Big pharma kisses its blockbuster years goodbye

Industry giants are facing major new challenges as patents run out on many of the drugs that have kept them in clover. Deirdre Hipwell reports

Lipitor is one of the biggest-selling prescription drugs in the world.

It is produced by the giant pharmaceutical company Pfizer and has revolutionised the treatment of patients with high cholesterol.

In 2009 Lipitor topped the best-selling prescription drug charts, generating $5.7bn in sales in the US and an additional $5.7bn outside the US. These revenues ultimately come from the drug's active ingredient, atorvastatin.

Lipitor is what is known in the industry as a classic "blockbuster drug".

The problem for Pfizer is that next year the patent to exclusively produce and sell Lipitor expires. This "coming off-patent" process will allow other companies to produce and sell generic copies of Lipitor, and it will take a hatchet to Pfizer's revenue stream from the drug.

Pfizer's pharmaceutical peers Sanofi-aventis and Bristol-Myers Squibb are facing a similar "generic erosion" of their widely used anti-clotting drug Plavix which comes off-patent next year.

But the real issue for the sector is that Lipitor and Plavix mark the start of a coming avalanche of expiring patents of blockbuster drugs over the next few years, known colloquially as the "patent cliff".

Some estimate that, over the next five years, drugs currently generating $142bn in sales annually will lose patent protection. The investment management firm AXA Framlington, meanwhile, has said that the leading pharmaceutical companies will lose between 14 per cent and 41 per cent of their existing revenues because of patent expiries.

And, despite record levels of investment in research and development by the big pharmaceutical companies, there appear to be few similar blockbuster drugs in the pipeline to plug the gaping revenue hole.

At a time when the world's population is getting bigger, older, and more likely to take prescription drugs, it seems counter-intuitive that the $518bn pharmaceutical sector could be entering an era of declining revenues and profits. However, it is a real possibility; and just last week the subject was a major topic for discussion at an annual life-sciences conference in London hosted by the venture-capital investment firm Index Ventures.

The sector is preoccupied with its own evolution; and, as this analysis shows, the challenges, and potential risks and rewards, are immense.

Is the 'patent cliff' hype?

The "patent cliff" is the chief challenge facing the industry, although some companies will be affected more than others. Patents can sometimes be extended by making slight changes to the chemical composition, for example – a process called "evergreening".

However, some analysts argue that the search for new blockbuster drugs is not good value for money.

PricewaterhouseCoopers (PwC), in its report Pharma 2020: The Vision, says that industry leaders' revenues "have come at a very high price". It notes that between 1985 and 2000 the industry's market value increased 85-fold, outpacing the stock market as a whole. But in the six years to 30 March 2007 the FTSE global pharmaceuticals index rose just 1.3 per cent, while the Dow Jones World Index rose by 34.9 per cent. Additionally, it says that only five of the top companies worldwide generate more than 10 per cent of their revenues from products launched since 2001. "Even allowing for inflation, the industry is investing twice as much in R&D as it was a decade ago to produce two-fifths of the new medicines it then produced," it says.

Where will all the new drugs come from?

"The number of new medicines is at an all-time low and is as low as it has been since the Second World War," says Professor Clive Page, chairman of Verona Pharma.

The small biotech company is working on three drugs that alleviate symptoms of hayfever and chronic respiratory diseases, and is emblematic of the new breed of companies providing the innovation and stream of drugs that will feed the big pharma companies' supply chain.

Smaller start-up companies have lower costs, smaller teams, more efficient working processes, high scientific expertise and the ability to recognise and produce new molecular entities that could become tomorrow's breakthrough drugs. But it is the big pharma companies that have the financial might to buy or license new drugs and take them through the often expensive second and third phases of testing, with the aim of producing a viable commercial drug at the end.

Kevin Johnson, chief executive of PanGenetics, which last November sold an experimental drug for the treatment of chronic pain for $170m to Abbott Laboratories, says: "In my view, it is easier to develop a drug in a small company, at least in the early stages. From there the balance of power shifts; when you get to the later stages of testing the big companies are the right ones to do that. It is about playing to relative strengths."

Can the small companies provide these drugs?

Securing finance is difficult for any start-up business and particularly tricky in the field of science. Experimental drugs, by their nature, are risky and can fail; scientific discovery can be lengthy, expensive and difficult to explain to a financial backer looking for returns on equity and financial performance. The sector has also had a bad reputation for promising more than it can deliver.

This is why Francesco De Rubertis, a partner at the venture capitalist Index Ventures, says the developing division of labour between the big pharma companies and the biotech sector, and emerging collaborations with big academic institutions, should be encouraged. "A new equilibrium has to be reached. We are not there yet but in the long term I am optimistic," he says.

Said Darwazah, chief executive of the FTSE 250 pharmaceutical company Hikma, says the changing nature of the business is not surprising: "Why should a scientist work for £100,000 a year in a big pharmaceutical company when he can set up on his own, do exactly the same work, create a new product and sell it for £100m?"

Smaller companies also tend to be more businesslike about killing projects that don't work, says Professor Page. "In small companies, people don't have pet projects that they keep throwing money at."

Is finding new blockbuster drugs the only option for big pharma?

Discovering new drugs is not the only answer for the sector as there are new frontiers opening in emerging markets such as China, Turkey, the Middle East and North Africa.

Tim Edwards, chief executive of Cellzome, which is producing chemical proteomics technology that identifies new drugs to treat inflammatory diseases, comments: "The emerging markets could produce revenue which could be equal to the revenue streams lost from drugs coming off patent."

Kevin Johnson of PanGenetics adds: "One half of the merger and acquisition dollars that have gone into acquiring companies has been in the emerging markets sector."

Many companies that previously focused on branded products are also looking to tap into the growing generic drugs market by setting up their own generic-drug producing and licensing arms.

Regulatory environment

Regulatory bodies and the large consumers of drugs, such as the NHS and health maintenance organisations in the US, are playing an increasing role in influencing the actions of pharmaceutical companies. As budgets are cut and healthcare reform gets under way many are buying or recommending only drugs that have a proven record and are cost-effective.

It is a contentious issue which was played out again last week as the storm continued over Roche's new bowel cancer drug, Avastin. The UK's healthcare cost agency – the National Institute for Health and Clinical Excellence (Nice) – has rejected the drug again, saying it is too expensive despite the manufacturers having offered new terms.

Andrew Dillon, chief executive of Nice, said: "We have to be confident that the benefits justify the considerable cost of this drug."

Steve Arlington, a partner at PwC, says the "payer agenda" is "much more powerful now than ever before". He says the industry has to participate in the debate on healthcare funding and demonstrate the value of its products.

So is it all doom and gloom?

At $518bn, the size of the pharmaceutical industry is still significant; it could grow to between $800bn and $1.3trn by 2020.

Global census figures suggest that future consumer demand could be strong. The United Nations projects that the world's population will grow from 6.5 billion in 2005 to 7.6 billion by 2020. Of that, around 719.4 million, or 9.4 per cent, will be 65 or older – up from 477.4 million two years ago.

The "grey factor" boosts the need for medicines dramatically, with the UK Department of Health stating that four in five people aged over 75 take at least one prescription product, while more than a third take four drugs or more.

PwC says that diseases once more usually associated with developed countries – such as hypertension (high blood pressure) and diabetes – are also increasing in developing markets. It says that in 2004 there were 639 million people in the developing world with hypertension, a figure that is forecast to reach one billion by 2025.