Developing a new medicine is a chancy business. Statistics show that out of every 10,000 drugs going into development, only 100 reach human trials, and barely 10 reach the market. Meanwhile, it takes 10 to 15 years on average to develop a new medicine from the early stages of compound discovery through FDA approval.
That's why it's so important for investors to evaluate a company's pipeline. A weak crop of next generation drugs puts the shareholder's investment in peril. Since high expectations are typically baked into the share price for the drugmaker's current blockbusters, and patent expirations are a continuing threat, the pipeline often determines what the future will hold.
When it comes to product pipelines, not surprisingly, some Big Pharma companies are doing much better than others. To help investors know what they need to watch most closely, we asked three Motley Fool contributors to highlight what Big Pharma they believe has the most perilous pipeline.
George Budwell: Among Big Pharmas that need their pipelines the most to replace aging legacy products, Merck & Co.'s (NYSE:MRK) name stands out of the crowd. In the second quarter, the pharma giant saw its revenues dip by 11% compared to a year ago, and the loss of patent protection for key products like Remicade are expected to weigh the company's earnings down even further going forward.
To replenish its product portfolio, Merck has been on an M&A frenzy in the last year, gobbling up both Idenix Pharmaceuticals and Cubist Pharmaceuticals. Unfortunately, the drugmaker's pipeline is targeting several high-risk/high-reward markets, with uncertain long-term growth prospects.
For example, Merck has jumped in with both feet into the all-oral, interferon-free hepatitis C drug market. Although its combo of grazoprevir/elbasvir has looked great in clinical trials for the most part, it doesn't exactly have a glaring competitive advantage over Gilead Sciences' dominant hep C offerings of Sovaldi and Harvoni. Put plainly, Merck's drug might end up lowering the overall value of the hep C market by giving payers another option to gain leverage in their fight against pricey new drugs in general.
On the oncology front, Merck's PD-1 inhibitor Keytruda has gotten off to a blazing fast start, but the immuno-oncology market as a whole is about to be swamped with similar medicines within the next year. Besides Bristol-Myers Squibb's competing PD-1 inhibitor, Opdivo, for example, AstraZeneca and Pfizer are also making rapid progress in their immuno-oncology efforts, which is likely to result in several drugs vying for pieces of the very same indications.
Merck's pipeline therefore may have problems finding enough profitable niches to keep the company growing for the long-term.
Cheryl Swanson: If you're looking for a "Perilous Pipeline" among the Pharma giants, I'd suggest you look straight at GlaxoSmithKline PLC (NYSE:GSK). Why Glaxo? The company has major headwinds not just with patent expirations, it has one of the worst success rates in pivotal stage studies among Big Pharma.
In fact, while Glaxo's CEO, Andrew Witty, had some upbeat Q2 revenue numbers to report last quarter, he had almost nothing to say about the company's late-stage pipeline. That's a bad signal for a top 10 Big Pharma, since the CEO typically emphasizes late-stage drugs in an attempt to drum up Wall Street enthusiasm. But Glaxo's high-profile candidates for cardiovascular disease and Duchenne muscular dystrophy both petered out in late-stage trials, making Glaxo's climb back from a rocky two years very perilous indeed.
In addition, Glaxo recently did an asset swap of its marketed and late-stage cancer lineup to Novartis AG for $16 billion. In return, it snagged Novartis' batch of vaccines for $7 billion. While at first glance it might appear that Glaxo got the best deal, since it netted a one-time gain just shy of $9 billion, oncology is a large growth area, and it left the company with even fewer pipeline candidates.
There are a couple of positives. Wall Street is so unimpressed with Glaxo right now that any good news on the pipeline front could be a source of upside for the stock. There also may be some plausibility to the latest rumors swirling about a takeover. Other than that, considering the challenge currently facing respiratory drug Advair from generic competition, and the chance of a dividend cutback, this is a company I'd avoid.
Dan Caplinger: Among pharma stocks, Eli Lilly (NYSE:LLY) has long raised concerns among investors about the future of its drug pipeline. Over the past several years, the company has had to deal with the expiration of patents covering blockbuster treatments including anti-psychotic drug Zyprexa, anxiety treatment Cymbalta, and osteoporosis-fighter Evista. Over the past four years, sales have declined around 20%, and earnings have been cut in half as generic competition weighs on Lilly's profitability. Lilly also has a number of other high-profile drugs that face the threat of falling off the patent cliff, including Cialis and Alimta.
To address the danger of further declines in sales and profits, Lilly has taken steps to beef up its research and development, and it currently has several drugs in phase 3 trials to address conditions such as Alzheimer's disease, diabetes, and general pain treatment. Partnerships with overseas companies also have the potential to bear fruit, with collaborations and licensing arrangements that could produce further wins in the future. Nevertheless, until Lilly's efforts really start paying off with new blockbusters, some will see the drug giant as having a perilous pipeline situation that warrants holding off on investing in the stock until the company produces a more visible success story.
Cheryl Swanson has no position in any stocks mentioned. Dan Caplinger has no position in any stocks mentioned. George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.