biotech company Ardea Biosciences. Another acquisition deal announced in April 2012 is Spectrum Pharma's upcoming acquisition of biopharma company Allos Therapeutics.
Going forward, we expect the M&A trend to continue. We also expect a significant pickup in in-licensing activities and collaborations for the development of pipeline candidates. Instead of developing a product from scratch, which involves a lot of funds and time, pharma companies are shopping for mid-to-late stage pipeline candidates that look promising.
Small biotech companies are also game for in-licensing activities and collaborations. Most of these companies find it challenging to raise cash, thereby making it difficult for them to survive and continue with the development of promising pipeline candidates. Therefore, it makes sense for them to seek deals with pharma companies that are sitting on huge piles of cash.
We would recommend investors to put their money in biotech stocks that have attractive pipeline candidates or technology that can be used for the development of novel therapeutics. Therapeutic areas which could see a lot of in-licensing activity include oncology, central nervous system disorders, diabetes and immunology/inflammation. The hepatitis C virus (HCV) market is also attracting a lot of attention.
Another trend that we are seeing in recent months is the divestment of non-core business segments. Pfizer sold its Capsugel unit in August 2011 and signed a deal for the divestment of its Nutrition business in April 2012. The company is currently exploring strategic alternatives for its Animal Health business.
Meanwhile, GlaxoSmithKline is divesting non-core brands from its Consumer Healthcare segment. In August 2011, AstraZeneca sold its Astra Tech business to DENTSPLY. The monetization of non-core assets will allow the pharma/biotech companies to focus on their areas of expertise. 2012 will see Abbott Labs splitting into two separate publicly traded companies. While one company will deal in diversified medical products, the other (AbbVie) will focus on research-based pharmaceuticals.
Another recent trend seen in the pharmaceutical sector is a focus on emerging markets. Companies like Mylan, Pfizer, Merck, Eli Lilly, Glaxo and Sanofi are all looking to expand their presence in India, China, Brazil and other emerging markets. Until recently, most of the commercialization efforts were focused on the US market—the largest pharmaceutical market—along with Europe and Japan.
Emerging markets are slowly and steadily gaining more importance and several companies are now shifting their focus to these areas. According to the IMS Institute, spending on medicines in "pharmerging" markets will double to $285-$315 billion in the next five years from $151 billion in 2010. This will catapult pharmerging markets to the second position where spending on medicines is concerned.
However, while higher demand for medicines, government initiatives for healthcare, new patient population, and increasing use of generics should help drive demand, we point out that emerging markets are also not immune from genericization.
Branded Drugs Market Share to Decline
According to the IMS Institute, market share for branded drugs will continue declining in the next five years. Branded drugs' market share, which declined from 70% in 2005 to 64% in 2010, is expected to decline to 53% by 2015. The decline will be driven by patent expiries, with generics accounting for a significant part of pharma spending. Spending on branded medicines in 2015 is expected to remain at the same level as in 2010.
While the US will witness a major increase in generic spending, generic spending in Japan will continue to be low, even though significant efforts are being made to increase the use of generics there. Overall spending in generics is expected to increase from 20% in 2005 to 39% in 2015.
Global spending for medicines is expected to reach almost $1.1 trillion by 2015, according to the IMS Institute. However, the five-year compound annual growth rate of 3-6% represents a significant slowdown from the 6.2% annual growth seen in the last five years.
Moreover, the US' share of global spending is expected to decline from 41% in 2005 to 31% in 2015. The share of spending from the top 5 European countries is also expected to decline (from 20% in 2005 to 13% in 2015) with spending by pharmerging markets expected to increase from 12% in 2005 to 28% by 2015. (Source of growth forecasts: IMS.)
We continue to have a Neutral outlook on large-cap pharma stocks. While the companies will continue to face challenges like pricing pressure and genericization, growth in emerging markets and product approvals could help reduce the impact.
A few years down the line, the pharma industry should show some signs of recovery. The industry should be out of the major patent cliff period, and new products should be contributing significantly to results. Increased pipeline visibility and appropriate utilization of cash should increase confidence in the sector.
About 35 new molecular entities were approved by the FDA up to mid-November 2011. Important product approvals include Johnson & Johnson's prostate cancer therapy Zytiga, Merck's hepatitis C virus (HCV) treatment Victrelis, Bristol-Myers' melanoma treatment Yervoy, AstraZeneca's Brilinta, Vertex Pharma's HCV treatment Incivek, Pfizer's lung cancer treatment Xalkori, and Glaxo/Human Genome's lupus drug Benlysta, among others. Potential blockbusters include Benlysta, Yervoy, Zytiga, Incivek and Xarelto.
In the biotech space, we are positive on Biogen Idec. We are optimistic on BG-12, the company's oral multiple sclerosis candidate.
In spite of a Neutral recommendation on Bristol-Myers, we are positive on the stock. Although Bristol-Myers is facing a major patent cliff with Plavix losing exclusivity later this year, the company's pipeline represents a lot of potential. 2011 has been a fruitful year for Bristol-Myers, with many key drugs getting approved.
We are positive on specialty biopharma company, Jazz Pharmaceuticals, which carries a Zacks #2 Rank. The company's fourth quarter results exceeded expectations, and we believe Xyrem has impressive growth potential.
We recommend avoiding names that offer little growth or opportunity for a take-out. These include companies which are developing drugs that are likely to face regulatory hurdles. The FDA has been exercising more caution in granting approval to new products and several candidates are facing delays in receiving final approval.
We would also avoid companies like Eli Lilly, which are facing patent expirations on key products and whose new products may not be enough to make up for the loss of revenues that will take place once generics enter the market. 2012 will be a challenging year for Eli Lilly, with the company losing patent exclusivity on Zyprexa in October 2011. Zyprexa sales should erode rapidly with the entry of generics. Moreover, we expect continued erosion of Gemzar sales due to genericization. Another company that is highly exposed to a patent cliff is Forest Labs.
Another company facing generic competition is ViroPharma. Estimates are down significantly as the company's lead product, Vancocin, began facing generic competition recently. The entry of generic versions will lead to a rapid decline in branded Vancocin sales. We expect ViroPharma to remain under pressure as generic players launch their versions of the drug.
We currently have a Zacks #4 Rank on Novartis. We expect 2012 to be a challenging year for the company given manufacturing issues, pricing headwinds, generic competition and unfavorable currency movement. The company's first quarter 2012 results were below expectations.
United Therapeutics also carries a Zacks #4 Rank. We are not too bullish on the company's chances of gaining US approval for oral treprostinil, given the mixed data on the candidate. Moreover, the company's weak late-stage pipeline concerns us.