Time ' s Up :
With Patents Expiring
On Big Prescriptions ,
Drug Industry Quakes
--Top Firms Gird for Onslaught
From Generics, Scramble
To Develop New Products
--Bet on Fewer Blockbusters
By Elyse Tanouye and Robert Langreth
08/12/1997
The Wall Street Journal
Page A1
(Copyright (c) 1997, Dow Jones & Company, Inc.)
Some of the nation's best-known prescription drugs are on the brink of a sales plunge -- and drug makers are
scrambling to survive it.
About 40 drugs with $16 billion in sales last year -- one-quarter of the industry's U.S. revenues and an even higher
percentage of total profits for some companies -- are set to lose patent protection by the end of 2002. That will throw
the gates open to savage competition from cheaper generic versions.
The reason: Drugs created during a pharmaceutical-research boom in the 1970s and 1980s are approaching the end
of their patents.
Never before have so many blockbuster drugs come off patent in such a short period of time. It will mean cheaper
drug prices and a potential bonanza for genericdrug makers. But it also will roil the industry over the next five years,
reshaping the landscape and altering the way drug companies conduct research and do business. How the big drug
makers that are most at risk deal with this looming challenge will determine which ones survive in a new round of
takeovers.
"It's an unprecedented period. It isn't just a great opportunity for us, it will be a great opportunity for consumers as
prices drop," says Bruce Downey, chief executive of Barr Laboratories Inc., Pomona, N.Y., which plans to churn out
cheap copies of the antidepressant Prozac, which sells for $2 a pill, and other big sellers.
At the epicenter of the patent-expiration quake is giant Merck & Co., which will lose a lock on four drugs that
provided more than half of its $6.18 billion U.S. drug sales last year, including the heart drugs Vasotec and
Mevacor. Schering-Plough Corp. stands to lose exclusivity on the allergy drug Claritin and others that contributed
57% of its $2.61 billion prescription U.S. drug sales last year. And Eli Lilly & Co. faces patent expirations on drugs
that generate more than half of its $4.02 billion U.S. drug sales, including Prozac.
The upheaval has already begun. Patent protection expired last month for Glaxo's anti-ulcer drug, Zantac, one of the
world's largest-selling prescription drugs with annual sales of $1.6 billion in the U.S. alone. (The drug is also
available over the counter.) Last week, the first generic rival entered the market. Glaxo's herpes drug, Zovirax, lost
its patent powers earlier this year and now competes with generics that cost consumers about 80% less.
To avert calamity, major pharmaceuticals companies are racing to find new drugs to replace the billions of dollars in
sales they stand to lose. They are embracing risky new technologies more quickly and scouting the world for
alliances and drug-licensing deals. Some are betting on legal muscle, lobbying for patent extensions and pursuing
narrower, add-on patents for a drug's use or method of manufacture.
And in a radical change, some companies are shedding their Hollywood-style focus on finding a few big hits -- a
longtime practice that left them vulnerable when patents expired -- in favor of developing a broader range of drugs.
Ultimately, that change could yield drugs aimed at smaller markets, and for rarer illnesses, which might have been
shelved in the past.
Still, some observers doubt all of this effort will be enough. It can take 15 years to turn a newly created molecule
into an approved product, with many more failures than successes along the way (only about one in 250 chemical
compounds that go into laboratory and animal testing ultimately make it to the pharmacy shelves). Even though
companies aim to cut that gestation time in half, it is doubtful they have enough new drugs in the works now to
offset the revenue lost to generics.
Jurgen Drews, research head of Swiss giant Roche Holding Ltd., was one of the first to sound the alarm, warning
two years ago that "The outlook for the industry is bleak." Today it hasn't much improved, he says, adding that the
industry still isn't generating enough new drugs to outrun the patent expirations. "There's a hole in the bucket, and
it's starting to get as big as the pipeline that is filling it," adds Robert Merold, general manager for health care at IMS
America, a pharmaceuticals market-research firm in Plymouth Meeting, Pa.
Patent protection is the financial fulcrum of the drug industry, emboldening makers to invest billions of dollars in
development; a successful entry costs an average of $350 million to develop when all the failures are factored in. A
patent lasts for 20 years, but because companies apply years before a drug hits the market, the insulation from
generics typically lasts about 12 years. When a drug patent expires in other countries, the impact is less severe, in
part because the generic business isn't as well developed overseas.
