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The pharmaceutical industry continues to march toward the patent cliff in 2010-2012, when a record amount of drug sales will lose patent protection in the U.S. This means some of the best-selling drugs, including Pfizer's (PFE) Lipitor, Bristol-Myers Squibb's (BMY) Plavix and Avapro, Eli Lilly's (LLY) Zyprexa, Wyeth's (WYE) Effexor, and Merck's (MRK) Cozaar/Hyzaar and Singulair will be exposed to generic competition.
The industry has gone through previous waves of patent expirations over the past 10 years, and it has largely been able to generate sales and earnings growth via a combination of volume growth, pricing increases, and new product launches. However, research-and-development productivity has fallen off, and as each successive wave of patent expirations washes over the industry, the pressure mounts on the industry's R&D pipelines to produce new, significant products.
Our selection criteria for the top 10 prospects is pretty straightforward—promising late-stage drugs due out over the next two years, where a lack of commercial success may have negative rating implications for the parent company. The failure of a drug prospect to perform up to commercial expectations, or even to reach the market, does not alone necessarily lead to a negative rating action. If a high-profile, high-potential, late-stage drug prospect at a Big Pharma company fails in development, it does not automatically mean that we lower the rating or revise the outlook to negative, if the company still has robust cash flows and a modest financial risk profile. However, the failure may lead the company to adopt a more aggressive financial policy (e.g., acquisitions or share repurchases) to drive future sales and earnings growth and counter negative shareholder sentiment.
The prospects we selected are from a wide range of companies, from top-rated Big Pharma and biotechnology companies to smaller speculative-grade specialty pharmaceutical players.
Amgen (S&P credit rating, A+)
Why it's important: Amgen (AMGN) is facing several years of low sales growth, because its core product portfolio of large molecule drugs is highly mature. The company's top products—Aranesp, Epogen, Neulasta/Neupogen, and Enbrel—contribute more than 90% of sales and are not expected to grow materially (and may even decline slightly) over the next five years because of several factors.
Status: Amgen submitted its request for approval of denosumab to the U.S. Food & Drug Administration in December 2008. If Amgen receives FDA approval in the standard timeframe, we expect denosumab to come to market in late 2009.
Profile: Denosumab is a human monoclonal antibody to Receptor Activator for Nuclear Factor k B Ligand (RANKL), an important molecule in bone metabolism that acts as the primary signal in bone resorption. Amgen has completed Phase III clinical trials for the treatment and prevention of osteoporosis in post menopausal women and in the treatment of treatment-induced bone loss in breast and prostate cancer patients and received positive results. Data from Phase III clinical trials for the prevention of bone metastases in prostate cancer patients and skeletal-related events in breast cancer, prostate cancer, and solid tumors will be available in late 2009 and in 2010. The twice-yearly dosing for the prevention of fractures in patients with osteoporosis makes it likely that the compliance rate would be higher than the current daily or weekly forms of treatment.
AstraZeneca (S&P credit rating, AA-)
Why it's important: During the past two years, AstraZeneca (AZN) has made great progress in its late-stage pipeline, which was thin in 2006. The company achieved improvements both from internal development and externalization. AstraZeneca faces some high-profile patent expirations for existing blockbuster drugs—Casodex in 2009, Arimidex in 2010, and Nexium in 2009-10.
Status: The drug is currently in Phase III of clinical development, targeting a potential launch in the fourth quarter of 2009 in Europe and the U.S.
Profile: Brilinta is an anti-platelet agent and the first reversible oral adenosine diphosphate (ADP) receptor antagonist to prevent more thrombotic events than do currently available thienopyridine therapies in patients afflicted with acute coronary system (ACS). The 11,000-patient trial PLATO has completed recruitment with data to be available in mid-2009. The molecule's reversibility is the key differentiator from competing products Plavix and prasugrel.
AstraZeneca and Bristol-Myers Squibb (S&P credit rating, A+)
Why it's important: AstraZeneca has made great progress in its late-stage pipeline during the past two years, but because the company also faces the high-profile patent expirations noted above, it needs to replace potentially lost sales from generic competition. In addition, AstraZeneca's strategy is to build up a sizable diabetes portfolio, and Onglyza's successful launch would mark the inauguration of that ambition. Given the dynamics of the diabetes market, Onglyza's sales prospects are good even in an increasingly crowded competitive environment.
Status: The molecule has been submitted for regulatory approval in Europe and the U.S., with decision dates expected around midyear 2009. The FDA's advisory committee gave a positive recommendation, however, on Apr. 2, 2009, supporting the molecule's new drug application for the treatment of adults with type 2 diabetes.
