“[T]he recent analyst downgrades for both firms are further proof of the importance of maintaining exclusivity through patent protection to pharmaceutical firms.”

Last month, business news outlets were reporting that stock prices for pharmaceutical firms Pfizer and Merck took a tumble after financial analysts downgraded the performance of both firms over concerns about impending patent cliffs or exclusivity issues – although more recent reports paint a mostly promising picture for the companies, thanks to upcoming acquisitions. A pharmaceutical analyst for UBS downgraded Pfizer from buy to neutral, citing the loss of patent protection in the 2025 to 2029 timeframe for several drugs which contributed 30 percent of Pfizer’s total revenue in 2015. For Merck, although patent expiry wasn’t cited in a note from a pharmaceutical analyst from BMO, that analyst dropped Merck’s rating from outperform to market perform based on the expectation that the company’s blockbuster cancer drug Keytruda would face increased competition in the immuno-oncology field during 2019. As of January 30, stock prices for both firms were down by at least a dollar per share from their closing price on January 23.

On the Edge

Although patent expirations affect corporate revenues regardless of industry, the term “patent cliff” is particularly used in the pharmaceutical realm, where billions of dollars in revenue may be tied to the sale of a single drug that is protected by only a few patents. Upon the expiration of those patents, generic drugmakers are quick to enter the fray and offer essentially the same treatment at a greatly reduced price. In 2017, patent expirations threatened about $26.5 billion in annual sales among major pharmaceutical developers. Between 2018 and 2024, patent expirations in the prescription drug industry are expected to put up to $251 billion in sales at risk .

UBS’ analyst note downgrading Pfizer specifically cited the loss of patent protection for drugs such as Xeljanz, prescribed for rheumatoid arthritis and ulcerative colitis; Ibrance, a breast cancer treatment; Xtandi, a prostate cancer treatment; Eliquis, a blood thinner prescribed for preventing strokes; and Tafamidis, a peripheral nerve treatment. Pfizer’s earning report for the fourth quarter of 2018 , released on January 29, 2019, indicated that Pfizer earned $2.79 billion in total revenues from the worldwide sale of four of those five drugs during Q4 (revenues for Tafamidis weren’t reported). That total represents about 20% of the nearly $14 billion in worldwide revenues Pfizer took in during 2018’s fourth quarter.

Although Pfizer has a few years before the patent cliff starts affecting revenues from Xeljanz and the other drugs, the company is also bracing for the loss of exclusivity in the U.S. market for its major nerve pain pharmaceutical, Lyrica. The U.S. Food & Drug Administration extended the pediatric exclusivity of Lyrica last November, but that period of exclusivity only lasts until this June. Pfizer earned $1.32 billion in revenues from worldwide sales of Lyrica during the fourth quarter of 2018 and although much of those revenues were earned outside of the U.S., the loss of U.S. exclusivity will hurt this total somewhat. Pfizer also reported the beginning of operations for its Upjohn division at the start of its 2019 fiscal year; this business focuses on the sale of off-patent legacy brands including Lyrica, Lipitor, Viagra and Celebrex.

Merck’s most recent earnings report , reflecting earnings during 2018’s third quarter, shows that the company indeed is reliant on revenues from Keytruda. Merck earned $1.89 billion for worldwide sales of Keytruda during 2018’s third quarter, about 17.5% of the company’s total sales for that quarter. Merck’s dependence upon Keytruda revenues will likely only increase due to recent regulatory approvals in the U.S. for treating patients with certain forms of either cervical cancer or non-small cell lung cancer (NSCLC). Last July, Keytruda also received regulatory approval in China for treating adult patients with unresectable or metastatic melanoma following the failure of prior therapy. However, the prospect that Merck could face increased competition in the immuno-oncology field through 2019 could prove troublesome for Merck’s overall fortunes.

The Future is Still Bright

Long-term forecasts don’t seem to indicate that either of these major pharmaceutical firms are in much trouble. A pharmaceutical industry forecast report through 2024 released by EvaluatePharma predicts that Pfizer will be second only to Novartis in terms of worldwide prescription drug sales with $51.2 billion in sales expected for the NYC-based drugmaker that year. Merck trails behind in seventh place but is still expected to clear $38 billion in worldwide sales in 2024. Both companies also own valuable pipeline portfolios to help offset any reduced revenues from patent expirations, with Pfizer making forays into vaccines while Merck continues to invest in vaccines and anti-infectious drugs . Still, the recent analyst downgrades for both firms are further proof of the importance of maintaining exclusivity through patent protection to pharmaceutical firms.

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