Big Pharma aims to sell older drugs, lift margins

Published May 6, 2014

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Ransdell Pierson New York

Leading global pharmaceutical companies have started to view their vast portfolios of older, established prescription drugs as vehicles for raising large sums of cash to fuel development of new medicines with far higher profit margins.

France’s Sanofi and US drug makers Merck and Abbott Laboratories were exploring selling off their mature drugs that had lost patent protection, people familiar with the plans said. Officials at the three companies declined to comment.

The divestments could bring in more than $7 billion (R73bn) for Sanofi, north of $15bn for Merck and over $5bn for Abbott, the sources said, giving them considerable firepower to develop, or buy, promising experimental medicines.

Such a shift will also remove a source of pricing pressure, since many of the older medicines are sold in emerging markets, where governments are demanding lower prices.

“It makes sense to sell your low-growth assets that drag down profit margins and to redeploy that cash to higher-value innovative biotech assets,” John Boris at SunTrust Robinson Humphrey said.

The trickier part, according to some people familiar with the processes, is finding a buyer, particularly if many of these assets reach the market around the same time. Suitors could include generic or speciality drug makers looking to widen their product line, or private equity firms content to milk the cash flow from the aging products without having to worry about the expense of drug development.

The Merck products in particular could attract the interest of Valeant Pharmaceuticals, which derives a quarter of its revenue from branded generics sold in emerging markets, Alex Arfaei, an analyst with BMO Capital Markets, said.

Valeant’s chief executive, Michael Pearson, has said he favoured established products over pumping cash into risky research and development projects.

Once companies divested their mature drugs, good-selling patent-protected drugs could have a bigger impact on financial results, Len Yaffe, the portfolio manager of the health-care fund at StockDoc Partners in San Francisco, said.

Patent protection for a new drug is generally 20 years from the time the patent was approved, but it can then take a medicine 10 or more years to be developed and reach the market, giving a limited window for exclusivity.

“From a smaller revenue base, it’s easier to grow revenue and earnings faster,” Yaffe said, especially as new drugs were approved and made contributions.

The interest in unloading these older assets represents a shift for Big Pharma, which has relied on them as cash generators to cushion steep revenue declines from more recent drug patent expiries. Almost all are sold outside the US, where governments are increasingly demanding lower prices.

The divestments would also feed into a larger shake-out of the pharma industry, whose major players are in the middle of a series of asset sales and swops to better focus on the types of medicines that will bring them the most growth. That logic has fuelled Pfizer’s $106bn unsolicited takeover bid for AstraZeneca and a $20bn swap between Novartis and GlaxoSmithKline (GSK).

Merck drugs likely to be sold include blood pressure treatments Cozaar and Hyzaar, with combined sales of $1bn last year; cholesterol fighter Zocor, with sales of $301 million, and hair growth drug Propecia, with sales of $283m.

Sales of Abbott’s aging drugs, which it calls “established pharmaceuticals”, fell 3 percent last year to $4.97bn, irking many investors.

When GSK reported quarterly financial results on Wednesday, it announced separate results for its established products division. Pfizer was expected to do the same yesterday, as a possible prelude to eventually divesting its mature drugs.

In September last year GSK sold two blood clot medicines that are branded generics, Arixtra and Fraxiparine, and a related factory, to South Africa’s Aspen Pharmacare for $1.1bn, as part of its strategy to focus on growth products.

“You should not be surprised if we were able to transact a disposal of some of that established product portfolio in the next year or two,” chief executive Andrew Witty said last week. “That is not part of our future.”

Pfizer is considering whether to divest its established products unit, which includes hundreds of off-patent drugs and ones that will soon lose patent protection.

An AstraZeneca purchase would allow Pfizer to combine the mature drugs divisions of both for a more significant sale or spin-off, some analysts say.

But Pfizer has said it would not be able to divest the unit until 2017, following a review of its financial performance.

There are clear risks for Merck, Sanofi and others, however, in concentrating their bets so much more heavily on the success of new medicines.

“Being more focused cuts both ways: your successes are magnified, but if you have failures, you feel them more when you have a less-diverse business,” Judson Clark at Edward Jones said. – Reuters

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