Roiling financial sector: Can this happen to the Pharma industry?

Roiling financial sector: Can this happen to the Pharma industry?

The week of September 15 will be remembered for some time in the annals of the U.S., and particularly Wall Street’s financial markets. The only questions at this point are: is U.S. government intervention to stop the market freefall the right approach? And was it enough?
The answer to these questions may not really emerge for some time, and even more U.S. government intervention may be necessary, as one of the main roots of the freefall, the downslide in the U.S. housing market, continues somewhat unabated with the number of foreclosures increasingly daily.
Surprisingly, for a brief period, the spotlight is off the pharma /biotech industry and healthcare, although the latest data shows that healthcare insurance costs to employees will increase about nine percent this year. Perhaps, given all the turmoil in Wall St., even the problems of the battered U.S. car and airline industries, pale in comparison.
Unlike the investment banking industry (Lehman Bros., Merrill Lynch, etc.), the U.S. pharma industry has some advance notice of its potential demise, and has time to prepare. I am referring, of course, to the potentially devastating effect of patent expirations which will wipe out huge amounts of sales and income quickly if a company has not prepared.
According to a Forbes article from last year (5/2/07), there are about U.S. $160 billion of drugs expected to lose patent life by the year 2016. This event is not news to the industry; in fact, Pfizer and Merck have already lost substantial sales in the last few years with the patent expirations in 2005 of Pfizer’s antidepressant Zoloft which had annual sales of $3.3 billion in 2005, and Merck’s cholesterol drug Zocor with annual sales of $4.4 billion in the same year.
In 2008, several top drugs lose their patent exclusivity.
Leading Drugs Losing Patent Exclusivity in 2008

Drug/Generic Name Company Indication 2008
Patent Expiration Date
Fosamax (Alendronate) Merck Osteoporosis $3 billion 2/6/2008
Advair (fluticasone/ salmeterol GlaxoSmithKline Asthma, chronic obstructive pulmonary disease $6 billion 2/12/2008
Serevent (salmeterol) GlaxoSmithKline Asthma, chronic obstructive pulmonary disease $500+ million 2/12/2008
Effexor XR (venlafaxine) Wyeth Depression $3.7 billion 6/13/2008
Lamictal (lamotrigine) GlaxoSmithKline Epilepsy, Bipolar disorder $2 billion 7/22/2008
Topamax (topiramate) Ortho-McNeil (Johnson & Johnson) Epilepsy, migraine prophylaxis $2.5 billion 9/26/2008
Casodex (bicalutamide) AstraZeneca Prostate cancer $1.2 billion 10/1/2008
Trusopt (dorzalamide) Merck Glaucoma $700 million 10/28/2008
Zerit (stavudine) Bristol-Myers Squibb HIV N/A 12/24/2008
Sonata (zaleplon) King Pharmaceuticals Insomnia $85 million 6/6/2008
TOTAL $19.7 + billion

Source: Business Week, February 6, 2008: “Big Pharma’s Patent Headache”
GlaxoSmithKline, alone, stands to lose 80-90 percent of its current franchise of at least $8.5 billion in sales of 3 products. But this pales to what Pfizer will lose by 2010 with the loss of patent exclusivity for Lipitor with over $13 billion in annual sales. Pfizer also lost patent exclusivity on its top cardiovascular drug Norvasc in 2007 worth several billion dollars. About $12 billion worth of annual drug sales were lost to patent exclusivity loss in 2006.
The above list doesn’t include the list of major biotech drugs which have lost patent expiration some time ago. These drugs (and companies) continue to receive market exclusivity as the U.S. Food and Drug Administration has not yet decided on or approved a “generics” strategy for biologics-based drugs. There will be considerable political pressure to create a biologics generics approval process shortly for two reasons: 1) it already exists in Europe; 2) the cost of biotech drugs to patients is substantially higher than that of traditional drugs.
Selected Big Pharma Stock Performance: 2003- 2008

Big Pharma Company Current Stock Price/Share Stock Price
Percent Change
Pfizer (PFE) $18.55 $30.38 <39 %>
Merck (MRK) $31.84 $50.62 <37 %>
Schering-Plough (SGP) $18.58 $15.24 +22 %
Wyeth $38.42 $46.10 <17 %>
Eli Lilly $46.69 $59.40 <21 %>
Bristol-Myers Squibb $21.00 $25.66 <18 %>
Johnson & Johnson $69.99 $49.52 +41 %
Glaxo SmithKline $44.52 $42.40 +5 %
Novartis $53.12 $38.84 +37 %
Sanofi-Aventis $34.45 $30.22 +14 %
AstraZeneca $45.20 $43.40 +4 %
Abbott Labs $58.71 $42.55 +38 %
Baxter International $66.02 $29.06 +127 %

Source: Yahoo Financial Page: 9/21/08
The sea of red indicates companies most impacted by patent expirations and includes companies such as Pfizer, Merck, Lilly, and Bristol-Myers. Their European counterparts, GlaxoSmithKline, AstraZeneca, and Sanofi-Aventis fared a bit better but hardly stellar.
Interestingly, the companies without reliance on just drugs (i.e. also have medical devices or diagnostics or both), such as J&J, and Midwest pharma stars Abbott Labs and Baxter, fared the best. Novartis, the Swiss giant, also fared well, but it has a significant part of its business in generics as the second largest generic company in the world.
As a number of these companies face further patent expirations over the next five years, eroding a significant portion of their existing businesses, there will an urgent pressure to acquire other companies, products and portfolios, much as we have seen in the past week the traditional banks acquiring investment banks. The “traditional banks versus investment banks” scenario in the drug business means Big Pharma acquiring Big Biotech.
So what other impact has last week’s financial shock had for the drug business? Well, the disruption of major investment banking firms certainly will put a damper for awhile on an already weak IPO (Initial Public Offering) market which will affect new biotech company offerings.
Of greater concern to me, however, is the pricing of new drugs, particularly biotech drugs. The cost of therapy is getting so high, particularly for annual cost of therapy, that if the pharma/biotech industry doesn’t self-regulate itself, this will become a lightning rod for political action against the industry. Many of these chronic medicines cost tens of thousands of dollars. Already one major pharma company has offered in Europe a strategy of rebating the cost of therapy if the drug doesn’t work in the disease (a kind of “money-back guarantee.”)
Generic medicine in the U.S. represents some 60 percent of the U.S. drug prescription market and has helped keep the overall cost of drug increase down, despite the large increase in healthcare insurance costs (mostly due to hospital and physician costs). Who hasn’t seen both Wal-Mart and Walgreen’s offering of a 30 day supply of an extensive list of medicines for $4/month?
The companies that stand to benefit most during the next 9 years of extensive patent expirations are clearly:1) the generic pharma companies (both American, Israeli, and Indian), and 2) biotech companies with new innovative medicines. If Big Pharma hasn’t gotten this message yet, there will be a vast transformation of the pharma industry as we know it today much like we have seen in the financial sector this past week. Recent rumors floating around the market are that Pfizer will acquire venerable Bayer, presaging other Big Pharma M&A activity.
See you soon!

Michael S. Rosen is president of Rosen Bioscience Management, a company that provides CEO services, including financing and business and corporate development to start-up and early-stage life science companies such as Renovar and Immune Cell Therapy. Rosen also is a founder and board member of the Illinois Biotechnology Industry Organization. He can be reached at
This article previously appeared in, and was reprinted with its permission. The article is not meant to be a stock recommendation.
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.