The years 2011-15
are very important for the big pharma(-ceutical) companies due to what is
called as 'Patent Cliff'. Several of them are losing the patent protection of
some of their high selling drugs. With a dry pipeline of new drugs which could
be patented, the analysts have already started to rerate the pharma companies,
especially those who employ huge R&D capital like Merck, Pfizer,
Astrazeneca, GSK etc. The concerned companies have also started to cut their
R&D quota and related employees. This trend of cutting on R&D, could
lead to a grim situation in the coming years as the discovery of new and
effective drugs would be affected badly by this attitude. But, the pharma
companies have their woes and cribs that the present IPR regime has been
causing them Huge Losses!
By present IPR or
Intellectual Property Rights regime, it means that any patent remains active
for a certain duration during which only the patent holder can manufacture and
sale the drug. Once the patent expires, several other players can also sell a
version of the drug called Generics. Thus, with the end of exclusive rights to
the patent holding company, the competition increases and the price of the
drug falls drastically.
Lets see if this
really causes loss to the companies or not. To understand this lets first have
a little understanding about the patents.
(Just one thought : If it is really causing losses, why are they not bankrupt by now? ;) )
A patent can be of
various types with the 'Utility' patents being the most common. They are
provided for 'new, non-obvious & useful Process, Machine, Article of
manufacture, Composition of matter' etc and is granted for 20 years from the
date of application of the patent. Patents are also provided for Design
(Design Patents) and are provided for 14 years from the date of patent
application.
The patent
durations used to be 17 years from the issue
date before June 8, 1995. But to accommodate the recommendations set forth by Trade Related
Aspect of Intellectual Property Rights (TRIPS), it has been changed to 20
years from the earliest filing date and
the magical date has been set as June 8, 1995.
Lipitor's, world's
most selling drug, actual patent expired in Mar 2010 but Pfizer obtained an
extension on the patent for another 20 months till Nov 2011. After this,
Ranbaxy along with Teva Pharmaceuticals were given the rights to produce the
generic version, Atorvastatin calcium, of the world's best selling drug.
Walgreen and other four large drug and grocery chains have sued Pfizer for
obtaining a fraudulent patent after the expiry of the original patent. They
have accused Pfizer of making a deal with Ranbaxy (and Teva) to go slow on the
production of the generic so that Lipitor could still make good sales. Pfizer
defends saying that they have additional patents on Lipitor's name which run
till 2016. Lipitor's sales hit as high as $12.9 Bn in 2004 making it the
highest selling drug of all times.
Now Lipitor is one
off example where the original innovator has made substantial returns on its
investment. But is it true for all companies? Lets have a look at the data
compiled by InnoThink Center for Research in Biomedical Innovation.
They have
taken a simple approach of adding the total R&D expenses of the big pharma
companies and divided it by the number of drugs approved during the years
1997-2011. This gives a mind-boggling figure of upto $11.79 Bn per drug that
has got the patent protection in all these years. The lowest figure is of $3.6
Bn. Certainly several drugs do not generate this kind of revenues to make good
of the R&D expenses as per the presented data.
However, arguments by
Donald Light and Rebecca Warburton negates this style of estimation. They say
that the 'New Active Ingredients' patented during all these years might be low
(eg. 5 for AstraZeneca) but the patented variations of the existing drugs are
the major source of profits for the drug companies and such incremental
patented drugs account for 60% of the total US drug budget. There are other
arguments too, which if accounted for, would bring down the 'R&D spending
per drug' to as low as one-third of the presented data. In all likelihood, it
should be between $1 Bn to $4 Bn.
Astrazeneca has
been posting an average sales revenue of $30.94 Bn in the past 5 years with a
CAGR of 7.24% while the average PAT stood at $7.25 Bn with a profit margin of
approximately 23%.
Since the patent of
20 years is counted from the date the patent has been first applied, the
effective duration of patents reduces to 10-12 years. It takes time to push
the first lot of the drug to the market after the patent is applied for.
Now, to see that if
this kind of profit is good enough to make up for the amount invested in
R&D or not, we assume that the company sells only 5 patented drugs for the
next 10 years, all acquired in the year 2012. This assumption spares us from
accounting the increased innovation cost per drug due to increasing
complexities in drug R&D. Thus
the investment in R&D pegs at $20 Bn taking the higher end of the our
estimate of $1 Bn to $4 Bn per drug.
Sales
|
2012-2022
|
$432.4 Bn
|
PAT
|
2012-2022
|
$99.45 Bn
|
- An investment of $20 Bn gives about 400% returns on investment in 10 years through one of the most conservative calculations.
So where is the loss to the innovator company? They easily recover their investment on R&D and make huge profits on the patents in the span of 10 years. Here we took the example of a company with highest cost of R&D per drug. The profits increase many folds for someone like Novartis or Merck. The so-called losses due to the limited patents are the revenues foregone due to the introduction of generics based on the patented or 'branded' drugs. The generics are generally priced in the range of 10-30% of the cost of the actual drug. EvaluatePharma estimates 'Sales at Risk from Patent Expirations in 2011-16' at $267bn. For eg. Lipitor's sales sky-rocketed to $9.6 Bn in 2011 but fell by 42% YOY in Q1 2012 after the exclusivity on the drug expired.
The end of
patent-protection of a blockbuster drug leads to a beginning of big gains for
the generics companies. The reason is clear. They get a solid market of the
patented drug for minimal investment. Thus, the major portfolio of the drug
companies consists of Generics.
Blockbuster drugs
like Lipitor, Zyprexa, Levaquin, Concerta & Protonix have seen their
patents expiring in 2011 while drugs like Plavix (anti-platelet), Seroquel
(antipsychotic), Singulair (asthma), Actos (Diabetes - type 2) and Enbrel
(arthritis) ar expiring in 2012.
In fact, Lupin, Dr.
Reddy's and Sun Pharma have all got the USFDA approval for selling the generic version of Seroquel in Sept 12.
Similarly, Ranbaxy launched the generic version of Actos in US recently.
Natco Pharma is
expected to launch the generic version of anti-ulcer drug lansoprazole in the
US next quarter as the 5th player in the $800 mn-a-year market for the drug.
But with the number
of patented drugs losing patent going down in the coming years, the new
sources of revenues for the generic-based pharma companies are capped in the
long term. Thus, an investment in companies which spend heavily on R&D and
secure patents for their innovation would fetch more in the coming years than
the generics selling companies. However, the timing would be of utmost
importance. For eg. Pfizer is set to lose some of its patented drugs which
account for about 28% of its revenues by 2013. And in absence of any major
discovery, the revenues are expected to fall drastically. An investment
opportunity would arise only after the market price of the stock reflects all
such negatives.
So what are the
companies which should be on radar for a good investment opportunity? Will
talk about it next time. :)
References:
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