Profile: Onglyza is a dipeptidyl peptidase-4 (DPP-4) inhibitor for the treatment of type-2 diabetes. Upon approval, the drug will be the third DPP-4 inhibitor after Januvia and Galvus, which is still awaiting FDA approval.
Bristol-Myers Squibb (S&P credit rating, A+)
Why it's important: Bristol-Myers stands to lose nearly $10 billion in 2008 sales to generic competition in 2010-12. Key drugs Plavix and Avapro will lose patent protection in the U.S., and Bristol-Myers' marketing agreement on Abilify expires. We believe, however, that the company does have one of the more promising pipelines in the industry, with at least four major, high-potential prospects in late-stage development: Onglyza, belatacept, dapagliflozin, and apixaban. All are expected to come to market in 2010-12, too late to generate enough sales to replace Plavix, Avapro, and Abilify. But if all goes well, they should become major contributors to the company's growth beyond 2012. We selected belatacept over the others because it is most likely the next to be filed for FDA approval; it is a biologic (which has the advantage of less direct competition); and all earnings will stay in-house, because it was self-developed by Bristol-Myers and not shared with partners, as the other three prospects are.
Status: Late-stage Phase III, with FDA filing expected this year. It has fast-track approval status.
Profile: A fusion protein linked to CTLA-4 that selectively blocks the T-cell activation process, belatacept is designed to reduce organ-transplant rejection with fewer side effects than cyclosporine, the current gold standard in immunosuppressant therapy.
Eli Lilly (S&P credit rating, AA)
Why it's important: As with almost all the big drug companies, Lilly loses patent protection on its top drugs in the 2010-12 period—specifically, top product Zyprexa (2011). However, 2013-14 is not going to be kind to the company, either, because major blockbuster products will also lose patent protection: Gemzar (for cancer) in 2013; Humalog (for diabetes) in 2013; Evista (for osteoporosis) in 2013; and Cymbalta (for depression) in 2014. Lilly's R&D program has yielded a number of new products over the past five years, so the pipeline has been productive. However, we believe the pipeline does not have enough high-sales-potential prospects. One of the few is Effient, a platelet inhibitor developed by Lilly and Daiichi Sankyo. Lilly's recent acquisition of ImClone adds some intriguing prospects to the company's pipeline, but we believe Effient is Lilly's only drug that could be generating blockbuster revenues by the time 2014 rolls around.
Status: An FDA advisory committee recently voted 9 to 0 to approve Effient for heart attack patients undergoing percutaneous coronary intervention. The overall positive tone from the committee leads us to believe Effient could reach the market by the end of 2009, although the company still has to discuss labeling with the FDA before final marketing approval.
Profile: Prasugrel is a platelet inhibitor that is a member of the thienopyridine class of ADP receptor inhibitors, the same class as Bristol-Myers' Plavix, the leading anti-platelet inhibitor and one of the world's largest-selling drugs. Data released from Lilly's Phase III Triton clinical study, comparing Effient with Plavix, showed that Effient was more potent at reducing the number of heart attacks—but also that it caused increased bleeding incidents. The key to Effient's commercial success is whether doctors and patients believe the increased potency outweighs the higher risk of fatal bleeding.
King Pharmaceuticals (S&P credit rating, BB)
Why it's important: The approval of one or both therapies would greatly enhance King's (KG) presence in the $20 billion pain management market, because it competes against new formulations of existing drugs, generics, and other abuse-resistant products. King recently bought Alpharma for approximately $1.6 billion, a price that assumes Remoxy's approval by the FDA. Moreover, the loss of King's Altace product in December 2007, and the potential loss of Skelaxin to generic entry, have placed more reliance on gaining approval of these pipeline products.
Status: King received a nonapproval letter by the FDA for Remoxy on Dec. 10, 2008, citing that additional nonclinical data could be required. In November 2008, an FDA panel narrowly recommended Remoxy for approval but suggested the drug be labeled tamper-resistant, rather than abuse-resistant. Separately, the company filed a new drug application (NDA) for Embeda and should receive a response from the FDA shortly.
Profile: Embeda is an abuse-resistant, extended-release, morphine-based drug for moderate to severe pain and is a follow-on product to Kadian, which was divested as part of King's acquisition of Alpharma. A sequestered naltrexone hydrochloride inner core is designed to mitigate euphoric effects of the morphine upon tampering. Remoxy is an abuse-resistant, extended-release oxycodone-based drug for moderate-to-severe pain. Its dosage form and gel-like consistency resist "dose-dumping" and unapproved routes of administration to prevent abuse.
