Healthy Skepticism Library item: 2237

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Publication type: news

Firn D.
Patent disputes and litigation take shine off 2001
Financial Times 2001 Dec 17

Full text:

The year 2001 saw the pharmaceuticals sector lose some of its glitter. After years of uninterrupted double-digit earnings growth that lent a gilt edged feel to pharmaceutical shares, some of the largest companies have faltered. Top selling drugs lost patent protection, exposing companies to cheaper generic competition. At the same time research and development to productivity failed to keep pace with companies’ aspirational growth targets. Meanwhile the sector’s image as a saviour of lives was seriously diminished by high profile disputes over the cost of Aids medicines in developing countries. But there was good news too. Few large mergers deliver the expected benefits, but that seems not to be true in pharmaceuticals, where three of the fastest growing companies have been created in recent mergers. GlaxoSmithKline, the Anglo-American company, and Aventis the Franco-German company, proved show size matters in marketing, with both reporting strong sales growth. The effect was even more noticeable on mid-sized Sanofi-Synthelabo, the French group, which has become Europe’s fastest growing pharmaceuticals group after taking a bigger role in the US marketing of its products. The trend is set to continue as it will regain the exclusive rights to market its sleeping pill Ambien in the US. But a number of companies were forced to revise forecasts down. In October Eli Lilly was forced to cut its earnings forecasts after a sharp fall in sales of Prozac – the second biggest selling drug ever to go off patent. Sales of the drug fell 34 per cent in the third quarter, the steepest decline ever for a branded medicine. In December Merck surprised investors by saying earnings would be flat next year and Bristol-Myers Squibb said growth next year could fall 7 per cent. Analysts had forecast 8 per cent growth in EPS for Merck. Merck expects to be hit by the expiry next year of the US patent on Prilosec, the worlds biggest selling prescription medicine. Merck earns royalties from AstraZeneca, maker of the $6bn-a- year ulcer treatment. AstraZeneca remains bullish, pinning its hopes on four new products, including Nexium, a safer version of Losec, and Crestor, a cholesterol treatment, to take up the slack. But few major companies have such a full development pipeline as AstraZeneca. That has been good news for biotechnology companies. After years of struggling to extract profitable terms from co-marketing and licensing deals, biotech companies have broken all the records as pharma companies fought over the most promising products. Celltech broke the European record when it licensed CDP-870, a potential arthritis treatment, to Pharmacia in a deal valued at about $500m. But ImClone struck the largest ever biotech-pharma deal with a $2bn agreement to license its cancer drug IMC-C225 to Bristol-Myers Squibb. Other biotechs found themselves acquisition targets as Johnson & Johnson paid $12.1bn to acquire Alza, Merck paid $620m for Rosetta and Abbott paid $355m for Vysis. Because of the cultural differences pharmaceutical companies generally prefer to license products or technology rather than buy a whole biotech company, but with biotech valuations well down on last year, the temptation to buy is stronger than ever. Smaller pharmaceutical companies, such of Altana of Germany also found their larger competitors keen to offer lucrative co-marketing deals for mass market medicines. But the single issue that overshadowed the industry in 2001 was patents. A high profile court case over the cost of Aids drugs in South Africa painted the industry as greedy and uncaring, despite a last minute climb-down. In a landmark case in Pretoria 39 of the world’s largest pharmaceutical companies accused the South African government of violating their patents by seeking to import cheap generic copies of the life saving medicines. The charge was eventually dropped after the government reassured companies it would follow international laws that allow patents to be over-ruled in emergencies, but not before a lot of damage had been done to the image of the companies. The perception that drugs companies care little for the third world was reinforced when Pfizer was accused of using Nigerian children as guinea pigs for a new antibiotic. But the industry’s moral stance on patent protection received its harshest blow in America when Canadian and US governments threatened to overturn the patent on Bayer antibiotic CiproBay after about 10 people died from anthrax. The move, just weeks before the World Trade round in Doha, seriously weakened the industry’s bargaining position and opened the way for an agreement.On the other hand drugs companies’ newly-discovered role as defenders against bio-attacks, thanks notably to Bayer’s Cipro and Acambis’ smallpox vaccine, tempered the US public perception of the industry as profit obsessed. Despite this the drugs industry’s largest, and most profitable, market is increasingly litigious and juries show little sign of losing their zeal for awarding hefty damages. In November American Home Products’ results were marred by a $950m addition to its $12.25bn litigation reserve for payments over two diet drugs linked to heart valve problems. Bayer, Pfizer, Johnson & Johnson, Baxter and Sulzer Medica are among other drugs and healthcare companies dealing with US lawsuits. Bayer faces class actions over LipoBay, also sold as Baycol, the cholesterol drug linked to over 50 deaths. But the loss of the $1bn-plus treatment means Bayer faces two years of negative growth in its pharmaceutical division, highlighting the risks of medium-sized companies becoming over-reliant on big just one or two products for their growth. After reforms to speed the approval of drugs in the 1990s, the US Food and Drug Administration has been forced onto the defensive after a string of high profile product withdrawals. The result has been a slowing of approvals and surprise rejections of new medicines adding to the woes of pharmaceutical companies. The FDA has been without a commissioner since the US Presidential election, and there is no sign that an appointment is imminent. Biotech companies faced problems too, but of a financial nature. After funding more than 100 biotech IPOs in 2000, the public capital market lost its appetite for the sector. Although private equity continued to flow into the sector at a higher level than 1999 and successful public companies were able to tap the market to the tune of $3.9bn in follow-on offerings. M&A, long talked about in biotech, but rarely seen, also gathered pace in 2001 as investors asked uncomfortable questions about the development pipelines of the profitable companies. Despite developing a string of blockbuster medicines few companies have sustainable futures on their own R&D efforts. In mid December it emerged Amgen, the world’s largest biotechnology, was in talks to acquire Immunex, in a deal that would create a company worth $85bn. The deal, if completed would cap a year of big biotech transactions. Millennium Pharmaceuticals agreed to pay about $2bn for Cor Therapeutics, an impressive 77 per cent premium. Medimmune’s acquired flu vaccine company Aviron for $1.5bn. And Cephalon bought Group Lafon for $450m. Consolidation looks set to continue with companies such as Biogen and Celltech thought to be looking at possible partners. War in Afghanistan put healthcare costs at the bottom of Washington’s political agenda by the end of the year, but with US prescription costs rising at over 10 per cent a year it will not go away forever. Pharmaceuticals may be immune to the economic cycle, but unless the industry can radically improve its productivity, and find ways to make drugs more affordable it may start to lose its status as a safe haven for investors.

