Here's the Aug 12 WSJ article on the big boys starting to look at Biotechs for
products:
Top Firms Must Prepare
For Onslaught of Generics
By ELYSE TANOUYE and ROBERT LANGRETH
Staff Reporters of THE WALL STREET JOURNAL
Some of the nation's best-known prescription drugs are on
the brink of a sales plunge -- and drug makers are
scrambling to survive it.
About 40 drugs with $16 billion in sales last year --
one-quarter of the industry's U.S. revenues and an even
higher percentage of total profits for some companies --
are set to lose patent protection by the end of 2002. That
will throw the gates open to savage competition from
cheaper generic versions.
The reason: Drugs created during a
pharmaceutical-research boom in the 1970s and 1980s
are approaching the end of their patents.
Never before have so many blockbuster drugs come off
patent in such a short period of time. It will mean cheaper
drug prices and a potential bonanza for generic-drug
makers. But it also will roil the industry over the next five
years, reshaping the landscape and altering the way drug
companies conduct research and do business. How the big
drug makers that are most at risk deal with this looming
challenge will determine which ones survive in a new round
of takeovers.
Patentless Prozac
"It's an unprecedented period. It isn't just a great
opportunity for us, it will be a great opportunity for
consumers as prices drop," says Bruce Downey, chief
executive of Barr Laboratories Inc., Pomona, N.Y., which
plans to churn out cheap copies of the antidepressant
Prozac, which sells for $2 a pill, and other big sellers.
At the epicenter of the patent-expiration quake is giant
Merck & Co., which will lose a lock on four drugs that
provided more than half of its $6.18 billion U.S. drug sales
last year, including the heart drugs Vasotec and Mevacor.
Schering-Plough Corp. stands to lose exclusivity on the
allergy drug Claritin and others that contributed 57% of its
$2.61 billion prescription U.S. drug sales last year. And Eli
Lilly & Co. faces patent expirations on drugs that generate
more than half of its $4.02 billion U.S. drug sales, including
Prozac.
The upheaval has already begun. Patent protection expired
last month for Glaxo's anti-ulcer drug, Zantac, one of the
world's largest-selling prescription drugs with annual sales
of $1.6 billion in the U.S. alone. (The drug is also available
over the counter.) Last week, the first generic rival entered
the market. Glaxo's herpes drug, Zovirax, lost its patent
powers earlier this year and now competes with generics
that cost consumers about 80% less.
To avert calamity, major pharmaceuticals companies are
racing to find new drugs to replace the billions of dollars in
sales they stand to lose. They are embracing risky new
technologies more quickly and scouting the world for
alliances and drug-licensing deals. Some are betting on
legal muscle, lobbying for patent extensions and pursuing
narrower, add-on patents for a drug's use or method of
manufacture.
And in a radical change, some companies are shedding
their Hollywood-style focus on finding a few big hits -- a
longtime practice that left them vulnerable when patents
expired -- in favor of developing a broader range of drugs.
Ultimately, that change could yield drugs aimed at smaller
markets, and for rarer illnesses, which might have been
shelved in the past.
Still, some observers doubt all of this effort will be enough.
It can take 15 years to turn a newly created molecule into
an approved product, with many more failures than
successes along the way (only about one in 250 chemical
compounds that go into laboratory and animal testing
ultimately make it to the pharmacy shelves). Even though
companies aim to cut that gestation time in half, it is
doubtful they have enough new drugs in the works now to
offset the revenue lost to generics.
Jurgen Drews, research head of Swiss giant Roche
Holding Ltd., was one of the first to sound the alarm,
warning two years ago that "The outlook for the industry is
bleak." Today it hasn't much improved, he says, adding
that the industry still isn't generating enough new drugs to
outrun the patent expirations. "There's a hole in the bucket,
and it's starting to get as big as the pipeline that is filling it,"
adds Robert Merold, general manager for health care at
IMS America, a pharmaceuticals market-research firm in
Plymouth Meeting, Pa.
Patent protection is the financial fulcrum of the drug
industry, emboldening makers to invest billions of dollars in
development; a successful entry costs an average of $350
million to develop when all the failures are factored in. A
patent lasts for 20 years, but because companies apply
years before a drug hits the market, the insulation from
generics typically lasts about 12 years. When a drug patent
expires in other countries, the impact is less severe, in part
because the generic business isn't as well developed
overseas.
But in the U.S., the largest single pharmaceuticals market
by far with more than 60% of world-wide sales, a patent's
phaseout can be devastating. Shortly after Bristol-Myers
Squibb Co.'s heart drug, Capoten, went off patent last
year, the 57-cent-a-pill brand was competing with generics
selling for three cents a pop. By the fourth quarter,
Capoten's U.S. sales had plummeted 83% to $25 million
from $146 million the year before.