Merck (S&P credit rating, AA-)
Why it's important: Merck faces patent expirations on Cozaar/Hyzaar in 2010 and Sigulair in 2012, following the loss of patent protection on Zocor in 2008. Each of the three products generated more than $3 billion in annual sales in their last full year's worth of branded sales. Merck's product pipeline has been relatively productive, launching a number of significant new products, such as Gardasil and Januvia, in the past few years. Concerns remain, however, regarding Merck's future sales and earnings growth outlook through the 2010-12 period. The need to improve R&D productivity contributed in part to Merck's recent decision to acquire Schering-Plough for $41 billion. The companies' combined pipelines would bring the number of late-stage Phase III candidates to 18 (nine from each company), giving Merck a chance to offset the bulk of the looming sales decline because of patent expiration.
Status: Cordaptive received a nonapprovable letter from the FDA in April 2008, although the product is approved in Europe. The reasons for the nonapprovable letter are unclear, with few specifics, but it may relate to the generally more conservative stance by the FDA for approving new products. We assume Cordaptive has a higher-than-average chance of being approved in the U.S., because of the Europen approval, but the timing is very uncertain.
Profile: Cordaptive is a combination of extended-release niacin with laropiprant, a chemical that prevents the side effects of niacin, such as flushing and hot flashes. Cordaptive is a cholesterol-lowering medication that reduces LDL-cholesterol, raises HDL-cholesterol, and reduces triglyceride levels. The drug is deemed to be effective and has the potential to generate blockbuster sales.
Novartis (S&P credit rating, AA-)
Why it's important: Novartis (NVS) has one of the deepest pipelines of the sector, resulting in a promising list of newly approved and to-be-approved drugs. Afinitor could be highly important for the evolution of the group's oncology exposure, because of that market's strong growth rates and the drug's oral administration.
Status: Novartis meanwhile received FDA approval for Afinitor on Mar. 30, 2009, as a first treatment for patients with advanced kidney cancer after failure of either Sutent or Nexavar-based treatments. Other future filings of the molecule are likely for neuroendocrine tumors, lymphoma, hepatocarcinoma, and gastric, non-small cell lung and breast cancer, which are all in Phase III development.
Profile: Afinitor is an oral inhibitor of the mTOR pathway for patients with advanced kidney cancer. The drug could be the first therapy to demonstrate significant benefit for patients after standard kidney cancer treatment fails.
Novo Nordisk (S&P credit rating, A)
Why it's important: Novo Nordisk (NVO) is the world's leading producer of insulin and related diabetes medications. Market approval of its insulin analogue Liraglutide would further cement its position in the global insulin markets, especially as competitor Eli Lilly's product, Byetta, has been approved in the U.S. since 2005.
Status: Liraglutide was submitted both in Europe and the U.S. in 2008 as an anti-diabetic. While the FDA's advisory committee has stated safety-related concerns with regard to interpretation of C-cell tumors in rodents, a majority of voters attested that the molecule has an acceptable cardiovascular safety profile. The FDA will now complete its review of liraglutide's application and potential approval, which has become more uncertain, while the European regulatory decision is expected by mid-2009.
Profile: Liraglutide is a once-daily glucagon-like peptide (GLP-1) analog of human insulin, stimulating the release of insulin from the pancreas only when glucose levels become too high. The drug class explores new territory between traditional metformin-based oral anti-diabetics and insulin-based medication, which is injected. The drug was also developed as an anti-obesity medication, for which it is in Phase III trials.
Sanofi-Aventis (S&P credit rating, AA-)
Why it's important: Sanofi-Aventis' (SNY) two main existing blockbuster drugs, Plavix and Lovenox, will be threatened by generic competition over the next few years. In addition, the group had to withdraw anti-obesity drug, Acomplia, from the market in 2007 because of safety concerns, so the company needs potential new blockbusters to replace lost sales volume elsewhere.
Status: Sanofi-Aventis filed Multaq with the European regulator EMEA in June 2008. In the U.S., the FDA advisory committee voted 10 to 3 in favor of approving Multaq, but the recommendation had qualifications that will affect the labeling and potentially temper the drug's commercial prospects.
Profile: Multaq is an anti-arrhythmic agent, planned as a first-line therapy for the treatment of atrial fibrillation patients without severe heart failure. Atrial fibrillation remains the main cause for cardiovascular hospitalization, with about 7 million patients in Europe and the U.S. Multaq appears to be the only anti-arrhythmic drug that has shown a significant reduction of mortality in atrial fibrillation patients, and it has a favorable safety profile.
Wong is a credit analyst for Standard & Poor's Ratings Services
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