January: Biotech companies on both sides of the Atlantic welcome new US rules on patenting genes. Last year, President Bill Clinton and Tony Blair, the UK prime minister, wiped $109bn – or 22 per cent – off the value of the biotechnology industry in a week after they said that raw gene-sequence information should be made freely available to scientists everywhere. In the UK the government announces tougher laws against intimidation after animal rights protesters step up a sometimes violent campaign against Huntingdon Life Sciences and its backers. Eli Lilly reports a slight fall in fourth-quarter earnings as Prozac, the lifestyle drug of the 90s generation, loses its overseas patent protection. The dip is the beginning of a $5bn gap in expected earnings after the US patent office cut three years of monopoly. It highlights the worrying reliance pharmaceutical companies have on just a handful of blockbuster medicines.

February: The US Food and Drug Administration approves AstraZeneca’s Nexium. The so called purple pill is the follow on to the company’s $6bn-a- year ulcer treatment Prilosec, the world’s biggest selling drug which is facing a loss of patent protection. Nycomed Amersham announces the flotation of 10 per cent stake in its Amersham Pharmacia Biotech joint venture. Analysts value the unit at between $3bn-$4.5bn, but the IPO is subsequently put on ice as the equity markets’ love affair with technology wanes.

March: Merck and Bristol-Myers Squibb offer to sell Aids drugs at a steep discount in Africa in an effort to stave off compulsory licensing of its patents. CAT shares plunge 25 per cent in a single day as market sentiment turns against biotechnology. Companies furthest from profit were hardest hit as investors liquidated portfolios to cover losses in it.

