Pharma's Fortunes Fine--For Now

Apr 17, 2007

Pharmaceutical companies are enjoying relative financial stability these days, finding their legs after a period of rough sailing. Yet a new report cautions captains of the industry not to stand too tall as seriously dangerous seas are churning up ahead. While pharma's product portfolio gained strength last year, the peak sales potential of the late-stage pipeline leaves much to be desired, according to Moody's Industry Outlook.

But first the good news: The number of blockbuster products in the market has increased, from 36 drugs in 2003 to 50 last year. These top-sellers contributed 36.4 percent of pharma's total 2006 revenues. In addition, despite both pressure from payers to hold down drug costs and increased competition in categories like cholesterol and hypertension, pharma is poised to raise prices another 2 to 4 percent, according to the report.

Moreover, only 18.5 percent of sales are at risk due to patent expirations before 2009. By contrast, generics eroded 25.6 percent of revenue between 2004 and this year. In addition, Medicare Part D should add another 5 percent in sales growth--particularly in categories that seniors use heavily.

On the legal front, companies like Bristol-Myers Squibb and Schering-Plough are wrapping up lingering litigation, shielding investors from more uncertainty. Other companies like Merck, however, continue to face product liability claims, the report noted. Johnson & Johnson last month became the most recent target in a slew of investigations into industry pricing and marketing practices.

Yet the reprieve--and here's the bad news--is only a temporary uptick. Between 2010 and 2012, some of the biggest players in the industry will lose as much as a third of their revenue when major patents expire. Pfizer will be especially hard hit with the loss of 35.1 percent of its revenue due to generic erosion--Lipitor (atorvastatin) and Viagra (sildenafil) are among the products affected. Eli Lilly is also facing the loss of 43.4 percent of revenues when three major products--including schizophrenia drug Zyprexa (olanzapine)--go off-patent.

"We believe that these exposures could lead to heightened merger and acquisition activity in the next few years," the report noted, adding that in-licensing deals are becoming increasingly scarce and competitive.

Adding insult to injury, late-stage pipelines are expected to replace only about 17.3 percent of lost revenue, based on estimated peak sales if all drugs are approved. That number takes into account the failure of Pfizer's cholesterol-booster torcetrapib, a much-hyped blockbuster-to-be that would have contributed more than 3 percent of the industry's revenue.

While singling out Wyeth's antidepressant Pristiq (desvenlafaxine), Merck's HIV compound MK-518, and Eli Lilly's anticoagulant prasugrel as very bright pipeline promises, Moody's concludes on a distinctly, well, moody note: "As the industry tilts its orientation toward specialty therapeutic areas, we are skeptical that the pipeline holds the same promise for blockbuster sales."