But in the U.S., the largest single pharmaceuticals market by far with more than 60% of world-wide sales, a patent's
phaseout can be devastating. Shortly after Bristol-Myers Squibb Co.'s heart drug, Capoten, went off patent last year,
the 57-cent-a-pill brand was competing with generics selling for three cents a pop. By the fourth quarter, Capoten's
U.S. sales had plummeted 83% to $25 million from $146 million the year before.
The last time a big block of drugs came off patent, a smaller batch between 1992 and 1995, many companies were
forced to merge or sell out to larger partners. Syntex Corp. was crippled by the meltdown of arthritis drug Naprosyn
after it went off patent in 1993, and it sold itself to Roche Holding the next year. Upjohn Co. lost patent protection
on its major drugs for anxiety, diabetes and insomnia in 1993 and 1994; less than a year later, it merged with
Pharmacia AB of Sweden to form Pharmacia & Upjohn Inc.
Consolidation this time around won't be any different, some industry observers predict. Particularly vulnerable are
companies that depend heavily on one or two big drugs, such as Schering-Plough and Astra AB, they say.
The flurry of industry patent expirations is the denouement of a scientific revolution of the 1970s and 1980s that
produced myriad drugs that changed medicine. Merck, Whitehouse Station, N.J., was one of the pioneers in this
push. Under the leadership of P. Roy Vagelos, the research chief who later became chairman, Merck helped
transform drug research from random chemical screening to a more methodical approach that targeted specific cell
activity.
The new science spawned a whole generation of breakthrough medicines to treat heart disease, depression, arthritis
and other illnesses. New drug applications to the Food and Drug Administration soared in the early 1980s to a peak
of about 270 in 1983 from 120 five years earlier. But after a few years, the easy discoveries had been found. As
additional drugs became harder to come by, new applications to the FDA sank to a low of 86 in 1993.
Merck reaped great rewards from its pioneering science in this period: Vasotec, Mevacor, the anti-ulcer treatment
Pepcid and heart drug Prinivil catapulted Merck from a middling drug company to world status in the mid-1980s.
But now those very drugs present the greatest concern as their patent protection ends.
Five drugs that contributed an estimated $1.9 billion to Merck's pretax earnings last year -- more than one-third of
the company's world-wide profits -- will lose market exclusivity in 2000 and 2001. That includes four Merck drugs
with sales of $3.31 billion in the U.S. (17% of Merck's global revenues), and the anti-ulcer drug Prilosec, another
high flyer with U.S. sales last year of $1.71 billion through Merck's joint venture with the Swedish firm Astra.
Merck executives say they are prepared. "We don't see ourselves falling off the cliff in the year 2000," says Edward
Scolnick, Merck's research chief and architect of the company's patent-expiration strategy. But some observers
worry that Merck isn't immune to the patent threat. Arvind Desai, an analyst at Mehta & Isaly, a New York
investment firm, forecasts 18% growth for Merck human-drug sales next year, but predicts the rate could drop by
two-thirds in 2001.
Of course, Merck has had plenty of time to prepare. But it hit a research dry spell in the late 1980s and early 1990s.
The budget for basic research was flat for several years in the early 1990s, and the company accurately warned
investors that its overall growth would slow. The prostate-shrinking Proscar, the drug that the company had hoped
would be its next blockbuster, fell far short of expectations. Adding to the uncertainty was Dr. Vagelos's scheduled
retirement as chairman in 1994.
Dr. Scolnick raised the problem of the looming patent expirations with Raymond Gilmartin, Dr. Vagelos's
successor, at their first meeting in 1994. The bottom line: He needed a big budget increase to test drugs in the
pipeline and to invest in emerging technologies.
Mr. Gilmartin says he understood: "My job was to find the money." Through cost-cutting and other programs, Mr.
Gilmartin scraped together funds to help boost research spending in 1995 and 1996. This year, Dr. Scolnick has
more than $1.7 billion to spend on research, 38% more than in 1994.
Fueled by the infusion, the Merck research machine in the past two years has cranked out nine new drugs, including
the AIDS treatment Crixivan, and Fosamax for osteoporosis. Crixivan alone is expected to add $500 million to
Merck's sales this year and should hit $1 billion in the next few years. About 10 drugs, including a reinvented
Proscar pitched as a baldness treatment, are making their way down the pipeline.
Analyst David Maris of Aros Securities in New York says many of his institutional clients are concerned about
Merck's patent expirations, but he predicts that by 2001 Merck's new drugs alone will contribute $11.5 billion to
world-wide sales -- nearly equal to the company's drug sales last year -- and drive annual sales growth of 12%.