April: South Africa claims a moral victory after the world’s largest drugs companies are forced into an embarrassing climb down over cheap Aids drugs. The companies portray the decision to drop charges of patent infringement is a victory, but they merely win an agreement that the government will follow international laws that allow patents to be over-ruled in emergencies. Roche says profit margins will fall as it tries to boost flagging pharmaceutical sales in the wake of a string of product failures. But despite the victory South Africa says treating TB and Malaria is a higher priority than Aids.

May: Novartis stuns the industry by buying 20 per cent of the voting shares in Roche, its Swiss rival, for $2bn-$2.8bn. But Novartis plays down talk of a merger, which is opposed by the Hoffmann and Oeri-Hoffmann families. Sulzer Medica, Europe’s biggest orthopaedics company, says its insurance will not cover the cost of replacing faulty artificial hip joints. Nicox, the French drug development company, raises E55m in one of the year’s few successful follow on offerings. SSL, the UK healthcare products company, calls in external investigators after its new finance director finds irregularities in the accounts.

June: Roche axes the British development centre behind some of the most significant advances in Aids treatment as part of a global effort to cut 3,000 jobs, the biggest redundancy programme in the pharmaceutical industry for years. GlaxoSmithKline follows with plans to cut 1,800 jobs as part of a plan to reduce costs by £1bn. The European Commission unveils proposals to speed drug approval. Europe wants to halve the approval time at a point when the FDA, of the US, is facing criticism for holding up the launch of new medicines. Europe also wants to loosen restrictions on promoting some drugs on the internet.

July: GlaxoSmithKline shows size does matter in pharmaceuticals. The recently-merged group reports a 14 per cent increase in pre-tax profits for the second quarter as a result of increased marketing power. But AstraZeneca says it will market Crestor, its new cholesterol lowering treatment alone. The company had been considering collaboration to boost the marketing effort. But AstraZeneca says the benefits of all the market for itself outweigh extra marketing costs, Crestor is one of the company’s “big four” products expected to compensate for the loss of $6bn-a-year ulcer treatment Prilosec.

August: Aventis, the Franco German pharmaceuticals group formed by the merger of Hoechst of Germany with Rhone-Poulenc of France, raises forecasts as it reports strong growth. The company is finding the extra marketing muscle it now has in the US is paying off in the form of higher sales in its most profitable market.Bayer issues its third profit warning of the year after its cholesterol lowering treatment Baycol is withdrawn after being linked to linked to 31 deaths. It delays its planned US listing as its shares tumble. Meanwhile competitors fight to win Bayer’s lost customers as US regulators say other cholesterol lowering drugs are safe, but the Europeans launch a review of safety of the entire class treatments.

September: Christaan Barnard, the heart transplant pioneer, dies while on holiday in Cyprus. His first patient, in 1967 lived only 18 days. The operation is now routine. Pfizer, the world’s largest drugs group, faces class action in the US over the way it conducted clinical trials of a new antibiotic in Nigeria. Baxter is forced to withdraw some of its blood filters after patients die in Spain. The problem is later traced to a factory in Sweden, which is closed. The company now faces litigation.

October: GlaxoSmithKline offers to hand over the rights to Aids drugs to local South African producers in an attempt to make cheap HIV treatment more widely available. Eli Lilly cuts its forecast after a steep fall in sales of Prozac. Later in the month Pharmacia warns its growth will slow when it hands back rights to Ambien, the big-selling sleeping pill to Sanofi- Synthelabo. HLS says it is moving to the US to escape animal rights activists. But within weeks the company finds itself without market makers as the activists target its US brokers.

November: Henry McKinnell, chairman of Pfizer attacks European drug pricing systems, saying cost control was stifling innovations and forcing companies to move their activities to the US.

December: A week after being told to pay a record E460m for fixing the price of vitamins Roche takes control of Chugai, the Japanese drug maker in a move that boosts its position in the world’s second largest medicines market and restores its place among the top 10 pharmaceuticals companies. Pfizer threatens to withhold new treatments from France unless the government allows it to charge higher prices. France is not the only offender, but it is the worst, says Pfizer. It can take up to three years after drugs are approved as safe to negotiate prices in France.Millennium Pharmaceuticals agrees to pay $2bn to acquire Cor Therapeutics and Amgen, the world’s largest biotechnology company, acquires Immunex in a $16bn cash and stock deal, creating a company worth $85bn.