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Big Pharma Scout Teams Show Generics' Impact

14 March 2014 in Trading Ideas

The nation’s large pharmaceutical companies are constantly on the discovery path for the next drug that has the potential to become a health-care blockbuster.

Now, it seems, that search is even taking place outside their own laboratories.

A story earlier this week from The Wall Street Journal highlighted how research directors from Johnson & Johnson were able to find a potential hit in an experimental cancer drug — now called Imbruvica by J&J – that has been approved to treat a rare lymphoma and a variety of leukemia.1

According to the Journal, JPMorgan has estimated that the drug, if proven effective, could generate revenue of $1.3 billion for J&J by 2017.

This go-and-seek method of drug development, the Journal said, is an indication of how difficult it can be to come up with new ways to attack tough diseases like diabetes and Alzheimer’s, leading to many costly failures of experimental drugs.

The new strategy has created a breed of scientist-dealmakers whose jobs are as much about finding external promising molecules as it is to nurture drug development in-house.

The Journal said that companies like Bristol-Myers Squibb and Sanofi count on such deals with outside companies to fill out their lineups, and Merck is reorganizing to do more of them. Of drugs under development by the top 10 pharmaceutical companies in 2012, the Journal reported, 33% were discovered elsewhere, up from 16% just 10 years earlier.


For many of these large companies, however, this new way of doing business wasn’t just an add-on but a real necessity. J&J, for example, started its “Project Playbook” drug-scouting plan in large part because 10 years ago the company saw that many of its top-selling drugs were about to lose patent protection and J&J didn’t have any drugs in its labs to replace the lost revenue.

And the competition felt by large drugmakers from generics has certainly not slowed down. Earlier this year, Pfizer said revenue in its final quarter of last year was hurt by increased competition from generic medicines. Pfizer lost its US patent protection for its cholesterol-lowering Lipitor drug in 2011, and has been facing growing generic competition in Europe for Viagra, its erectile dysfunction pill.2

The Drug-Patent Cliffs motif has gained 9.1% in the past month. During that same time period, the S&P 500 is up 2.8%. Over the past 12 months, the motif has risen 68.4%; the S&P 500 has increased 22.9%.

Interestingly enough, generic drugs represent both the upstart and the mainstream. While only $30 billion was spent on generic drugs out of the $260.8 billion spent on US prescription drugs in 2012, 84% of all medicine used in the US in 2012 was generic.3

And, while drug development can also stall for individual generic producers, the growing cost-consciousness by health insurers (not to mention Obamacare) in supporting low-cost medicines could be behind the long-term optimism for holders of generic drug stocks.

1Jonathan D. Rockoff, “Pharmaceutical Scouts Seek New Star Drugs for Cancer, Diabetes,” WSJ.com, March 9, 2014.

2Andrew Ward, “Pfizer sales decline on increased competition from generics,” FT.com, Jan. 28, 2014.

3Anna Edney and Drew Armstrong, “Generic-Drug Failures Spur Concern as FDA Steps Up Action,” Bloomberg.com, Feb. 27, 2014, http://www.bloomberg.com/news/2014-02-28/generic-drug-failures-spur-concern-as-fda-steps-up-action.html, (accessed March 11, 2014).