The last time a big block of drugs came off patent, a
smaller batch between 1992 and 1995, many companies
were forced to merge or sell out to larger partners. Syntex
Corp. was crippled by the meltdown of arthritis drug
Naprosyn after it went off patent in 1993, and it sold itself
to Roche Holding the next year. Upjohn Co. lost patent
protection on its major drugs for anxiety, diabetes, and
insomnia in 1993 and 1994; less than a year later, it
merged with Pharmacia AB of Sweden to form Pharmacia
& Upjohn Inc.
Scientific Revolution
Consolidation this time around won't be any different,
some industry observers predict. Particularly vulnerable
are companies that depend heavily on one or two big
drugs, such as Schering-Plough and Astra AB, they say.
The flurry of industry patent expirations is the denouement
of a scientific revolution of the 1970s and 1980s that
produced myriad drugs that changed medicine. Merck,
Whitehouse Station, N.J., was one of the pioneers in this
push. Under the leadership of P. Roy Vagelos, the
research chief who later became chairman, Merck helped
transform drug research from random chemical screening
to a more methodical approach that targeted specific cell
activity.
The new science spawned a whole generation of
breakthrough medicines to treat heart disease, depression,
arthritis and other illnesses. New drug applications to the
Food and Drug Administration soared in the early 1980s
to a peak of about 270 in 1983 from 120 five years
earlier. But after a few years, the easy discoveries had
been found. As additional drugs became harder to come
by, new applications to the FDA sank to a low of 86 in
1993.
Merck reaped great rewards from its pioneering science in
this period: Vasotec, Mevacor, the anti-ulcer treatment
Pepcid and heart drug Prinivil catapulted Merck from a
middling drug company to world status in the mid-1980s.
But now those very drugs present the greatest concern as
their patent protection ends.
Merck's Challenge
Five drugs that contributed an estimated $1.9 billion to
Merck's pretax earnings last year -- more than one-third of
the company's world-wide profits -- will lose market
exclusivity in 2000 and 2001. That includes four Merck
drugs with sales of $3.31 billion in the U.S. (17% of
Merck's global revenues), and the anti-ulcer drug Prilosec,
another high flyer with U.S. sales last year of $1.71 billion
through Merck's joint venture with the Swedish firm Astra.
Merck executives say they are prepared. "We don't see
ourselves falling off the cliff in the year 2000," says Edward
Scolnick, Merck's research chief and architect of the
company's patent-expiration strategy. But some observers
worry that Merck isn't immune to the patent threat. Arvind
Desai, an analyst at Mehta & Isaly, a New York
investment firm, forecasts 18% growth for Merck
human-drug sales next year, but predicts the rate could
drop by two-thirds in 2001.
Of course, Merck has had plenty of time to prepare. But it
hit a research dry spell in the late 1980s and early 1990s.
The budget for basic research was flat for several years in
the early 1990s, and the company accurately warned
investors that its overall growth would slow. The
prostate-shrinking Proscar, the drug that the company had
hoped would be its next blockbuster, fell far short of
expectations. Adding to the uncertainty was Dr. Vagelos's
scheduled retirement as chairman in 1994.
More Money
Dr. Scolnick raised the problem of the looming patent
expirations with Raymond Gilmartin, Dr. Vagelos's
successor, at their first meeting in 1994. The bottom line:
He needed a big budget increase to test drugs in the
pipeline and to invest in emerging technologies.
Mr. Gilmartin says he understood: "My job was to find the
money." Through cost-cutting and other programs, Mr.
Gilmartin scraped together funds to help boost research
spending in 1995 and 1996. This year, Dr. Scolnick has
more than $1.7 billion to spend on research, 38% more
than in 1994.
Fueled by the infusion, the Merck research machine in the
past two years has cranked out nine new drugs, including
the AIDS treatment Crixivan, and Fosamax for
osteoporosis. Crixivan alone is expected to add $500
million to Merck's sales this year and should hit $1 billion
in the next few years. About 10 drugs, including a
reinvented Proscar pitched as a baldness treatment, are
making their way down the pipeline.
Analyst David Maris of Aros Securities in New York says
many of his institutional clients are concerned about
Merck's patent expirations, but he predicts that by 2001
Merck's new drugs alone will contribute $11.5 billion to
world-wide sales -- nearly equal to the company's drug
sales last year -- and drive annual sales growth of 12%.
