Big Pharma and Patent Cliffs

Highlights include Pfizer Ltd. (PFE), Merck & Co. (MRK), AstraZeneca plc (AZN), Abbott Laboratories (ABT) and Johnson & Johnson (JNJ).

Patent expirations of big-selling drugs, otherwise known as "patent cliffs," have recently received a significant amount of attention as a result of a sizable number of impending patent expiration for blockbuster drugs between now and 2012.

Lipitor, Pfizer's (PFE) $12+ billion cholesterol drug, accounts for roughly 25% of the company's revenue and is scheduled to lose patent protection in late 2011. Besides Lipitor, Pfizer will also lose patent protection on Caduet, Geodon, Viagra, and Xalatan between now and the end of 2012.

Altogether, Pfizer has drugs with about $18 billion in sales (about 40% of expected 2009 revenues) that will lose patent protection over the next four years. Pfizer is attempting to address their patent cliffs through cost-cutting and new sources of revenue. In January 2009, the company announced that it planned buy Wyeth for about $68 billion.

We estimate that drugs with sales of over $73 billion from the largest 10 pharmaceutical companies will be initially exposed to generic competition over the next 4 years. To put that into perspective, in 2008 Merck (MRK), Eli Lilly and Bristol-Myers had combined sales of $65 billion.

While Pfizer's patent cliff issues are widely reported, there are other companies which get less attention that are in a similar position. Most notable of these are AstraZeneca (AZN) and Merck, both of whose stock prices, like Pfizer's, are at multi-year lows. We calculate that AstraZeneca has over $11 billion in sales exposed to patent cliffs through the end of 2012, representing about 35% of the company's expected revenue in 2009. By 2012 patents will expire on five of AstraZeneca's drugs with sales of over $1 billion each, including mega-blockbuster Seroquel/Seroquel XR which we expect to post peak sales of over $5.3 billion.

Merck, which will see patents on blockbusters Cozaar and Singulair expire in 2010 and 2012, respectively, will have almost $8 billion (about 32% of forecasted 2009 revenue) in sales exposed to new generic competition over the next four years.

Merck and AstraZeneca have also initiated significant cost-cutting programs to try and soften the impact of the impending generic onslaught. Both companies are also likely looking to bring in additional revenues through acquisitions and partnerships.

Some of the companies with the least patent cliff exposure through the end of 2012 are Abbott Labs (ABT) (no material exposure), GlaxoSmithKline (about 4% of revenues exposed), Johnson and Johnson (JNJ) and Schering-Plough (both with about 6% of revenues exposed).

Read the full analyst report on PFE

Read the full analyst report on JNJ

Read the full analyst report on ABT

Read the full analyst report on AZN

Read the full analyst report on MRK