|Big Pharma is facing an impending patent cliff|
|Business News - Press Release|
|Written by Datamonitor|
|Thursday, 03 December 2009|
Big Pharma seeks to insulate itself from impact of patent cliff
The pharmaceutical industry is facing an impending patent cliff, when some of its biggest selling drugs will lose patent protection and become exposed to generic competition. While companies are seemingly investing as much into diversification as they are into R&D, a new Datamonitor report suggests that moving away from the core business of prescription drugs may not be the best strategy.
Between 2001 and 2008, the collective revenues of 'Big Pharma' (the 16 largest pharmaceutical companies by annual revenue, including Pfizer, GlaxoSmithKline and Johnson & Johnson) grew by 8.6% year-on-year. If this rate of growth were to be maintained, revenues would reach $628 billion by 2014.
However, this analysis does not take into account the upcoming patent cliff. Key patent expiries within the pharmaceutical sector will intensify from 2011 onwards, affecting some of the biggest brands in the industry, such as Pfizer's Lipitor (atorvastatin), driving down revenue growth for pharmaceutical companies. As such, the reality is that revenue growth among Big Pharma will flat-line at 0.2% between 2008 and 2014, leading Datamonitor to forecast sales of $387 billion in 2014.
This dramatic slowdown in revenue growth is almost entirely attributable to the expiration of patents for key products, a phenomenon from which few within the Big Pharma peer set will emerge unscathed. Thus, unsurprisingly, the question currently consuming the industry is just how to deal with the forecast decline in revenue growth, leading some companies to consider diversifying away from the branded pharmaceuticals sector.
Branded pharmaceuticals represents just one sector within the relatively sprawling healthcare landscape. While pharmaceuticals has historically been the most popular single merger and acquisition target sector for Big Pharma, it is notable that 'ex-pharmaceutical' sectors were collectively responsible for 47% of all acquisitions undertaken between 2000 and Q2 2009. The different sectors which pharmaceutical firms can and have diversified into include over-the-counter healthcare products, medical devices and diagnostics, animal health, retail pharmacies and health insurance. However, Datamonitor has observed that companies for which pharmaceuticals accounted for more than 90% of 2008 revenues (AstraZeneca, Eli Lilly, Pfizer, and Merck & Co) had above-average operating margins, while companies with a more intermediate pharmaceutical focus (GlaxoSmithKline, Roche, Wyeth, Sanofi-Aventis, Schering-Plough and Bristol-Myers Squibb) and those that were diversified (Bayer, Johnson & Johnson, Abbott, and Novartis) had comparatively low operating margins.
Ultimately, although Big Pharma could potentially offset sales growth decline by diversification, the resulting fall in operating margin would act to reduce operating profit and somewhat negate the benefits of diversification. Therefore, pharma-focused companies have little to gain from diversifying away from branded pharmaceuticals, and should instead ride out the patent cliff by looking to increase operating margins.
While cost-cutting and restructuring can go some way to achieving this goal, merging with and acquiring other pharmaceutical companies and biotechs to gain access to their drug development pipelines is a more powerful means of improving operating margin. Indeed, the clutch of mega-mergers that Big Pharma has historically entered into is indicative that consolidation and mega-merger activity is an entirely logical strategy through which to endure the upcoming patent cliff.
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