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Is This the End of Big Pharma?

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Pfizer (NYSE: PFE  ) has a huge task cut out for it. The company's blockbuster cholesterol treatment Lipitor, which loses patent protection in November, is the highest-selling drug in the world, and now the company has the tough mission of figuring out how to replicate its success.

Lipitor, launched in 1997, has fetched $10 billion in annual revenues to the company since then. The equation, however, would soon change when generic-drug makers begin selling cheaper versions. Plus, Pfizer's patent for Xalatan glaucoma drug also expires in 2011. So what's a huge pharma company to do?

The other victims
Fortunately, Pfizer is not alone in battling patent troubles. Other big pharmaceutical firms are also facing a similar challenge.

Merck's (NYSE: MRK  ) asthma drug Singulair goes off-patent in 2012 while Novartis' (NYSE: NVS  ) patents on its cancer drug Zometa and hypertension treatment Diovan are set for expiration in 2012. Eli Lilly's (NYSE: LLY  ) schizophrenia drug Zyprexa goes off-patent in 2011. GlaxoSmithKline's (NYSE: GSK) Avandia and Forest Laboratories' (NYSE: FRX) Lexapro are also slated to go off-patent next year. AstraZeneca (NYSE: AZN) has a little more breathing room thanks to a favorable U.S. court ruling that froze out generic competition on Crestor until 2016. In other words, the patent expiration process is simply another reality of doing business in this particular line of work.

For these drugmakers that have relied heavily on their patented offerings to generate revenue, the next few years appear unusually daunting. One estimate suggests a total of more than 10 medicines would start facing generic competition from this year, resulting in a loss of nearly $50 billion in terms of annual sales of all these medicines put together.

Patent expiration woes
Patent expirations present a great deal of difficulty to pharmaceutical companies -- the companies no longer have the "safety" of their patented drugs, and they need to create new products to be in the race. However, hundreds of millions of dollars in research and development expenses do not necessarily guarantee approval -- but do drain the company's finances.

For example, the industry essentially doubled annual R&D spending over the past decade to a whopping $45 billion, yet Food and Drug Administration approvals are increasingly tough to come by. In 2010, Pfizer and Eli Lilly had high-profile failures with drugs attempting to treat Alzheimer's disease. Earlier this year, Merck was also unsuccessful with anti-clotting medicine vorapaxar, one of the key justifications for the Schering-Plough merger.

The smaller effects
Patent expirations, however, are a boon to small generic companies and customers of generics who enjoy a much cheaper price tag of highly desired medicines. Generic-drug makers get a readymade base for building their products with just a small amount of investment in research and development. Plus consumers stand to gain from cheaper versions of the medicines they have been taking. Nevertheless, apprehensions remain that the generics may not be equally efficient as their original versions.

The brighter side
I'm not trying to sound too pessimistic about the coming wave of patent expirations and its effect on big drug companies. Every ending signifies a new beginning, and a continued use of existing products reduces the scope of innovation. So if patents on old drugs cease to exist, it may pave the way for new ones. Patent expiration ensures that companies indulge in continuous research. And constant effort may actually improve the quality of research leading to the invention of new technologies and new products. These new products not only create a wider product line but could also be more profitable.

Susmita Chatterjee does not own shares of any of the companies mentioned above. Pfizer is a Motley Fool Inside Value choice. GlaxoSmithKline and Novartis are Motley Fool Global Gains recommendations. The Fool owns shares of GlaxoSmithKline. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2011, at 9:46 AM, mgw6 wrote:

    The challenges and dysfunction of the pharmaceutical industry come as no surprise to those who have read the book Pharmaplasia™. This disconcerting situation has been decades in the making and unfortunately, will take decades to turn around. It is clear that the “Big” in “Big Pharma” has become a liability and has been detrimental to innovative R & D.

    Those looking for or postulating near-term quick fixes from strategic restructuring, mega-mergers, technology acquisitions, or breakthrough serendipitous discoveries to resolve the industry dysfunction will be sadly disappointed. As described in Pharmaplasia™, many of the problems in the pharmaceutical industry are related to their large inefficient organizational size, are deep rooted in an outdated business model, and involve more than just a lack of productivity in R & D.

  • Report this Comment On March 11, 2011, at 8:19 AM, epcotint wrote:

    Current woes have been in making since turn of the century but have accelerated since 2005.

    It is going to be interesting to see how the pharmaceutical landscape will look like in the Year 2020.

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