Mr. Gilmartin's prediction: "I see Merck becoming the No. 1 company again before the year 2000," up from No. 3
currently, and remaining in the top tier of health-care companies thereafter.
Other drug companies with big patentexpiration exposure insist that they, too, have it all under control. But some
doubters see a shakeout ahead. Schering-Plough, Madison, N.J., for example, could become takeover bait, some
observers argue. It faces patent expirations on Claritin and several other drugs that contributed one-fourth of its total
sales of $5.66 billion last year and about 40% of its profits. Yet the company's research pipeline is viewed as merely
average, says Hemant Shah, an independent drug analyst based in Warren, N.J. A Schering spokesman declines to
comment on the speculation, but says that the company has many drugs in its pipeline.
Astra, another midsize maker, depends heavily on Prilosec, the ulcer medication sold through its joint venture with
Merck. Considered a research star, Astra has several new products in the works, including drugs for asthma and
various Prilosec successors. An Astra spokesman says that, while the company is confident it will produce enough
new drugs to replace Prilosec revenues, "there is always the possibility of acquiring companies."
Eli Lilly, Indianapolis, derived 43% of its U.S. drug sales last year from Prozac, whose main patent expires in early
2001. Lilly also faces a court battle next year with Barr Laboratories, which is challenging the patent's validity to get
an earlier shot at selling a copycat. Although Lilly has several promising drugs in the pipeline for osteoporosis,
Alzheimer's disease and migraine headaches, it may have a hard time growing for a few years if Prozac is beset with
generic rivals early on, some analysts believe.
A Lilly spokesman says the company's pipeline is ample enough to replace Prozac. Also, Lilly contends that Prozac
will get two additional years of protection, to 2003, because the company holds a second "use" patent covering
appetite disorders.
To fill the patent gap, drug giants are turning more to biotechnology boutiques and other partners. In 1996, U.S.
drug companies formed a record 180 research collaborations with biotech partners and pledged to spend up to $2.8
billion on those alliances, up from 69 deals worth $1.4 billion in 1993, according to BioWorld Financial Watch,
Atlanta, which tracks such transactions.
The pressing need for new drugs also has led to the earlier adoption of new technologies. SmithKline Beecham PLC,
London, faced "the Tagamet crisis" when it lost patent protection on the ulcer drug in 1994, says Chief Executive
Jan Leschly. To avoid such threats in the future, the company has invested in riskier, cutting-edge techniques. It was
one of the first major drug companies to leap into new technologies for gene-hunting and automating the process of
mixing experimental chemicals in thousands of different combinations.
Some companies, reversing their past focus, have decided they can no longer bet their futures on finding a handful
of huge sellers. Sir Richard Sykes, Glaxo chief executive, says Glaxo learned from Zantac that blockbuster
dependency can be hazardous to a company's health. Now Glaxo, based in London, has shifted to developing
broader "portfolios" of drugs. "We don't avoid blockbusters, but we don't rely on them," Sir Richard says.
Ultimately, that will be good for medicine, he adds, as drugs that in the past might have languished will now become
available. For example, Glaxo developed Flolan for a rare condition of high blood pressure in the lungs, he says,
even though "it is a very small market" of less than $100 million annually.
Glaxo is also moving many more drugs into development. Five years ago, the company would have five to six
molecules in development at any given time, but now the number is 20 to 30 molecules a year. Merck, too, is
broadening its product line, from 11 therapeutic areas in 1992 to two dozen by the year 2002.
Glaxo says it expects its growth to slow just temporarily because of the Zovirax and Zantac expirations.
While researchers toil, lawyers and lobbyists also are busy. Many makers obtain additional patents covering a drug's
use, production, chemical form or other aspects, hoping to extend the protected period. Schering-Plough has
patented a metabolite, a chemical formed in the body as its Claritin antihistamine is digested, and says this new
patent will add two years to the drug's patent life, extending it to 2004. The company also has lobbied, so far
unsuccessfully, for new laws that would help lengthen the brand's patent life.
"Patent lawyers lay out a mine field for potential competitors. You can get through it, but it makes life difficult," for
generic drug companies, says Salem M. Katsh, a top patent attorney at Shearman & Sterling in New York.
"It's part of the game," observes Daniel Vasella, president of Novartis AG, the world's largest maker in Basel,
Switzerland, which has few drugs coming off patent in the next five years, thanks to the luck of timing. "You have
to use all the skills you have."