FRX Forest Road Acquisition Corp

The New Year is expected to be a happy beginning for generic companies like Teva Pharmaceuticals (TEVA), Mylan, Inc. (MYL), Watson Pharma (WPI), Dr. Reddy’s (RDY) and Sandoz, the generic arm of Novartis (NVS). A large number of high-value branded pharmaceuticals have begun to go off-patent, and many more will lose patent exclusivity in the next few years.

Major revenue generating blockbuster medicines like Pfizer’s (PFE) cholesterol drug Lipitor, Eli Lily’s (LLY) antipsychotic drug Zyprexa and Johnson & Johnson’s (JNJ) Levaquin lost patent exclusivity in the US in November, October and June of this year, respectively. While Teva and Dr. Reddy’s have launched their generic version of Zyprexa, India’s largest generic maker Ranbaxy Laboratories Ltd. has launched a generic of Lipitor in partnership with Teva. Watson has launched the authorized generic version of Lipitor.

Generics Coming Home to Roost

Further, in the 2012-2018 timeframe, many more blockbuster drugs are expected to lose patent protection in the US. Important among these are: Forest Laboratories’ (FRX) depression drug Lexapro (March 2012), Bristol-Myers Squibb/Sanofi’s (BMY/SNY) hypertension drug Avapro (March 2012) and blood thinner Plavix (May 2012), Swiss drug maker Novartis’ (NVS) hypertension drug Diovan (September 2012), Merck’s (MRK) asthma drug Singulair (August 2012), Pfizer’s erectile dysfunction drug Viagra (2012), Abbott Laboratories’ (ABT) dyslipidemia drug TriCor (mid-2012), Eli Lily’s depression drug Cymbalta (2013) and diabetes product Humalog (2013), Teva’s multiple sclerosis drug Copaxone (2014), Forest’s Alzheimer’s drug Namenda (early 2015) and Pfizer’s central nervous system drug Lyrica (2018).

The generic makers with a robust pipeline are sure to exploit the patent cliff overhanging the pharma industry, especially with so many blockbuster branded medicines slated to lose patent protection in 2012, the year stands out as a beacon for these companies with a slew of product launches already lined up.

Important 2012 US generic launches for Mylan include Provigil, Diovan, Zyprexa, Plavix, Actos/Actoplus, Viramune, Clarinex, Singulair and Avapro. Teva, another force in the generic space, has drugs like Avandia, Avandamet, and Avandaryl, Actos/Actoplus and Entocort EC ready for 2012 launch while Watson has Xopenex.

Further, the industry stands to gain from an increasing awareness of generic products. Given the uncertain economic outlook, various government agencies as well as privately managed care organizations are taking initiatives to promote generics in place of costlier branded treatments.

These factors, together with an aging population and a corresponding increase in healthcare costs, should lead to continued expansion of the generics marketplace. Besides, US healthcare reform that works at bringing more people under the purview of prescription drug benefit would catalyze generics uptake.

Data from IMS Health substantiate that the growth rate of generics is twice that of branded drugs the world over. In Europe, too, generics make up almost half of total volume sales.

Big Pharma in the Pale

While the generic companies are expected to shine going ahead, large pharmaceutical players like Pfizer, Eli Lilly, Merck, Forest, Johnson & Johnson and Bristol Myers would have a tough time in the coming years. Obviously, one’s gain is another’s loss. The loss of patent exclusivity for these biggies would definitely affect their top line.

The influx of generic competition will not only put downward pressure on pricing, it will also result in gross margin contraction over the next several years. At the same time, the loss of revenues due to genericization is unlikely to be compensated sufficiently by new product launches for most of these branded companies. The extent to which branded companies can replace lost sales, from generic lapses, by new product launches is still to be seen.

Reliable data from IMS Health reveal that market share for branded medicines fell from 70% in 2005 to 64% in 2010, a function surely due to sour economic conditions. The percentage is expected to deteriorate further, to 53%, through 2015.

Beyond the Bubble

With success guaranteed till 2017-2018, the question for investors is what lies beyond. With most large branded drugs due to lose patent exclusivity within 2017-2018, we have little visibility into the growth prospects for generic companies beyond that timeframe.

Moreover, large pharmaceutical players are not willing to take the blows lying down. These well-capitalized companies are continuously launching new products, entering into in-licensing deals and indulging in tuck-in acquisitions.

These companies are also undertaking measures like work force reduction and share repurchases to shore up the bottom line. The last laugh may well be theirs. Meanwhile, generic players are geared up to make the best use of the current favorable market conditions.

 
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