Reuters | By Ransdell Pierson
Leading global pharmaceutical
companies have started to view their vast portfolios of older, established
prescription drugs as vehicles for raising large sums of cash to fuel
development of new medicines with far higher profit margins.
France's Sanofi and U.S. drugmakers Merck & Co and Abbott Laboratories are exploring selling off their mature drugs that have lost patent protection, Reuters reported this week, citing people familiar with the
plans. Officials at the three companies declined to comment.
The divestments could bring in
more than $7 billion for Sanofi, north of $15 billion for Merck and over $5 billion for Abbott, the
sources said, giving them considerable firepower to develop, or buy, promising
experimental medicines.
Such a shift would also remove
a source of pricing pressure, since many of the older medicines are sold in
emerging markets, where governments are increasingly demanding lower prices.
"It makes sense to sell
your low-growth assets that drag down profit margins and to redeploy that cash
to higher-value innovative biotech assets," said John Boris, an analyst
with SunTrust Robinson Humphrey.
The trickier part, according
to some people familiar with the processes, is finding a buyer, particularly if
many of these assets reach the market around the same time. Suitors could
include generic or specialty drugmakers looking to widen their product line, or
private equity firms content to milk the cash flow from the aging products
without having to worry about the expense of drug development.
The Merck products in
particular could attract the interest of Valeant Pharmaceuticals, which derives a quarter of its revenue from branded generics sold in
emerging markets, said Alex Arfaei, an analyst with BMO Capital Markets.
Valeant's Chief Executive
Michael Pearson has said he favors established products over pumping cash into
risky research and development projects.
Once companies divest their
mature drugs, good-selling patent-protected drugs can have a bigger impact on
financial results, said Len Yaffe, portfolio manager of the healthcare fund at
StockDoc Partners in San Francisco.
Patent protection for a new drug is generally 20 years from the time the
patent was approved, but it can then take a medicine 10 or more years to be
developed and reach the market, giving a limited window for exclusivity.
"From a smaller revenue
base, it's easier to grow revenue and earnings faster," Yaffe said, especially as new drugs are approved and make
contributions.
CASH COWS LOSE APPEAL
The interest in unloading
these older assets represents a shift for Big Pharma, which has relied on them
as cash generators to cushion steep revenue declines from more recent drug
patent expiries. Almost all are sold outside the United States, where governments
are increasingly demanding lower prices.
"That makes them less
profitable and attractive," said Morningstar analyst Debbie Wang. "It's gotten tougher in the past two or three
years."
The divestments would also
feed into a larger shakeout of the pharma industry, whose major players are in
the midst of a series of asset sales and swaps to better focus on the types of
medicines that will bring them the most growth. That logic has fueled Pfizer
Inc's $106 billion unsolicited takeover bid for AstraZeneca and a $20 billion
swap between Novartis and GlaxoSmithKline.
Merck drugs likely to be sold
include blood pressure treatments Cozaar and Hyzaar, with combined sales of $1
billion last year; cholesterol fighter Zocor, with sales of $301 million, and
hair growth drug Propecia, with sales of $283 million.
Sales of Abbott's aging drugs,
which it calls "established pharmaceuticals," fell 3 percent last
year to $4.97 billion, irking many investors.
When GSK reported quarterly
financial results on Wednesday, it announced separate results for its
established products division. Pfizer on Monday is expected to do the same, as
a possible prelude to eventually divesting its mature drugs.
GSK last September sold two
blood clot medicines that are branded generics, Arixtra and Fraxiparine, and a
related factory, to South Africa's Aspen Pharmacare for $1.1 billion, as part
of its strategy to focus on growth products.
"You should not be surprised
if we were able to transact a disposal of some of that established product
portfolio in the next year or two," Chief Executive Andrew Witty told
reporters last week. "That is not part of our future."
Pfizer, which recently spun
off its animal health and infant formula businesses, is considering whether to
divest its own established products unit, which includes hundreds of off-patent
drugs and ones that will soon lose patent protection.
Some analysts say an
AstraZeneca purchase would allow Pfizer to combine the mature drugs divisions
of both for a more significant sale or spin-off.
But Pfizer has said it would
not be able to divest the unit until 2017, following a review of its financial
performance. It is one of the company's three main businesses, and with revenue
of $9.46 billion last year, it generated 18 percent of total Pfizer sales.
There are clear risks for
Merck, Sanofi and others, however, in concentrating their bets so much more
heavily on the success of new medicines