Drugmakers Poised to Report Biggest Drop Since 2006 on Record Patent Loss

Pfizer Inc. (PFE) and rival U.S. drugmakers are poised to report the industry’s biggest drop in quarterly profit in more than four years as the companies cope with record patent losses in 2011.

Earnings at the 11 drugmakers listed in the Standard & Poor’s 500 Index probably fell 1.4 percent in the first quarter, even as overall profit for companies in the index may have gained 12 percent to a record, according to analyst estimates compiled by Bloomberg. Pharmaceutical profits last fell in 2009’s first quarter, and the current drop is the biggest since a 3.5 percent slip in the final quarter of 2006.

Pfizer, Merck & Co. and Bristol Myers Squibb Co. are eliminating jobs, cutting costs and shedding business units to prepare for patent expirations. In 2011, drugmakers face generic rivals to products with $34 billion in yearly sales, a figure 34 percent higher than last year. Sales at risk from patent losses will swell to $147 billion by 2015, Bloomberg data shows.

“A brand can lose 40 percent of sales and 50 percent of volume globally in the first two years after generic entry,” said Chris Bowe, a New York-based analyst for Informa Plc, a London industry research firm, “It’s now not uncommon to see a brand lose 50 percent of U.S. sales in two quarters.”

Products with $147 million in annual sales will lose patent protection during the next five years, according to Bloomberg data. Photo Illustration: Bloomberg Close

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Products with $147 million in annual sales will lose patent protection during the next five years, according to Bloomberg data. Photo Illustration: Bloomberg

Four U.S. drugmakers report earnings next week. Eli Lilly & Co., based in Indianapolis, will report on April 18, followed by New Brunswick, New Jersey-based Johnson & Johnson and New York- based Forest Laboratories Inc. on April 19 and Abbott Laboratories, of Abbott Park, Illinois, on April 20. The average quarterly earnings growth for drugmakers was 10 percent since the first quarter of 2007.

Divestitures Considered

Drug profits last quarter were also hampered by the U.S. health-care overhaul, which mandates product discounts for older Americans, as well as price cuts from European drugmakers.

To make up for lost sales, Chief Executive Ian Read at New York-based Pfizer said last quarter he was reviewing possible divestiture of each company division -- baby formula, animal health, consumer and established products -- to concentrate on drug development. On April 4, Pfizer agreed to sell Capsugel, its smallest unit, which manufactures pill casings, to KKR & Co. for $2.38 billion.

“Everybody knows it’s coming, everyone’s placed their bets,” said Les Funtleyder, a New York-based fund manager at Miller Tabak & Co. “What pharma investors are interested in is pipelines and corporate transactions -- either acquisitions or divestitures. That’s going to dominate the discussions.”

Analysts and investors will press Read on conference calls about his plans and ask other CEOs whether Pfizer’s break-up strategy will be repeated at their companies, said Barbara Ryan, an analyst at Deutsche Bank AG.

‘Cool Kid’

GlaxoSmithKline Plc (GSK), based in London, yesterday said it will divest its over-the-counter brands. Sanofi-Aventis SA of Paris is seeking a buyer for its U.S. dermatology business, people familiar with the matter on April 13.

Pfizer “is like the cool kid in school now, and everyone will be focused on asking that question: Are you going to split up” your non-pharma business, Ryan said in a telephone interview. “Companies are going to take different paths.”

Nine of the world’s 15 best-selling medicines will lose patent protection during the next five years. Chief among these products is Pfizer’s Lipitor cholesterol pill, the world’s best selling drug with $10.7 billion in 2010 sales. Lipitor lost market exclusivity in Spain and Canada last year and will have generic U.S. competition in November.

Pfizer Profit Slips

Pfizer reports earnings on May 3. The world’s biggest drugmaker may post a drop in profit excluding one-time items to 58 cents a share from 60 cents a year earlier, according to the average of 17 analysts surveyed by Bloomberg. Joan Campion, a spokeswoman, declined to comment on Read’s plans for splitting off units.

Merck, based in Whitehouse Station, New Jersey, lost patent exclusivity last year to its Cozaar and Hyzaar blood pressure medicines, resulting in a 57 percent drop in the drugs’ sales in the fourth quarter. Next year Merck loses its Singulair asthma treatment, with $5 billion in yearly sales.

Merck reports April 29. Its profit excluding certain items probably gained to 84 cents a share from 83 cents, according to 15 analysts surveyed by Bloomberg.

Most U.S. revenue growth in the pharmaceutical industry will come from price increases after some drug costs were raised more than 10 percent, Bernstein’s Anderson wrote in an April 12 note. Pricing outside the U.S. probably declined after cost reductions were implemented last year in at least 10 European countries, he said.

Bristol-Myers Pipeline

Bristol-Myers is expected to report earnings declined to 52 cents a share from 56 cents a share excluding one-time items, according to 15 analysts surveyed by Bloomberg. The company faces generic competition next year to its Plavix blood thinner, which generates about a third of the company’s revenue.

To prepare for the loss, the New York-based company sold its wound care and medical imaging businesses in 2008 to raise almost $5 billion. The company also split off its Mead Johnson nutritionals business to focus on adding drugs to its pipeline. Bristol-Myers won U.S. approval in March for Yervoy, the first treatment proven to extend lives of patients with advanced melanoma, and is expecting U.S. approval decisions on four new drugs by the end of 2012, Jennifer Mauer, a spokeswoman, said in a telephone interview.

Eli Lilly & Co. (LLY), based in Indianapolis, faces the biggest loss of branded drugs as a percentage of sales, with 78 percent of revenue facing generic competition by 2016, according to a Bloomberg analysis. Its top seller, the antipsychotic medicine Zyprexa, loses exclusivity this year. Profit for the quarter likely declined to $1.17 a share, from $1.18 a share a year earlier, according to analyst estimates.

Roche Results

Roche Holding AG, the world’s biggest maker of cancer drugs, yesterday said first-quarter sales declined 9 percent as the Swiss franc strengthened and revenue from the Avastin tumor medicine fell. The Basel, Switzerland-based company also said it expects the U.S. health-care overhaul will have stripped about 1 billion francs ($1.12 billion) from sales by the end of this year, following a 532 million-franc impact in 2010.

The law’s impact “should level out in the second half of the year,” CEO Severin Schwan said on a conference call. The changes are expected to shave “just over” 2 percentage points from revenue in 2011, he said.

To contact the reporter on this story: Tom Randall in New York at trandall6@bloomberg.net.

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net.

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