Has AstraZeneca Fallen Off the Patent Cliff?

The patent cliff — the expiration of patents on blockbuster pharmaceuticals — cost drug manufacturers $36 billion in 2012 and will decrease sales by an estimated $25 billion this year.

Fourth quarter results from AstraZeneca (NYSE:AZN) and Eli Lilly (NYSE:LLY) showed the extent that generic competition has deeply hurt their profitability.

London-based AstraZeneca reported quarterly earnings on Thursday of $1.56 per share. While the results beat the expectations of analysts polled by Thomson Reuters by 21 cents, the company’s core earnings fell 3 percent from the year-ago quarter. The pharmaceutical company only avoided a much larger drop by lowering costs and securing a favorable tax adjustment. Its drop in sales was much worse than the decrease in earnings; they declined 16 percent to $7.28 billion, but beat analysts’ estimates of $7.20 billion…

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“Our performance in 2012 reflects a period of significant patent expiry and tough market conditions globally,” said Chief Executive Officer Pascal Soriot in the earnings press release.

Soriot, who joined AstraZeneca from Roche (RHHBY.PK) last October, has a tough task ahead of him. He is facing the loss of exclusivity on several best-selling medicines and a limited new drug pipeline. In particular, sales of Seroquel IR, an antipsychotic drug that lost patent protection last March, plummeted 92 percent to $94 million in the last quarter. Meanwhile, the company has halted nine drug development programs since June 30.

“Soriot needs to consider bold moves to get AstraZeneca back on its feet,” reported Reuters following the earnings release.

Analysts expect that AstraZeneca will follow the strategy pioneered by Bristol-Myers Squibb (NYSE:BMY), known as “string of pearls,” to strengthen revenue by acquiring small- or mid-sized companies. After all, the company’s worst patent expiration is yet to come; Nexium, a treatment for ulcers, is its third-best seller and the drug will lose exclusivity in 2014. In 2011, Nexium and Seroquel generated 10.3 billion in sales.
While AstraZeneca is not looking to make a large, “disruptive” acquisition, Soriot told Bloomberg reporters that the company is looking to purchase small- or medium-sized companies.

Several other drug manufacturers, including GlaxoSmithKline (NYSE:GSK) have successfully navigated the patent cliff. But Pfizer (NYSE:PFE) felt the lingering effects of losing Lipitor in its fourth quarter and Eli Lilly saw both revenue and net sales decrease year-over-year as a result of antipsychotic drug Zyprexa’s patent expiration.

However, with a varied assortment of new medications, the company is better positioned than AstraZeneca. “We saw the patent cliff coming as recently as the middle of the last decade and began to invest in our pipeline,” the Chief Executive John Lechleiter told CNBC on Tuesday, which gave management time to develop new drugs. He said the company has approximately 35 drugs in various stages of testing.

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