BREAKINGVIEWS-Big Pharma’s revenue hole requires a pricey fix

By Aimee Donnellan

LONDON, Jan 27 (Reuters Breakingviews) - So-called patent cliffs are an unfortunate reality for the world’s largest pharmaceutical groups. While insulated from competition, blockbuster drugs fuel sales, fund research and allow the companies to reward shareholders with generous dividends. The moment the treatments become imitable, those benefits fall away like a stone. CEOs try to smooth out these cliffs by buying budding biotechs to keep a full pipeline of protected intellectual property. But soaring valuations and fewer targets make it an expensive fix.

For Bristol-Myers Squibb BMY.N, Pfizer PFE.N, Merck & Co MRK.N, Novartis NOVN.S, Johnson & Johnson JNJ.N, this headache is acute. In 2028, $111 billion Bristol-Myers will lose patent protection on its blood thinner Eliquis, which accounts for more than a quarter of its sales. In the case of $271 billion Merck, a staggering revenue drop looms in 2029, when star cancer treatment Keytruda, which accounts for over 40% of sales, loses its exclusivity. As a whole, around $400 billion worth of drugs will be exposed to generic competition by 2030, per Caldwell Law.

To plug this hole, CEOs have embarked on a flurry of dealmaking. Last year, Merck boss Robert Davis splurged nearly $20 billion on Verona Pharma and Cidara Therapeutics. Earlier this month, the Financial Times reported that he was also looking to buy cancer specialist Revolution Medicines for $32 billion, although the talks have since ended, according to the Wall Street Journal. Meanwhile, Pfizer entered a heated bidding war with Novo Nordisk NOVOb.CO to buy obesity-focused biotech Metsera last year for $10 billion, having scooped up Seagen for $43 billion in late 2023.

The problem is evident in share prices. Russell 2000 biotechnology .R2ICBBIO stocks are up 48% on average over the past year, whereas Bristol-Myers and Pfizer are down. This makes it more expensive for the pharma crowd to buy promising future treatments. One option is to pounce on biotechs before they release promising late-stage data or receive regulatory approval. Merck could have bought Verona in early 2024 for about a tenth of what it eventually ended up paying, had it not waited for the target's pulmonary disease medication to receive U.S. Food and Drug Administration approval. But buying unproven drugs would be closer to a venture capital-style model, implying that the incumbents may have to accept many failed investments for each future blockbuster.

These kinds of tactics may be necessary, however, since there are fewer biotechs available. Venture capital funding for the sector declined dramatically in the five years following the pandemic. According to EY, in 2019 there were over 960 funding rounds but by 2024 that number had shrunk to 644. Luckily for Big Pharma bosses, the incumbents' balance sheets are relatively healthy: many large groups like Novartis, Merck and AstraZeneca AZN.L are only around one times levered. That means pharma CEOs at least have some headroom to pay up. Making a good return, however, will prove much trickier.

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CONTEXT NEWS

GSK on January 20 said that it would acquire California biotechnology RAPT Therapeutics for $2.2 billion. The UK buyer is facing the loss of exclusivity on its star HIV treatment dolutegravir in 2027.

U.S. drugmaker Pfizer on November 7 clinched a $10 billion deal for obesity drug developer Metsera. The target accepted a sweetened offer from Pfizer over a rival bid from Novo Nordisk, citing U.S. antitrust risks in the Danish group's pursuit.