Mr. Gilmartin's prediction: "I see Merck becoming the No.
1 company again before the year 2000," up from No. 3
currently, and remaining in the top tier of health-care
companies thereafter.
Takeover Bait?
Other drug companies with big patent-expiration exposure
insist that they, too, have it all under control. But some
doubters see a shakeout ahead. Schering-Plough,
Madison, N.J., for example, could become takeover bait,
some observers argue. It faces patent expirations on
Claritin and several other drugs that contributed one-fourth
of its total sales of $5.66 billion last year and about 40% of
its profits. Yet the company's research pipeline is viewed
as merely average, says Hemant Shah, an independent
drug analyst based in Warren, N.J. A Schering spokesman
declines to comment on the speculation, but says that the
company has many drugs in its pipeline.
Astra, another midsize maker, depends heavily on
Prilosec, the ulcer medication sold through its joint venture
with Merck. Considered a research star, Astra has several
new products in the works, including drugs for asthma and
various Prilosec successors. An Astra spokesman says
that, while the company is confident it will produce enough
new drugs to replace Prilosec revenues, "there is always
the possibility of acquiring companies."
Eli Lilly, Indianapolis, derived 43% of its U.S. drug sales
last year from Prozac, whose main patent expires in early
2001. Lilly also faces a court battle next year with Barr
Laboratories, which is challenging the patent's validity to
get an earlier shot at selling a copycat. Although Lilly has
several promising drugs in the pipeline for osteoporosis,
Alzheimer's disease and migraine headaches, it may have a
hard time growing for a few years if Prozac is beset with
generic rivals early on, some analysts believe.
A Lilly spokesman says the company's pipeline is ample
enough to replace Prozac. Also, Lilly contends that Prozac
will get two additional years of protection, to 2003,
because the company holds a second "use" patent covering
appetite disorders.
New Collaborations
To fill the patent gap, drug giants are turning more to
biotechnology boutiques and other partners. In 1996, U.S.
drug companies formed a record 180 research
collaborations with biotech partners and pledged to spend
up to $2.8 billion on those alliances, up from 69 deals
worth $1.4 billion in 1993, according to BioWorld
Financial Watch, Atlanta, which tracks such transactions.
The pressing need for new drugs also has led to the earlier
adoption of new technologies. SmithKline Beecham PLC,
London, faced "the Tagamet crisis" when it lost patent
protection on the ulcer drug in 1994, says Chief Executive
Jan Leschly. To avoid such threats in the future, the
company has invested in riskier, cutting-edge techniques. It
was one of the first major drug companies to leap into new
technologies for gene-hunting and automating the process
of mixing experimental chemicals in thousands of different
combinations.
Some companies, reversing their past focus, have decided
they can no longer bet their futures on finding a handful of
huge sellers. Sir Richard Sykes, Glaxo chief executive,
says Glaxo learned from Zantac that blockbuster
dependency can be hazardous to a company's health.
Now Glaxo, based in London, has shifted to developing
broader "portfolios" of drugs. "We don't avoid
blockbusters, but we don't rely on them," Sir Richard says.
Ultimately, that will be good for medicine, he adds, as
drugs that in the past might have languished will now
become available. For example, Glaxo developed Flolan
for a rare condition of high blood pressure in the lungs, he
says, even though "it is a very small market" of less than
$100 million annually.
Lawyers and Lobbyists
Glaxo is also moving many more drugs into development.
Five years ago, the company would have five to six
molecules in development at any given time, but now the
number is 20 to 30 molecules a year. Merck, too, is
broadening its product line, from 11 therapeutic areas in
1992 to two dozen by the year 2002.
Glaxo says it expects its growth to slow just temporarily
because of the Zovirax and Zantac expirations.
While researchers toil, lawyers and lobbyists also are busy.
Many makers obtain additional patents covering a drug's
use, production, chemical form or other aspects, hoping to
extend the protected period. Schering-Plough has patented
a metabolite, a chemical formed in the body as its Claritin
antihistamine is digested, and says this new patent will add
two years to the drug's patent life, extending it to 2004.
The company also has lobbied, so far unsuccessfully, for
new laws that would help lengthen the brand's patent life.
"Patent lawyers lay out a mine field for potential
competitors. You can get through it, but it makes life
difficult," for generic drug companies, says Salem M.
Katsh, a top patent attorney at Shearman & Sterling in
New York.
"It's part of the game," observes Daniel Vasella, president
of Novartis AG, the world's largest maker in Basel,
Switzerland, which has few drugs coming off patent in the
next five years, thanks to the luck of timing. "You have to
use all the skills you have." |
